UK ministers explore shelving stricter audit rules for private companies

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UK ministers are looking to scrap promised tougher audit rules for private companies as the government looks to dial back regulations to boost economic growth.

Business Secretary Jonathan Reynolds and Employment Minister Justin Madders have met with large audit firms and big investors in recent months to discuss watering down or axing reforms that would designate about 600 companies “public interest organizations,” according to people familiar with the discussions.

The previous Conservative government pledged to reform UK audit systems after a series of high-profile corporate failures, such as outsourcer Carillion, retailer BHS and cafe chain patisserie Valerie.

In 2021, ministers proposed to classify the largest private companies and target-listed companies as public interest organizations (PIEs). After the collapse of the BHS they worked on, questions arose as to whether audits of non-listed firms should be scrutinized more deeply to prevent similar failures.

The designation will audit around 600 non-listed companies with 750 employees and more than £750mn in annual turnover under a strict regulatory regime overseen by the Financial Reporting Council (FRC).

Reynolds told the Financial Times in 2023 that, if Labor came to power, it would push through long-delayed reforms. But a person familiar with the government’s thinking said the reforms were now “ancient history” as the need for stricter audits was seen as “another barrier, a ceiling on growth”.

Reynolds is concerned that the proposals will encourage companies to duck below the 750-employee mark or move overseas, with the government instead creating a list of companies selected for qualitative “significance” or abandoning the proposals altogether, the person added.

Ministers have pledged to keep an eye on growth in recent weeks and last month ordered the 17 biggest watchdogs to set measures to boost the economy.

Government on Tuesday forced out The chair of the competition regulator after commenting that the agency was not focused enough on growth.

The FRC was first tasked with improving audit standards in 2018 after a rash of high-profile failures. The previous Tory government produced a package of reforms, which included replacing the current regulator with a stronger audit, reporting and governance authority.

But it is watered down Proposals to reduce the number of new PIEs from 2,000 to 600 in 2022.

Auditors complained about stricter scrutiny being applied by the regulator to PIEs, with top 10 firm Grant Thornton saying it had shed 70 per cent of its PIE work in the five years to 2022.

Labor used him First King’s Speech Last year promised a draft audit reform and corporate governance bill. The draft law may still include the current PIE proposals, one of the people said, and ministers may choose to hash out the details in parliament.

A Reynolds aide said the minister was still open-minded about the “specific threshold” for applying to PIE, adding that the business secretary was listening carefully to views on the matter and considering the wider economic impact of audit reform.

The Department of Business and Commerce said it would welcome views from interested parties before publishing the draft bill later this year.

“Our top priority is to strengthen the economy and improve the quality of life of working people, and that is why our audit reform is focused on supporting growth and business for investment,” the department added.