Our recent roundtable discussion on the upcoming UK Corporate Governance Code Reform was both enlightening and insightful. With experienced auditors from across a range of sectors, the event delved deep into the nuances of the reform, drawing parallels and distinctions from the US SOX controls.
For context:
What will change with UK Corporate Governance Code Reform aka UK SOX?
“This new regime places substantial new reporting requirements on directors and will require a substantial investment of time and resources to ensure compliance. The headline change for companies is new requirements for public disclosures by the directors of a company including a Director’s Responsibility statement, a Statement on Fraud, a Resilience statement and an Audit and Assurance Policy (AAP).”
BDO, Michael Stallard
Here are the key takeaways from our roundtable for internal audit professionals
Business Readiness Varies Widely:
There’s a significant variation in how businesses are preparing for the reform. Listed businesses, with their stringent regulations and high scrutiny, appear to be a step ahead. However, large private companies are gradually joining the bandwagon. Interestingly, many are keen on adopting these controls, irrespective of whether they currently meet the requirements. The consensus was clear – understanding and implementing these controls can only strengthen a company’s business model.
External Auditors and Assurance:
One of the heated discussions revolved around whether external auditors would be the ones providing assurance on these controls. While no concrete answer emerged, it sparked intriguing debates on resource allocation. Some companies mulled over leveraging pre-existing financial controls to manage the new requirements.
The Uncertainty Challenge:
The reform details are still in flux, making planning a challenge. This ambiguity is causing some companies to curtail external spending. However, this presents a potential risk. Once the reform is fully fleshed out, there might be a mad rush to get everything in place. This could lead to a shortage of suitable candidates, especially for larger private companies where such controls aren’t mandated yet.
Addressing Fraud:
A notable component of the reform is the emphasis on disclosing measures to prevent fraud and misconduct. One practical suggestion from the round table was to conduct fraud risk self-assessments. These assessments can provide businesses with a clearer picture of their vulnerability and actionable steps to bolster their defences.
Will the workforce be affected?:
Operational controls come into play; an interesting development from US SOX, is that the UK reform will focus on operational controls in addition.
Discussion was had about how materiality can be gained when looking at operational controls. Further to this, who will be responsible for the testing of controls? Will it sit in 3rd line, with one part of the team testing UK reform controls, and the other part conducting typical 3rd line audits? Will it be given to a co-source?
This drives the question around talent – do we have enough talent in the UK to cater for these changes? Do we have enough British talent or will this drive the need for teams to sponsor more visas.
Positioning the New Role:
An essential aspect of the discussion was deciding where this new role (or function) should reside within a company’s structure. While opinions varied, a majority of the Heads of Audit felt that it should sit within the 2nd line of defense. It ensures that the function remains independent yet integrated enough to effect meaningful change. Furthermore, there was a collective acknowledgment of the need to define the materiality of the role. The granularity of this role’s responsibilities and its impact needs to be explicitly mapped out.
In conclusion, the UK Corporate Governance Code Reform presents both challenges and opportunities for businesses.
It’s a testament to the evolving nature of corporate governance and the proactive measures companies must take to stay ahead. Whether it’s aligning resources, addressing fraud, or deciding on the structural placement of the new function, early and informed action will be crucial. As the reform details get clearer, businesses that have started their preparations, no matter how preliminary, will undoubtedly be better poised to navigate the changes.
If you have anymore questions about these changes and how they affect your upcoming recruitment, please contact Julia.White@iac-recruit.com.