Britain likely to adopt Sarbanes-Oxley style audit rules in some form, says regulator

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LONDON (Reuters) – Britain is likely to adopt landmark U.S.-style safeguards on financial reporting in some form even if the government shies away from legislation, the UK’s accounting watchdog said on Monday.

The government will say before the end of the year how it will legislate to apply some or all recommendations from three reviews of corporate governance and auditing, after big company collapses at retailer BHS and builder Carillion raised questions about audit quality.

The government has proposed that directors state why they believe their company’s internal controls and risk management are strong enough to ensure accurate financial reporting.

It draws on U.S. rules from 2002 known as Sarbanes-Oxley or SOX, where directors can go to prison for breaches, though no such penalty has been proposed in Britain.

Jon Thompson, CEO of the Financial Reporting Council, said this was the “key political decision” of the reform package and ministers will consider “very carefully” the administrative costs of such rules against their benefits.

“Even if legislation is not passed in this area, it will be relatively easy to raise the bar further with revisions to the corporate governance code, or for us to include reporting on internal controls in minimum standards or audit committees,” Thompson told an event held by the ICAEW, an accounting industry body.

Audit is dominated by KPMG, EY, Deloitte and PwC or the Big Four, and the UK government has proposed requiring these firms to share an audit with a smaller rival like BDO, but many companies are opposed and prefer a cap on market share.

Thompson said there is no single solution and the FRC has told the government it wants powers to impose a market share cap or shared audit on a company-by-company basis.

It was “highly likely” there will be an obligation on the regulator to set out a plan on the number of years it would take to change the audit market in a significant way, Thompson said.

The FRC will also publish a 19-point framework in coming weeks that spells out what constitutes high quality audit and practice.