UK ministers are exploring scrapping promised stricter audit rules for private companies as the government seeks to dial back regulation in a bid to boost economic growth.
Business secretary Jonathan Reynolds and employment minister Justin Madders have met large audit firms and big investors in recent months to discuss watering down or axing reforms that would designate about 600 companies “public interest entities”, according to people familiar with the talks.
The previous Conservative government pledged to reform the UK’s audit regimes after multiple high-profile corporate failures, such as outsourcer Carillion, retailer BHS and café chain Patisserie Valerie.
In 2021, ministers proposed classifying the largest private companies and Aim-listed companies as public interest entities (PIEs). They acted after BHS’s collapse sparked questions about whether audits of non-listed companies should be scrutinised in greater depth to prevent similar failures.
The designation would place the audits of roughly 600 non-listed companies with 750 employees and more than £750mn in annual turnover under a tighter regulatory system overseen by the Financial Reporting Council (FRC).
Reynolds told the Financial Times in 2023 that, if Labour won power, it would push through the long-delayed reforms. But one person familiar with the government’s thinking said the reforms were now “ancient history” because tighter auditing requirements were viewed as “another barrier, a ceiling to growth”.
With Reynolds worried that the proposals would incentivise companies to duck below the 750-employee mark or move overseas, the government might instead compile a list of firms selected for qualitative “importance” or abandon the proposals altogether, the person added.
Ministers have in recent weeks vowed to pursue growth, and last month ordered 17 of the biggest watchdogs to set out measures to boost the economy.
On Tuesday, the government forced out the chair of the competition regulator after taking the view that the agency was not sufficiently focused on growth.
The FRC was first tasked in 2018 with improving audit quality after a rash of high-profile failures. The previous Tory government drew up a package of reforms, which included replacing the current regulator with the more powerful Audit, Reporting and Governance Authority.
But it watered down the proposals in 2022, reducing the number of new PIEs from as many as 2,000 to 600.
Auditors had complained about the tighter scrutiny applied by the regulator in relation to PIEs, with top 10 firm Grant Thornton saying it had sworn off 70 per cent of its PIE work in the five years to 2022.
Labour used its first King’s Speech last year to promise a draft Audit Reform and Corporate Governance bill. The draft legislation might still include the current PIE proposals, one of the people said, and ministers could opt to hash out the details in parliament.
One ally of Reynolds said the minister was still open-minded about the “specific thresholds” to apply to PIE, adding that the business secretary was listening carefully to views on the subject and considering the wider economic impact of the audit reforms.
The Department for Business and Trade said it would welcome the thoughts of interested parties before publishing the draft bill later this year.
“Our top priority is boosting the economy and raising living standards for working people and that’s why our audit reform is focused on growth and supporting business to invest,” the department added.
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