Government consultation on audit reform – our response

The Department for Business, Energy and Industrial Strategy (BEIS) ran a consultation on restoring trust in audit and corporate governance: proposals on reforms which closed on 8 July 2021. It proposes to increase the number of organisations defined as Public Interest Entities (PIEs) by including those with turnover in excess of £100m. The proposals also include changes to the existing rules for housing associations already defined as PIEs.

We’ve summarised the key points from the consultation, and our response, below.

Lowering the threshold

• The consultation suggests that a £100m of ‘incoming resources’ threshold might be applied to third sector entities such as universities, charities and housing associations, to set the definition of a PIE.
• Reviewing the revenues of housing associations reveals that several housing associations would be in excess of this threshold, although if this is introduced in a few years’ time as scheduled, more housing associations would likely fall into this category through housing developments and mergers. Many of these organisations are already defined as PIEs, although this tends to be only the subsidiary company holding the public bond. This reform is likely to expand PIE classification to the whole group.
• In the consultation paper the government states that this will increase competition in the audit market, although the evidence from the previous proposals that introduced the concept of PIEs does not lead to this conclusion. In fact the previous proposals have decreased competition in the audit and non-audit market, increased audit costs and created a significant barrier for new entrants to the audit market.

Other proposals – internal controls and stress testing

• On internal controls, the consultation proposes that an external benchmark should be used to carry out an assessment and that elements of the US Sarbanes-Oxley Internal Control framework could be used to carry out this review. This could further increase external audit costs and the administrative burden for housing associations.
• On stress testing, the consultation also recommends that companies should disclose stress testing as part of a Resilience Statement to further report on viability and resilience issues. There could be duplication for housing associations from the requirements for stress testing set out by the Regulator of Social Housing (RSH).

The timetable

• These proposals would take effect over time, with part of the changes already being implemented by the Financial Reporting Council. However, the main elements from the proposals, including widening the definition of PIEs, would be introduced over the next few years.
• First, parliamentary time would need to be found for the bill. Following this, the suggestion is that there could be a transition period when special measures might apply – for example, to make sure of an orderly transition to a new regulatory regime.
• Finally, the consultation states that there will be a phased introduction whereby premium listed companies would implement for two years before the remaining organisations fall under the new PIE definition.

Our response

We support in principle that third sector organisations, including housing associations with more than £100m of turnover, are of public interest and should therefore be defined as PIEs. However, we have a number of concerns, including those set out above, and have requested a meeting with the Department for Business, Energy and Industrial Strategy to discuss these and to further consider the timetable.