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February 5, 2023

New SOX In the U.K.? It’s (Probably) Coming Soon

The February gloom was broken recently by the news that the British government will be introducing reforms targeting company financial reporting and audit oversight. In truth, none of this should be a surprise.

There have been several accounting scandals in recent years where the directors of various companies have been unscrupulous and their external auditors did not present a sufficient challenge over the veracity of the financial statements. The textbook examples are Carillion (KPMG) and Patisserie Valerie (Grant Thornton).

Kwasi Kwarteng, the new business secretary, will be outlining the proposals in a white paper, a consultation document whereby interested parties can submit feedback on the government’s plans. The content of the white paper is unknown, but new Sarbanes-Oxley-type rules are expected to be introduced. While the SOX rules originated in the U.S., many financial services firms in the U.K were obligated to comply due to overseas operations in America.

Moreover, there is an expectation that directors rather than boards will be held responsible for the accuracy of the financial statements. Any misrepresentation or error could be subject to fines or censure. It is also expected that companies will be obliged to report their activities on environmental matters, such as climate change.

Needless to say, many of these proposed changes have not been well-received by the business community as it is more regulation. Regulation has a financial cost and this comes off the bottom line. Why spend time on red tape when it could be spent selling widgets? Many companies are already complaining. However, if one was to speculate, the regulations are likely to apply to non-financial services firms over a certain balance sheet value. The corner shop is unlikely to be caught in the regulatory net.

Of course, there will be winners and there are no prizes for guessing who these are. With the introduction of SOX in the U.S. in 2002, the advisory branches of the major accountancy firms were inundated with work. It was a major payday. Anyone with SOX experience was hot property. The irony won’t be lost on some. Much of this reform is designed to break the “lucrative relationship” between the advisory firms and big business.

Regulatory reform seems to be the gift that doesn’t stop giving.

About the author:

Tim Ames is an accountant based in the U.K.

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