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Posted: 24 Jun, 2022

Earlier this month, Sir Jan du Plessis, the new chair of the UK’s audit watchdog, the Financial Reporting Council (FRC) made a speech in which he vowed to make company directors accountable for corporate accounting scandals.

He referred to the government’s decision to water-down plans for a UK version of the US’s ‘Sarbanes-Oxley Act’ calling it a “missed opportunity” and saying the FRC will instead seek to hold company directors accountable itself.

Before the government’s rollback which comes after it faced significant push-back from businesses, plans to bring in a UK version of Sarbanes-Oxley would have mandated that company executives sign off on financial reports, thereby taking individual responsibility for the accuracy of financial records.

Now, it is understood that the FRC will set out plans as to how it will ensure that executives take responsibility without government legislation.

Why the need for reform?

In recent years, there has been a series of high-profile accounting scandals including those involving Carillion, BHS and Patisserie Valerie that have highlighted the need for reform.

In fact, the US brought in Sarbanes-Oxley in 2002 after it suffered its own string of corporate accounting scandals including Enron, Tyco International, Adelphia and WorldCom.

The Act as it exists in the US covers the responsibilities of a public corporation’s board of directors, criminal penalties for certain misconduct, the oversight role of boards of directors and the independence of outside auditors who review the accuracy of corporate financial statements. It also mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial records which is a key element that Sir Jan du Plessis wants to introduce in the UK.

Currently in the UK, the onus for accounting scandals lands on the audit profession as we have seen many times in recent years. Consider the collapse of BHS in which PwC and the firm’s senior audit partner Steve Denison were deemed to have failed to properly scrutinise the business. The FRC said BHS’s 2014 accounts were “incomplete, inaccurate and misleading” and yet the audit was signed off in March 2015, days before BHS was sold for £1 in a deal that led to its collapse, the loss of 11,000 jobs and a £571m pension deficit. The FRC said PwC failed in its auditing responsibility and fined it a record £6.5m, banning Steve Dennison from audit work for 15 years as well as personally fining him £325,000. However the FRC’s final report into the matter, while criticising PwC for “seriously poor audit work” did not include any criticism of Sir Philip Green or any of his management team for providing misleading and unrealistic financial accounts.

Similarly, in the case of Patisserie Valerie, its auditor was fined £2.3m and accused of a “serious lack of competence” over its role in the accounting scandal that led to the collapse of the chain. But while the auditor acknowledged that the quality of its audit work fell short of what was expected of it, it also highlighted that the board and management of Patisserie Valerie also failed to detect the sustained and collusive fraud that had been taking place within the business.


What’s next?

We don’t yet know how Sir Jan du Plessis plans to carry out his vow to hold company directors to account.

It might be part of the new Audit, Reporting and Governance Authority (ARGA)’s powers which will become the new audit authority in the UK next year following recommendations set out in Sir John Kingman’s review of the FRC in 2018 which proposed replacing the FRC with a new, stronger regulator.

But whatever his plans, it is likely that they will be welcomed by the audit profession if not by businesses.

For businesses, if Sir Jan is successful, directors will need to take an even more active role in ensuring they understand their company’s financials to be certain they do not open themselves up to personal penalties and consequences should they sign off on incorrect figures.


TMA UK is part of TMA, a global organisation that represents the interests of turnaround professionals as its members who have the skills needed to assist companies in challenging times. If you need assistance, please contact our helpline on 0844 804 0116


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