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British ministers are considering scrapping tougher audit rules promised to private companies, as the government seeks to cut regulation in a bid to boost economic growth.
Business Secretary Jonathan Reynolds and Jobs Minister Justin Madders have met with major audit firms and big investors in recent months to discuss watering down or scrapping reforms that would single out around 600 companies as “public interest entities,” according to people familiar with the negotiations.
The previous Conservative government pledged to reform the UK’s audit regimes after several high-profile company failures, such as contractor Carillion, retailer BHS and cafe chain Patisserie Valerie.
In 2021, ministers proposed classifying the largest private companies and Aim-listed companies as public interest entities (PIEs). They acted after the collapse of BHS raised questions about whether audits of unlisted companies should be scrutinized further to avoid similar failures.
The designation would place the audits of around 600 unlisted companies with 750 employees and an annual turnover of more than £750 million under a stricter regulatory system overseen by the Financial Reporting Council (FRC).
Reynolds told the Financial Times in 2023 that, if Labor came to power, he would push through the long-delayed reforms. But a person close to the government’s thinking said the reforms were now “ancient history” because tougher auditing requirements were seen as “another obstacle, a ceiling to growth”.
Reynolds fears that the proposals will incentivize companies to drop below 750 employees or move abroad, the government could instead draw up a list of companies selected for their qualitative “importance” or abandon the proposals altogether, a added the person.
Ministers have pledged in recent weeks to continue growth and last month ordered 17 of the biggest watchdogs to outline measures to boost the economy.
On Tuesday, the government expelled president of the competition regulator after considering that the agency was not sufficiently focused on growth.
The FRC was first tasked in 2018 with improving audit quality after a series of high-profile failures. The previous Conservative government had drawn up a package of reforms, which included replacing the current regulator with the more powerful Audit, Reporting and Governance Authority.
But that watered down proposals in 2022, thereby reducing the number of new PIEs from 2,000 to 600.
Auditors had complained about the regulator’s tighter scrutiny of PIEs, with top 10 firm Grant Thornton saying it had given up 70 per cent of its PIE work in the five years to 2022.
The work used its king’s first speech last year, to promise an audit reform and corporate governance bill. The bill could still include current PIE proposals, one of the sources said, and ministers could choose to work out the details in Parliament.
A Reynolds ally said the minister was still open-minded about the “specific thresholds” to apply to the PIE, adding that the business secretary was listening carefully to views on the subject and considering the wider economic impact of reforms to the audit.
The Department of Trade and Business said it would welcome considerations from interested parties before publishing the bill later this year.
“Our top priority is to stimulate the economy and raise the living standards of workers and that is why our audit reform is focused on growth and supporting businesses to invest,” the ministry added. .