Getting Closer To The UK Version of SOX
Understanding SOX A Bit Better
First things first; what exactly is SOX? The Sarbanes-Oxley Act details can be fairly complex, however, “SOX compliance” refers to the annual audit that public companies in the USA are subject to. This involves providing proof of accurate and data-secured financial reporting. Initially, the driving force behind the decision to implement the Act during 2002 in the USA was a series of fraud cases across a range of top US companies. Similar to the idea behind the USA implementation, the UK government aims to restore trust in audit and corporate governance.
The time is approaching when responses to the consultation, which was issued by the government on 18 March, are due. This consultation has set out a broad programme of reform for companies, directors, audit committees, auditors, investors, other stakeholder and the regulator. A significant emphasis has been placed on companies with public interest (PIE’s). Responses to the consultation are due by 18 July.
Current Compliance Regulations
Code was drawn up by the London Stock Exchange in 1999. The guidance applied to listed companies and has been widely perceived to be sufficient in maintaining compliance. Even though the guidance has been revised, pressure has been placed on the government to impose a strengthened internal controls regime, similar to SOX. This will essentially mean that directors will need to attest to the effectiveness of internal controls of financial reporting.
The pressure to impose stricter regulations comes on the heels of a succession of audit and accounting related issues in recent years, most noticeably at Tesco, BHS, Carilion and Patisserie Valerie. The SOX-styled compliance was mentioned by Sir John Kingman in his Independent Review of the Financial Reporting Council. Additionally, Sir Donals Brydon in his Independent Review into the quality and effectiveness of audit recommendation suggested serious consideration.
What This Means For The UK
The guidance seems set to apply to premium listed companies first, thereafter extending to all PIEs after two years. So what will need to change in your company? Most notably, your company will need to ensure that internal controls are sufficient. Furthermore, your company's directors and senior management will need to take responsibility for these internal controls. These regulations will bring with them some serious repercussions if not found compliant, so this is something that will need to be done correctly.
Formalising your approach is a good way to start to reay your business for the SOX-style guide to audit compliance. This is especially true when it comes to reporting, testing and taking responsibility. Reporting that is supported by evidence will help your business in the long run. You will need to evaluate how ready your business is to make such a change. With the earliest implementation set to be December 2023, it is a good idea to prepare your business for at least one trial year of the system before it takes effect.
The Flip Side of The Coin
While the change is generally a positive change that will ensure compliance and help to ease the minds of investors, there is also the other side to consider. This has been evident in the US implementation of SOX and refers to the deregistration from public stock exchange of many smaller businesses who were unwilling or unable to absorb the costs involved in the SOC compliance. This is also set to occur in the UK with bigger companies being more pressured to comply and smaller companies rather wanting entrepreneurship. All in all, the changes are interesting and will be a substantial turning point in the PIE space.
Is your business compliant with all statutory regulations? Whether you run a large corporate business or an SME that operates in your neighbourhood, you have to ensure compliance. With Spartan Accounting Group, our London accountants can help your small business stay on top of your financial department. We specialise in tax and VAT returns, costing and budgeting, bookkeeping and payroll, to name a few. Schedule a free 30 mins business consultation to find out how our fixed-fee accounting firm can help your business.
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