UK business chiefs could see their bonuses and dividends under threat as part of the the government’s new audit proposals.
The move is part of a “major overhaul” of the UK’s audit regime in a bid to break up the dominance of ‘Big Four’ audit firms (PwC, Deloitte, KPMG, EY), after the collapse of companies including Thomas Cook, Carillion and British Homes.
It also comes not long after the collapse of Arcadia, the retail group owned by billionaire Sir Philip Green, who famously took a £1.2bn (£860m) dividend payment from the company in 2005, two years after buying it.
The Department for Business, Energy & Industrial Strategy said it wants to make directors of the country’s biggest companies “more accountable if they have been negligent in their duties, reflecting the level of responsibility that comes with holding such a position.”
They could face fines or suspensions in the most serious cases of failings – such as significant errors with accounts, hiding crucial information from auditors, or leaving the door open to fraud.
Companies could be expected to write into directors’ contracts that their bonuses will be repaid in the event of collapses or serious director failings up to two years after the pay award is made, clamping down on what the government called ‘rewards for failure’.
The government also said large businesses would need to be more transparent about the state of their finances, so they do not pay out dividends and bonuses at a time when they could be facing insolvency.
WATCH: Boohoo under pressure to link bonuses to progress on workers' rights
Directors would also have to publish annual ‘resilience statements’ that set out how their organisation is mitigating short and long-term risks, encouraging their directors to focus on the long-term success of the company and consider key issues like the impact of climate change.
The head of policy and corporate governance at the Institute of Directors, Roger Barker, welcomed the move and said that “credible corporate reporting is essential if trust in business is to be improved. Such reporting is ultimately the responsibility of the board of directors. It is therefore right that directors be held to account in their fulfilment of this duty."
However, he noted that "the collective responsibility of the board for corporate reporting must be maintained as a central feature of UK corporate governance."
He also said that although director accountability needs to be enhanced, it would be counterproductive if the legal and financial liabilities piled onto directors made their role "excessively unattractive or risky" for any capable individual to undertake.
He noted that it is important to consider a variety of ways in which corporate behaviour can be improved.
"The government should consider the endorsement of a code of conduct for directors through which a less legalistic approach to director behaviour could be encouraged. The time is also ripe to consider how director competence could be enhanced through appropriate director education and professional development."