Policy PulseQuarterlyJuly 2016

Contents

Welcome to Policy Pulse

2Introduction

4Long term value

6 Brexit: all bets are off! What now for UK policy and regulation?

9Country–by-country reporting: a taxing challenge for multinationals

12Non-financial reporting in Brexit Britain

16Competitive tenders — from good practice to legal practice

20Recent regulatory updates. Developments worth watching

21Contact the team

This publication is designed to provide you with an overview of the most important regulatory and public policy developments facing you and your business today, in the areas of reporting, auditing and governance.

The UK continues to undergo regulatory change, and as we approach Brexit the uncertainty associated with this change is likely to increase further. Policy Pulse is here to provide you with the insight and questions that will help you to navigate your way through these and other regulatory developments, and capitalise on the opportunities they present.

You may have read the Financial Reporting Council’s (FRC) report on Corporate Culture and the Role of Boards. In it, Sir Win Bischoff, Chairman of the FRC, highlights ‘the way companies create and sustain value is directly linked to the debate about the role of business in society’. The FRC’s report also asserts that ‘the debate about the role of business in society is directly linked to the way in which companies create and sustain long term value for the benefit of a wide range of stakeholders.’

To the latter point, this edition includes an article on long term value, as well as content from EY’s leading experts on the topics of Brexit, country-by-country reporting, non-financial reporting and audit tendering. We have also included examples of regulatory updates and consultations which have made the news in recent months.

To discuss any of these articles in more detail, please contact EY’s Regulatory and Public Policy team.

Eamonn McGrath UK Head of Regulatory and Public Policy

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Because of the growing complexity of business, some would argue that accounting standards must necessarily become more complex. We do not accept this as a premise. The fact that financial reports have lost most of their usefulness and relevance to investors is largely due to the lack of any clear consensus on what is meant by performance. This primarily results from a lack of alignment between performance reporting and the business drivers of value creation, including the intangible value-creating resources of business enterprises.

The nature of value has changed. In 1975, 83% of S&P 500 market value was accounted for on the balance sheet; today it is only 16%. The S&P 500 is skewed by the degree of tech stocks, but is a good representation of what future stock markets will be comprised of. The lack of measurement and reporting around the value of intangibles is pervasive, as is the absence of economic, social and environmental externalities. This, in turn, may be distorting decision making across the capital cycle, from savers to business investment, and has major ramifications for global economies.

Market value ascribed to currently unaccounted intangibles is derived from information which is not subject to assurance, potentially leading to a lack of confidence and trust in the capital markets. While accounting standards and the sustainability professional have grappled with these reporting challenges, often in a fragmented way, it is now important for the accounting profession to address it decisively and adopt a leadership position.

There is the need to develop a substantially more transparent system of financial reporting that distinguishes between past performance and long term value creation. This would enable investors to assess the future cash flow potential of the company’s long term value-creating activities. The current reporting model co-mingles long term value-creating activities with past performance, which means that currently this is not easily achieved.

Accounting must evolve to keep pace with the global landscape and the demands of our stakeholders to provide assurance in a changing world. Coupling all of this with the explosion of data, the technological advancements, climate change and the macroeconomic shifts we have reached an inflection point and the time to innovate is now.

We are proposing a Long Term Value (LTV) model as a new way for companies to communicate their long term value-creating potential and are inviting you to participate in a major collaboration of leading Academics, Businesses Leaders and Institutional Investors to develop a roadmap for action.

Hywel Ball Managing Partner, Assurance

Components of S&P 500 market value

Source: Ocean tomo, LLC

Tangible assets

1975 1985 1995 2005 2015*

100%

80%

60%

40%

20%

0%

Intangible assets

*January 1, 2015

17%

83%

32%

68%

68%

32%

80%

20%

84%

16%• Rigorously

accounted, reported and assured

• No standards for accounting, reporting and assurance

• Performance measures are based on tangibles

Countries with highest proportion of intangible assets

Source: GIFT 2016, CIMA report

0 50 100

DenmarkBelgiumUnited StatesBrazilUnited KingdomIrelandMexicoSwitzerlandSwedenFranceGermany

Tangible net assets Disclosed intangible assets

Disclosed goodwill Undisclosed value

Long term valueThe approach to the form and content of financial reports has not changed fundamentally over the past 100 years. However, one obvious development is that the complexity and volume of accounting and reporting requirements now pose a major challenge to maintaining and enhancing the quality, relevance, usefulness and transparency of financial reporting to investors and the capital markets.

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Brexit: all bets are off! What now for UK policy and regulation?The result of the referendum was a surprise for many in the UK and elsewhere. For those who predicted political and economic upheaval, it was a disappointing outcome. But that was then, and this is now. So in this issue of Policy Pulse we consider what comes next.

1 National Audit Office report: ‘The Business Impact Target: cutting the cost of regulation, 27 June 2016’

Questions worth asking• How will the board

identify and prioritise its tasks to mitigate the potential risks from Brexit?

• What steps has it taken already to engage with investors?

• How are other stakeholders, including employees, being approached on the subject?

First and foremost, the UK’s policy and regulatory landscape will remain unclear while our relationship with the European Union (EU) is renegotiated. That said, EU-derived legislation is still being implemented into UK law and in many respects it will be business as usual. If the UK negotiates to join the European Economic Area we can expect this state of affairs to continue, the only difference being our inability to influence subsequent EU legislation.

Freeze-dried preservationSo what happens if the UK makes a “cleaner” break, regaining sovereignty over its law making? The most practical way to do this is for the government to “freeze” everything in UK law at the point of departure. This would include legislation derived from EU Directives and EU regulations which took direct effect in the UK. To do anything else would create legal difficulties and potentially serious repercussions for the UK. For example, there are EU regulations to which we currently adhere which have no UK equivalent (e.g., airline safety regulations). It would make no sense to repeal regulations like this without having something to replace them. So the UK needs to prioritise its reform/repeal agenda.

Avoiding the banana skinsAs the UK seeks greater autonomy over its own public policy, there may not be as much time as first thought to get things in order. According to a recent NAO report¹, of the 951 regulations validated by the UK’s Regulatory Policy Committee, 31% originated from the EU and the rest were home-grown. In light of this, we hope the government focuses its attention on policies to stimulate UK growth (e.g., jobs, trade, infrastructure, skills and innovation) rather than getting distracted repealing obscure EU legislation (e.g., Commission Regulation No. 2257/94: classification of “bendy” bananas).

That said, the government is mindful of the sentiments behind the vote to leave e.g., a widely reported malaise in public opinion towards big business and the so-called London elite. This has already been picked up by Theresa May’s political antenna, with a pledge for more policy on business (e.g., consumer and worker representation on company boards, more diverse non-executive directors, and binding shareholder votes on executive pay).

What next for audit reform?The EU audit reforms became UK law on 17 June 2016. We do not expect this to change over the short to medium term. In fact many aspects of the reforms were already included in UK regulation, and the Financial Reporting Council confirmed publicly on 24 June 2016 that the UK regulatory framework for auditing and reporting will remain unchanged. So for companies affected by these reforms the message could not be clearer. Continue with your plans, and regardless of when you next have to tender the audit, make sure your audit committee’s composition and policy on non-audit services are compliant for the beginning of your next financial year (e.g., 1 January 2017 for 31 December year ends).

31% of the 951 regulations validated by the UK’s Regulatory Policy Committee originated from the EU

Continue with your plans, and regardless of when you next have to tender the audit, make sure your audit committee’s composition and policy on non-audit services are compliant for the beginning of your next financial year.

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Playing the Hokey Cokey Regardless of whether UK companies trade inside or outside the EU, or whether multinationals focus their operations here or in the EU, the strength of the UK’s capital markets is paramount. To this end high quality reporting and auditing, with good corporate governance to match, is how UK companies can play their part to take the risk out of Brexit and make it a success.

The sorts of issues which may arise include: i) markets and interest rate volatility; ii) deterioration in cash flow as customers feel the pain of Brexit; and iii) uncertainty making it more difficult for companies to hit targets, increasing pressure on people. In turn, these developments could lead to a number of other challenges that may require an accounting, reporting and/or auditing response e.g: i) loss of business creating lower profitability; ii) lower asset values (including pension assets); and iii) higher risk of asset impairment.

Preparing for the next steps Therefore, UK companies need to be mindful of the potential risks created by a lead-up to, and then eventual exit from, the EU. As with any form of risk management, asking the right questions is key to finding the most appropriate mitigations.

For example: Does the group have sufficient access to capital to cope with the immediate and longer term impacts of Brexit, if finance and capital are harder or slower to source? How much of the order book is EU-based? Has cancellation history changed post-referendum? How has this been reflected in cash flow forecasts and impairment testing scenarios? What proportion of employees are EU nationals? Are they a flight risk? What impact has volatility in exchange rates had on the group? Are hedging arrangements still effective?

Only time will tell which risks and issues matter the most, and which companies will emerge as the post-Brexit winners. Others are sure to follow, and policymakers and trade negotiators will do their part to open up new opportunities. For our part we will continue to support our clients, to help them navigate through this change, whilst engaging with the same policymakers to help keep the UK on the right track.

High quality reporting and auditing, with good corporate governance to match, is how UK companies can play their part to take the risk out of Brexit.

Country-by-country reporting: a taxing challenge for multinationalsOn 12 April 2016 the European Commission (EC) published a proposed Directive (“the Directive”) to introduce, via an amended Accounting Directive, country-by-country reporting (CBCR) for EU-based companies.

98 Policy Pulse. Regulatory & Public Policy - July 2016

Although Brexit means the UK may not be required to implement this amending Directive², the reporting requirements of the Directive are expected to apply to non-EU multinationals doing business in the EU (e.g., post-Brexit UK incorporated group companies). Also, the UK government may still wish to legislate for CBCR because the EC’s proposal is aligned to the OECD’s Action 13 CBCR requirements. The underlying principles of these requirements were also supported in the G20 meeting in Antalya in November 2015.

Who gets trawled in the net? The proposals apply to a wide range of entities. EU parented multinationals (consolidated group net turnover of above EUR 750 million) or EU non-affiliated entities with this level of turnover may be caught. Medium-sized or large subsidiaries of non-EU headquartered groups (consolidated group net turnover of above EUR 750 million) might also be affected. In addition, branches of non-EU headquartered companies within a non-EU group (consolidated group net turnover of above EUR 750 million) where the group does not have a medium-sized or large subsidiary within the EU, could also be required to comply.

Disclosing more than before As expected, the proposed Directive requires that CBCR must include a brief description of activities (i.e., number of employees, turnover, profit before tax, current year tax accrued (not including deferred tax or provisions for uncertain tax liabilities) and cash tax paid). The Directive would also require disclosures of accumulated earnings together with explanations of any material discrepancies between the amounts of tax actually paid and the amounts accrued. By comparison, the Action 13 CBCR requirements will additionally include disclosures to tax authorities of tax residency, tangible assets and stated capital. The EC accepts that it is appropriate for certain information only to be provided to tax authorities.

Activities within the EU will need to be broken down on a country-by-country basis, whilst activities outside the EU can generally be aggregated. However, in a recent change, the data will have to be broken down on a country-by-country basis for jurisdictions “deemed not to abide by good governance standards”. The list of such jurisdictions has yet to be drawn up but will be compiled by the Commission using various criteria (e.g., whether the jurisdiction complies with transparency and standards on information exchange, fair tax competition, and standards set by the G20 and/or the OECD).

The external auditor will need to state whether the information has been provided in accordance with the Directive, and the data must continue to be available to the public for five years. This is to allow comparisons to be made between different reporting periods. The report must also be filed with a business register in the EU.

The currency to be used in the report is the currency in which the consolidated financial statements are presented. EU banking groups can continue to report under the Capital Requirements Directive as long as that includes all activities. Non-EU banks with a consolidated turnover of over EUR 750 million would be covered by the CBCR rules in the same way as other groups. EU groups in the extractive and logging industries with a turnover of EUR 750 million will be within the public CBCR rules, in addition to their current reporting obligations.

2 EU member states are usually granted two years to transpose EU Directives into national law. Given that this Directive is still at the proposal stage, and it can take several years for Directives to be adopted by the European Council and Parliament, it is highly likely that the UK would have left the EU by the time this Directive has to be implemented by member states.

Non-EU banks with a consolidated turnover of over EUR

750mwould be covered by the CBCR rules in the same way as other groups.

Activities within the EU will need to be broken down on a country-by-country basis, whilst activities outside the EU can generally be aggregated.

Questions worth asking• How will your group

ensure it can collate, from all regions of the business, the full range of information required in the CBCR format?

• What arrangements will be made to help ensure different parts of the group, have the necessary means and support to verify data collated for CBCR reporting?

• What steps has the group taken to ensure it is prepared to handle closer public scrutiny of its international tax affairs?

In cases of non-compliance, the penalties already included in the Accounting Directive would apply. National authorities would be entitled to impose fines which would have to be ‘effective, proportionate and dissuasive’.

Next steps Since the proposals are framed as an amendment to the Accounting Directive, they can be agreed by qualified majority voting in the Council of Ministers, which can speed up the legislative process. However, the proposals also require agreement at the European Parliament level and MEPs may push for the scope to be expanded.

Once adopted though, the intention is that the new Directive would be transposed into national legislation within one year of entering into force, and will apply no later than the first financial year commencing one year after that. The Commission will then produce an evaluation of the Directive five years after the date for transposition into national legislation.

Initial observations Since the UK, along with other countries, has already enacted legislation to bring in CBCR to tax authorities, group companies will already be preparing to collect much of the information proposed by the Commission, albeit not necessarily in the same form. However, given the additional public disclosure of the information and likely scrutiny, these proposals can only add to the pressure on group companies to ensure CBCR data and the supporting processes are robust. Furthermore, it reinforces the need for organisations to have a clear tax transparency strategy, so that all sources of tax information, whether disclosed to the public or to tax authorities; whether compulsory or voluntary, conveys a single coherent message.

It is not yet clear whether data can be collected and aggregated under the same methods allowed for the purposes of Action 13 reporting, but it is to be hoped that the same flexibility is retained to avoid any confusion in the numbers produced.

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Non-financial reporting in Brexit BritainIn December 2012 the European Commission (EC) published its Corporate Governance Action Plan, prompted in part by the fallout from the financial crisis of 2008. One of its proposals included the introduction of a Directive requiring EU member states to legislate for non-financial reporting.

To achieve this, new requirements were added to the Accounting Directive via an “amending Directive” called the Non-Financial Reporting Directive (NFRD). On 15 November 2014 the NFRD came into force, with an effective date of 6 December 20163.

However, the UK was already one step ahead. It introduced in July 2013 legislation requiring UK quoted companies to make specific non-financial disclosures in a Strategic Report (SR) and Directors’ Report (DR)4. That took effect for financial years ending on or after 30 September 2013. The NFRD requirements will apply to companies’ annual reports from 1 January 2017.

Same jigsaw, different piecesThe two pieces of legislation (UK and EU) overlap in many areas although the wording and emphasis vary. There are also requirements in the NFRD which the UK will be required to implement in addition to the current UK regime, so long as it remains a member of the EU or EEA. The plan is to do this by amending the UK’s earlier legislation of 2013.

Additions to the UK reporting regime will include requirements for disclosures on anti-corruption and anti-bribery matters. This was foretold in the Financial Reporting Council’s Guidance on the Strategic Report, 2014. More detail on the impact of the business on social, community and environmental matters will also be required, specifically the effects of the businesses of those with whom the company has relationships (where relevant and proportionate). Another “addition” will be the level of explanation required of companies that do not disclose certain categories of non-financial information. Current practice in the UK5 is for companies to state, on whichever category of non-financial information might ordinarily be included in a report, that they have nothing to say on that particular subject. Come January 2017 they will be legally obliged to explain the reasons why.

On and beyond UK narrative reportingThe Department for Business, Energy and Industrial Strategy (BEIS) has the task of implementing the NFRD. Its predecessor, the Department for Business Innovation and Skills, recently consulted on how this might be achieved, given the scope of the NFRD. This is because the NFRD only applies to large EU Public Interest Entities (PIE)6 i.e., PIEs with over 500 employees. But UK legislation on reporting applies to all UK incorporated companies, with additional requirements (i.e., SR) for those companies quoted on the London market.

3 EU Directives are “implemented” in two stages. When a Directive is finally approved by a plenary session of the European Parliament, it comes into “force”. The date when the Directive has to be transposed into local law by each member state, is when the Directive takes “effect”. Most Directives have to be transposed within two years from the date of enforcement.

4 Requirements for the SR and DR are provided in the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

5 If a company does not disclose a piece of non-financial information the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, s 414C (7), simply requires the company to confirm what it has not reported.

6 In summary, a PIE is defined as an entity incorporated in an EU member state, with equity or debt listed on an EU regulated market. Banks and insurance firms are also caught (whether listed or not).

The UK was already one step ahead. It introduced in July 2013 legislation requiring UK quoted companies to make specific non-financial disclosures in a Strategic Report and Directors’ Report.

1312 Policy Pulse. Regulatory & Public Policy - July 2016

This presents BEIS with three options. Firstly, it could introduce a two-tier non-financial reporting regime. Retaining the current UK reporting requirements and adding NFRD provisions to them, for large PIEs only. Secondly, it could repeal the UK reporting regime altogether, replacing it with the NFRD for large PIEs only. Thirdly, the two sets of requirements could be blended together. Existing non-financial reporting requirements for UK quoted companies would in effect be topped-up with additional NFRD provisions, and the combined legislation extended to all PIEs.

At the time of writing this article BEIS was undecided as to which option to take, although anecdotally it seems that a “blended approach” might be the preferred way forward. This is because a two-tier system would add complexity and potential confusion, especially where a PIE’s headcount might increase and decrease above and below the 500 threshold, requiring it to switch between different reporting requirements on each occasion. A replacement of the current UK regime would mean that large swathes of UK incorporated companies, and companies quoted on the London market with less than 500 employees, would face fewer legal requirements to disclose non-financial information.

The post-Brexit company narrativeDespite the current uncertainties faced by UK companies, including the principal risks associated with Brexit, there is one constant which is sure to remain: that non-financial reporting provides shareholders and other stakeholders with a meaningful, comprehensive view of the position and performance of the company.

It is therefore reasonable to assume that legislation requiring non-financial reporting is never going to go away. It is also likely, given the overlap between UK and EU reporting regimes and the swing towards a “blended approach”, that the fundamental requirements of NFRD are here to stay post-Brexit. Therefore, management teams faced with the task of telling the “company’s story” could do well by taking heed now of how BEIS plans to implement the NFRD.

Questions worth asking• How will the board

determine the impact of its business relationships on social, community and environmental matters?

• What steps will the board take to ensure it has confidence when disclosing how it mitigates the risks of corruption and bribery in its business dealings?

• How will the board reappraise its policy on making non-financial disclosures, including its explanations for non-disclosures?

14

Competitive tenders – from good practice to legal practice

Audit tendering is nothing new, and many companies have switched auditors recently in anticipation of the reforms. This was done in the knowledge that they will be required to tender more frequently in the years to come, and for some audit committee members it’s going to be a whole new experience. However, there is an aspect to this which is new for everyone.

The tendering process, and related responsibilities on the part of the directors and audit committee, are now prescribed in law. As far as we know this is a first for the UK and a significant departure from the received wisdom of best practice and guidance that predates the reforms. The intention is to make audit market competition more open, fair and transparent.

Competitive tenderThe EU reforms require audit tenders to be “competitive”. This has been implemented in the UK Companies Act 20068 and the requirements can be summarised as follows.

The audit committee must first undertake an audit firm selection procedure. This requires the committee to identify its first and second choice candidates for appointment, with explanations for each one (i.e., why they prefer one firm over the other). The committee also has to give written assurances that their recommendation is free from influence by a third party, and that no contractual arrangements have been introduced to limit the selection procedure9 (e.g., a bank covenant that requires the company to only appoint auditors from the Big Four).

Once the committee has agreed on its choices, it has to make its recommendation to the board of directors (including the information mentioned above). The board in turn is required to propose an auditor or auditors for appointment. This must include the recommendation made by the audit committee or, if the directors’ proposal departs from the preference of the committee, the reasons for not following that recommendation.

Given that UK law also states that the tendering process should ‘substantially meet the requirements of Article 16(2) to (5) of the EU Audit Regulation’, companies should also be mindful that the tender process does not in any way preclude the participation of smaller firms (i.e., firms which received ‘less than 15 % of the total audit fees from public-interest entities in the member state concerned in the previous calendar year’). Notice should also be taken that tender documents ‘shall contain transparent and non-discriminatory selection criteria that shall be used by the audited entity to evaluate the proposals made by statutory auditors’.

Notice should also be taken that tender documents ‘shall contain transparent and non-discriminatory selection criteria that shall be used by the audited entity to evaluate the proposals made by statutory auditors’.

The tendering process, and related responsibilities on the part of the directors and audit committee, are now prescribed in law.

7 See Policy Pulse, March 2016, pages 14 -16, 8 Part 16, s485A and s489A Companies Act 2006.9 Requirement sits in Article 16(6) of the Audit Regulation

Now that EU audit reforms are finally implemented in the UK7, companies affected by them (Public Interest Entities) are getting to grips with the detail. Many are likely to be encountering the full implications of these changes for the first time. Indeed one aspect in particular, related to the task of mandatory audit firm rotation, seems to have come as a surprise to some.

1716 Policy Pulse. Regulatory & Public Policy - July 2016

Questions worth asking• How will the audit

committee decide on its selection criteria for the next auditor?

• What measures will the committee use to determine its first and second choice auditor?

• How will the committee disclose the steps it has taken to conduct a “competitive tender”?

Qualifying tenderApart from outlining how the tender will be undertaken, the law states when it should be undertaken. The reason for this is twofold.

Firstly, the UK government took up an option in the EU reforms for companies to extend their audit tenures from ten years to a maximum of twenty, on the proviso that a “competitive tender” takes place on or before the tenth year of tenure10. Companies have the flexibility to decide when that tender should take effect (i.e., the tender process can be for any accounting year up to and including the year following the end of the ten year maximum).

Secondly, the EU reforms come with a set of transition rules, stating when companies caught by the legislation have to switch their auditor for the first time in the new regime. If the external auditor was appointed between 17 June 1994 and the 16 June 2003, the company needs to appoint a new auditor for financial years beginning on or after 17 June 2023 at the latest. If the company appointed its external auditor before 17 June 1994, it needs to appoint a new auditor for financial years beginning on/after 17 June 2020 at the latest.

It should be noted that there are no transitional provisions if the external auditor was first appointed on or after 17 June 2003. For example, if the auditor was appointed between 17 June 2003 and 16 June 2006, the company is required to re-tender the audit for financial years beginning on or after 17 June 2016. If the auditor was appointed later (e.g., for 31 December year-end 2009) the audit would have to be re-tendered 10 years hence (e.g., in 2019).

Tender ahoyBefore these new laws were enacted an Order was issued from the Competition and Markets Authority (CMA) in 201411, requiring UK incorporated FTSE companies to announce the date of their upcoming tenders. This requirement still stands and is now also reflected in the UK Corporate Governance Code 2016, and the FRC’s Revised Guidance on Audit Committees 2016.

These disclosures should be helpful for companies and audit firms alike, who need to keep a broad perspective on the rate of tenders over a given period of time so they can plan ahead accordingly. Similarly, investors will be interested to know if there are any issues or concerns behind a change in the timing of a tender, and those interested in this may also wish to engage with the company as it undertakes the tender process.

If the PIE appointed its external auditor before 17 June 1994, it needs to appoint a new auditor for financial years beginning on/after

17 June 2020at the latest.

10 Part 16, s487, s489 and s491 Companies Act 2006.11 The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use

of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014

18

Developments in audit 2015/16: an overviewThe FRC commissioned independent research into the current and future state of auditing in the UK. It reported in July 2016 that there was a higher level of confidence in audit in 2015, compared with 2014. However, an expectation gap remains between what audit does and what certain groups believe it does or would like it to do. Concerns also remain over the use by companies of non-audited data.

Corporate culture and the role of boards: report on observationsIn July 2016 the FRC published findings from its research on corporate culture, in terms of its influence on corporate governance. The report concluded, amongst other things, that a healthy corporate culture is a valuable asset, a source of competitive advantage and vital to the creation and protection of long-term value. It is the board’s role to determine the purpose of the company and ensure that the company’s values, strategy and business model are aligned to it. The FRC plans to incorporate its finding in its guidance on board effectiveness.

UK referendum on BrexitIn June 2016 the outcome of the UK referendum on Brexit resulted in market volatility, a drop in the value of sterling and a change in the leadership and cabinet of the UK government. In terms of EU legislation, especially legislation recently enacted (or about to become UK law), speculation has arisen as to whether it will remain (or come into) force. Feedback from the government, regulators and others is that it is business as usual, at least for the time being.

UK law, standards, guidance and corporate governance code introduced/revised to implement EU audit reforms in the UKAfter six years in the making, the EU audit reforms took effect on 17 June 2016. There were no surprises from what the FRC and UK government had issued earlier in the year. For example, there is no extended list of NAS (apart from a ban on tax advocacy work, which applies to PIEs and non-PIEs, and a ban on tax contingency fees for PIEs). The derogation on certain tax and valuation services is introduced, and the FRC’s extraterritorial application of non-audit service prohibitions and cap for UK incorporated group companies was introduced. The government introduced maximum audit tenures of 20 years.

Warning to FTSE 350 chairmen on asset write downs and profit re-forecasts Chairmen of every FTSE 350 company received a warning from the UK Investment Association (IA)in June 2016. It said that if, in the event of re-electing or appointing new management their respective companies: i) write down the value of their assets; and/or ii) significantly scale back their future profit expectations, their companies will be subject to an “Amber Top” warning. This means that the company and its “change in circumstances” will be commented upon publically by the IA, and in the process the quality of its corporate governance will be called into question (effective from 1 August 2016).

Review of the UK insolvency regimeThe Insolvency Service (IS) commenced, from May 2016, a review of the UK’s corporate insolvency regime with the intention to enable more corporate rescues of viable businesses and ensure that the insolvency regime delivers the best outcomes. The IS is considering whether the UK’s regime needs updating in the light of international principles developed by the World Bank and the United Nations Commission on International Trade Law. This was also prompted by recent large corporate failures, and an increasing EU focus on providing businesses with more tools to facilitate company rescue.

The future of assurance in the UK In May 2016 the Institute of Chartered Accountants in England and Wales (ICAEW) published its report: Outlook on the future of assurance and auditing’. The ICAEW is seeking to raise the debate on the future role of the board in getting the right level of assurance for its stakeholders (e.g., by asking the right questions about risks and information flows). The paper refers to assurance on risk disclosures and forward-looking information, and the role of assurance on the narrative and intangibles.

Anti-corruption agendaThe UK government hosted in May 2016 an anti-corruption summit, outlining plans for tackling money laundering and other financial crimes. As part of this event various professional services organisations signed a “statement of commitment” to play their part in helping to counter corruption. Proposals were also announced to introduce a new criminal offence for companies that fail to prevent economic crime committed by employees (e.g., tax evasion).

Country-by-country tax reporting for multinationals The EC issued proposals in April 2016 which build on earlier initiatives to counter corporate tax avoidance in Europe, which is estimated by the EC to cost EU countries EUR 50-70 billion a year. The aim is that multinational companies operating in the EU with global revenues exceeding EUR 750 million should publish key information on where they make their profits, and where they pay their tax on a country-by-country basis. The same rules would apply to non-EU multinationals doing business in Europe. In addition, companies would have to publish an aggregate figure for total taxes paid outside the EU.

Beneficial ownership transparency The UK government issued proposals in March 2016 to enhance the transparency of beneficial ownership for foreign companies that purchase land or property in England and Wales, or participate in public contracting in England. It will be for the relevant authorities in each administration to bring forward measures in this area outside England and Wales. Scottish authorities are already considering reform of property registration. The aim of these requirements, if they become law, is to help counter money laundering.

Recent regulatory updates Developments worth watching

The Regulatory and Public Policy Team

Eamonn McGrathPartneremcgrath@uk.ey.com

Andrew HobbsPartner ahobbs@uk.ey.com

David ParrishAssociate Directordparrish@uk.ey.com

Kristel TchambaRegulatory Analystktchamba@uk.ey.com

Jane Hayward GreenAssociate Directorjgreen4@uk.ey.com

Loree GourleyDirectorlgourley@uk.ey.com

21Policy Pulse. Regulatory & Public Policy - July 201620

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