The plan for introducing SOX-style corporate governance regulations in the U.K. continues to take shape. In March 2022, the Department of Business, Energy & Industrial Strategy (BEIS) released its 232-word white paper titled ‘Restoring Trust in Audit and Corporate Governance.’
SOX is a financial reporting requirement short for the Sarbanes-Oxley Act. The United States initially enacted SOX in 2002 in response to financial scandals and high-profile frauds of the early 2000s. The idea behind SOX legislation is to create financial reporting standards for publicly-listed companies. Ideally, these standards prevent corporations from producing fraudulent financial statements. It also deals with auditors’ independence for those companies and the standardisation of financial disclosures.
Whilst not yet confirmed, compliance areas are likely to include the following:
- Enhanced financial disclosure: The rules should require public companies to file regular reports with the Financial Conduct Authority (FCA). Under U.K. SOX, the CFO and CEO of the publicly listed company will need to certify the accuracy of the financial reporting to shareholders and the board of directors.
- Internal control assessment: Each financial report will need to include explanations for the company’s internal control structure. Management then will assess the control effectiveness, and if any areas of deficiency are found, it should spell out ways for improvement.
- Real-time disclosures: Should the company experience any changes to its financial operations, it must make public disclosure as quickly as possible. These disclosures protect shareholders and the public by giving them up-to-date information.
- Penalties: Should any company official purposefully conceal or falsify information in the report to deceive the public, shareholders, or the FCA, it could be an prisonable offence. Financial penalties are possible too.
So how does this fit with the Further Education sector? Whilst the the proposals seek to expand the definition of Public Interest Entities to include large private companies, it is unlikely in the first instance at least, that FE will be caught within the definition. However, what starts in one area of corporate governance, often has the habit of flowing down the line to us all in some shape or form. Those who currently state they comply with the UK Corporate Code of Governance, will need to mindful of how the Code may change to align with this new area of compliance.
UK SOX places substantial new reporting requirements on directors and will require a substantial investment of time and resource to ensure compliance. We are already beginning to see similar requirements placed on those in leadership at FE colleges, for example, when changing Accounting Officer mid-year, the ACOP Post 16 Code of Practice now states a requirement for the outgoing CEO to produce a Status report as supplement to the RSAQ annual submission. ‘Where there is a change of accounting officer during the year, or up to the date of signing the declaration, it is the responsibility of the new accounting officer to be satisfied that they can support their signing of the statement. This will be achieved through discussions between the new accounting officer and the corporation, the internal auditor (if applicable), the senior leadership team and, where possible, the previous accounting officer, who should provide a statement to the corporation on regularity, propriety and compliance covering the reporting period up until their date of departure, alongside all relevant working papers, minutes and reports during the period covered by the statement‘.
The ESFA also published in January 2022, The scope of work of audit committees and internal auditors in college corporations, strengthening the work around audit and internal controls within FE colleges.
Whilst it may not be mandatory for FE colleges to immediately comply with this new area of corporate governance, understanding the direction of travel and getting ahead of the curve on best practice in this area, may well save time and headaches further down the road.