Will the proposed change in the definition of a public interest entity affect you?

Five years on from the collapse of Carillion plc, the Government’s proposals, published in May 2022, for restoring trust in audit and corporate governance are still to be implemented. This article considers one of the proposals, changing the definition of a public interest entity and the effects that this could have on you.

A public interest entity (PIE) is a business that is of significant public focus because of the nature of the business, the size or the number of employees. Within the UK, the current definition of PIE includes entities with transferrable securities listed on a UK regulated market, credit institutions and insurance undertakings. The proposals extend this definition and will bring in the largest private companies which have both 750 or more employees and an annual turnover of at least £750 million. This is often referred to as the 750:750 threshold.

The proposals explained that when consolidated financial statements are prepared by a UK parent company and the group as a whole, including any subsidiaries outside the UK, meets the 750:750 threshold, the UK parent company will be a PIE. When a UK entity which meets the threshold is itself a subsidiary, it will be a PIE and so will its parent entity if the parent is also UK incorporated. The Government hopes that these measures will ensure that UK businesses aren’t able to move their workforce offshore to avoid the additional requirements and that regardless of where in the world their activities take place, their corporate governance is robust.

A smoothing mechanism, to minimise volatility in reporting, will be introduced for companies which will mean that they have to continue to meet the additional requirements for a set period after they initially qualify as a PIE, even if they drop below the 750:750 threshold. To date, no further details have been provided on the smoothing mechanism or the period over which the company will continue to be a PIE.

The 750:750 threshold definition will have implications for the company’s corporate reporting and financial statements as well as for business advisors. Amendments proposed to corporate reporting include:

• The introduction of a resilience statement requiring a company to explain the matters that they consider a material challenge to their resilience in the short and medium term. This should include as a minimum, at least one reverse stress test.
• An audit and assurance policy which must be updated every three years. An annual implementation report will provide a summary update of how the assurance activities outlined in the policy is working in practice.
• Reporting on the steps that the directors have taken to prevent and detect material fraud.

The FRC’s Ethical Standard prohibits a PIE auditor from providing almost all non-audit/additional services to its PIE audit client. We expect the prohibition to also apply to private companies meeting the 750:750 threshold. If your auditor provides corporation tax advice, for example, they will not be able to continue to act as both your auditor and corporate tax adviser.

If your business meets the 750:750 threshold, you should consider as early as possible which role you would prefer your existing advisors to continue in.

If you would like to discuss this further, please contact Tessa Park.