What is a public interest entity (PIE) and will it affect you?

14 February 2024 / Insight posted in Technical guidance

In the often complex world of modern economics, specific entities can have substantial influence, not only when it comes to commerce, but also in our wider society. These entities, known as public interest entities (PIEs), are therefore exposed to increased regulatory scrutiny due to their significant impact on the public interest. It’s often vital that these businesses succeed and deliver to the expected standard, but understanding what this means can be confusing.

In this article, we’ll explore the world of PIEs, examining their definition, role in the UK’s economy, regulatory framework, and share some examples of public interest entities operating in the United Kingdom.

Defining public interest entities in the UK: PIE definition

In the United Kingdom, a public interest entity (PIE) is a business that is of significant public focus because of the nature of the business, the size of its operations, or the number of employees currently on the books. The current PIE definition includes those with transferable securities listed on a UK-regulated market, credit institutions, and insurance undertakings.

As you might remember, Carillion PLC collapsed a little over six years ago, and as a result, prompted the UK government to take action, aimed at restoring trust in audit and corporate governance. However, these proposals are yet to be implemented, which means that the same fiasco that took place in early 2018 could happen again, highlighting the need for reform.

These proposed changes would extend this public interest entities definition, bringing into the fold the companies that 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 and would mean that most major companies would therefore fall under the amended regulatory changes to financial reporting and the need for clear audit reports.

Legal framework and examples of UK PIEs

The legal framework surrounding PIEs in the UK is multifaceted and stringent. This is by design, crafted to ensure transparency, accountability, and adherence to best practices – although this can vary on a case-by-case basis. Regulatory oversight is provided by bodies such as the Financial Reporting Council (FRC) and the Prudential Regulation Authority (PRA). These bodies have the aim of restoring trust in audit and corporate governance by ensuring that PIEs adhere to high standards of governance, tax reporting, and risk management.

Countless private companies fall under the current definition, but some notable examples of public interest entities include multinational corporations such as BP and Unilever, major financial institutions such as Barclays and HSBC, and even the National Health Service (NHS), which provides essential public sector services to a vast majority of the population.

The role of PIEs in the UK’s economy

Public interest entities undoubtedly play a significant role in propelling economic growth, driving innovation, and employment in the UK. These entities contribute significantly to the nation’s Gross Domestic Product (GDP) through their diverse activities across various sectors. They can also be seen as a strong export by providing services in other countries, which builds international trust in the United Kingdom as a whole.

What’s more, PIEs, which are often private companies, serve as major employers, providing millions of jobs directly and indirectly through their extensive supply chains. Coming back to Carillion, this is exactly why the collapse of these huge private companies cannot be allowed to happen – tens of thousands of people can lose their jobs overnight if the rules and regulations are not adhered to.

Regulatory environment for PIEs in the UK

Key regulations governing PIEs include the Companies Act, the Financial Services and Markets Act, and the Listing Rules. PIEs are also subject to stringent audit and governance standards, with mandatory external audits and rigorous reporting requirements to enhance transparency and accountability.

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, however, this is yet to be confirmed.

Advantages and challenges of PIE classification

While being classified as a PIE offers certain advantages, it also presents unique challenges for businesses operating in this space.

Advantages of PIE classification

Being recognised as a PIE enhances an organisation’s credibility, signalling to investors, stakeholders, and the public that it operates with transparency and integrity. This can be beneficial for listed companies, as it could show investors that additional regulations are adhered to and that the company is a safer-than-usual investment choice.

Compliance with rigorous regulatory standards can also enhance stakeholder confidence and trust, fostering long-term relationships and mitigating risk. While this may involve much more work from an administrative and governance perspective, public interest entities are typically seen in a more positive light due to the value they provide.

PIE status can ease the path to acquiring further capital, allowing entities to raise funds for investment and expansion with less hassle. While this can also come with problems, such as how these funds are used, this can be extremely beneficial for companies looking to capitalise on gaps within the market.

Challenges of PIE classification

However, public interest entities in the UK face a higher regulatory burden, including greater reporting requirements, compliance costs, and scrutiny from regulatory bodies. This means that there is little room for corporate reporting missteps, adding further pressure on key decision-makers.

These potential missteps or non-compliance by a public interest entity can lead to severe reputational damage, impacting investor confidence and stakeholder trust. For a listed company, this can have a disastrous impact on stock prices, which could take years to recover.

At the same time, adhering to stringent regulatory standards can be complex and costly, particularly for smaller entities with limited resources. While these companies can often afford the additional cost that comes with PIE status, it’s something that many internal teams may not be appreciative of, which is why many look for external assistance.

How Moore Kingston Smith can help

If your business meets the 750:750 threshold, you should consider which role you would prefer your existing advisors to continue in as soon as possible. If you would like to discuss this further, please contact Tessa Park.

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