On 31 May 2022, the Department for Business, Energy and Industrial Strategy (BEIS) published its Response Statement (the Statement) following its consultation on reforms aimed at ‘Restoring trust in audit and corporate governance’. In our summary of the Statement we cover the key headlines, a summary of how the changes will most likely be implemented, and how they could impact key stakeholders such as companies, directors and audit committees.
As part of this reform package, BEIS intends to proceed with the proposal that directors of certain UK Public Interest Entities (PIEs)[1] will be required to report on the steps they have taken to prevent and detect material fraud. BEIS considers that auditors’ existing requirements to then identify and report material inconsistencies in directors’ reporting will be sufficient for reporting on directors’ fraud statements, and will wait and see if this, and recent revisions to the auditing standard on fraud, have the anticipated effect in clarifying what is expected of auditors in explaining the work they have done to detect fraud.
Our recently published 2022 Global Economic Crime Survey, shows that the level of fraud, corruption or other economic crime in UK businesses is at its highest level since the survey began, with 64% of UK respondents reporting a fraud in the past 24 months, much higher than the global average of 46%. In contrast with this trend only 40% of organisations reported that they have conducted an enterprise wide risk assessment, and at least one third of UK respondents noted that they don’t currently have a designated risk management function in place. We hope that the Statement’s intervention in this area will start to reverse the trends in our findings, i.e. more steps to prevent and detect fraud leading to less fraud being suffered.
Fraudsters flourish in times of disruption and uncertainty such that the UK and global markets continue to experience. While the landscape continues to evolve, current trends highlight business susceptibility to fraud in their supply chains and growing concern about wider Environmental, Social and Governance (“ESG”) issues. More than two thirds (69%) of our UK respondents were concerned about manipulation of ESG reporting by their employees, and 66% were concerned about deception within ESG reporting by third parties that they rely on.
While the scale of the financial losses are on the rise (41% reported losses in excess of £800k) the potential impact of fraud on reputation, share price and employee morale can be significant. In our view an effective fraud risk management programme is a key component to countering this threat, and to inform the disclosures proposed in the Statement.
In our paper “Restoring trust through enhanced fraud risk management”, we provide our views on what the key elements of the directors’ disclosure could be and how a robust fraud risk management framework can provide Boards with the necessary level of information required to support the disclosure.
If you would like more information on fraud risk management or to discuss the impact of the BEIS proposals on your business, please contact:
