UK Corporate Governance Code 2024 - Effective 2025

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2024 Corporate Governance Code – Effective 2025

Annual Declaration of Effectiveness of Internal Controls

The 2024 UK Corporate Governance Code was published on 22 January 2024, after a consultation process which focused on a few key issues. The main one being the effectiveness of the internal controls of the company. This is covered by Provision 29, which deals with the Board’s accountability for maintaining effective internal controls.

Provision 29 of the 2024 Corporate Governance Code is extremely important and quite radical in its approach. In that it requires the Board to make a declaration in the annual Financial Statements that the  internal controls are effective. This encompasses:

  • “A Declaration of Effectiveness of the material internal controls as at the balance sheet date; and
  • A description of any material controls which have not operated effectively as at the balance sheet date, the action taken, or proposed, to improve them and any action taken to address previously reported issues.”

The declaration will have to cover all material aspects of operational compliance and reporting. Boards will also have to explain in their annual report how they have performed their monitoring of the material controls.

This is essentially a nod towards the Sarbanes-Oxley (Sarbox) Act of the USA, which requires Chief Executives to make a similar personal declaration covering the published financial results of their global operations.

The 2024 Corporate Governance Code is applicable to financial years beginning on or after 1 January 2025. However, Provision 29 will only apply to financial years beginning on or after 1 January 2026.

The 2018 Corporate Governance Code will continue to apply to all earlier financial years. The UK Corporate Governance Code is published by the Financial Reporting Council (FRC).

Provision 29 of the 2024 Corporate Governance Code

Declaration of Effectiveness of Internal Controls; Potential Benefits

Provision 29 of the 2024 Code requires an annual Declaration of Effectiveness of the material internal controls. The preparatory work required to be able to make such a statement, should provide a solid (and perhaps stronger) basis for companies to be able to rely upon to evidence the effectiveness of their internal controls. Thereby satisfying one of the Government’s major concerns, which is “Restoring Trust in Audits and the annual Financial Statements, by enhancing transparency and improving investor confidence.”

This expectation is supported by the results of a survey report published by the Washington based Center for Audit Quality detailing the outcomes arising from the implementation of the Sarbanes-Oxley (Sarbox) Act in the USA. Those results were:

  • 79% of Chief Financial Officers (CFOs) said that it had improved the quality of information in the financial statements
  • 85% of CFOs agreed that it had improved the internal financial controls
  • 34% of CFOs thought that it had greatly helped their company
  • 26% of CFOs said that it had helped to build trust among stakeholders and customers
  • 21% of CFOs thought that it had facilitated more accurate financial reporting
  • 21% of CFOs said that it had helped to streamline the processes

The number of companies that must follow the Corporate Governance Code is relatively small. However, the big four audit firms are likely to increase their focus on the internal control environment of all companies and hence highlight more “areas of concern,” regarding the internal control environment. It would be a high risk approach for any company to ignore the recommendations of their auditors. Especially if ignoring those recommendations would be likely to increase the risk of future major financial losses to the creditors, shareholders or employees.

All Boards of Directors are “responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.” This  implies that the Directors should know that their internal controls are effective, at least insofar as they might impact the Financial Statements of the company.

Around 1200 Directors a year are disqualified from being directors, due to insolvency related issues, which arguably might have been avoided if the internal control environment has been more effective. Partly for this reason there is a standard Statement of Director Responsibilities, which sets out the responsibilities of all company Directors for the financial affairs of their company.

Please click here for more information about the Financial Responsibilities of Directors under the Companies Act.

The Definition of Corporate Governance

Corporate Governance is the system by which companies are directed and controlled.

This definition originated in the first version of the UK Corporate Governance Code (the Code), which was published in 1992 by the Cadbury Committee. That same definition was adopted in a further review commissioned by the Secretary of State for Trade and Industry in 2003. That review was chaired by Sir Derek Higgs.Its final report was entitled “Review of the Role and Effectiveness of Non-Executive Directors” and later came to be known as the “Higgs Report.” Much of the wording of the original 2003 report can still be seen in the UK Corporate Governance Code 2024.

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