Definition of public interest entity
Original recommendation
The Kingman Review recommended that the Government should review the UK’s definition of a PIE. (Source: Kingman 18)
Proposal
The Government believes that regulation by ARGA should focus on public interest entities. Auditors and audits of those entities are already subject to more stringent requirements and oversight. The Government intends to introduce a wider definition of ‘public interest entity’ to ensure that large businesses which are of public importance are subject to appropriate regulation.
Private companies
The Government proposes to extend the UK’s PIE definition to include large companies within certain limits regardless of whether they are admitted to trading on a regulated market. Two options have been put forward:
Option 1:Adopting the test used to identify those large companies which are already required to include a corporate governance statement in their directors’ report, i.e. all companies with either:
- more than 2,000 employees; or
- a turnover of more than £200 million and a balance sheet of more than £2 billion.
Option 2: a narrower test which incorporates the threshold for additional non-financial reporting requirements for existing PIEs, and would mean the definition of a PIE was only extended to large companies with both:
- over 500 employees; and
- a turnover of more than £500 million
It is estimated that Option 1 would mean that approximately 1,960 entities would be brought within the definition of a Public Interest Entity, whereas option 2 would mean around 1,060 additional entities being caught by the definition.
AIM companies
The Government intends that any new definition of PIE should also include companies on the exchange-regulated AIM market with a market capitalisation above €200m.
Newly listed companies
The Government is considering whether to make the transition to listed status easier by making compliance with some or all of the proposed new PIE requirements optional for a period of time after flotation, subject to gross revenues remaining below a specified threshold.
Government response
Companies with 750 or more employees and at least £750m annual turnover will become PIEs. This will mean that the new regulator will be able to scrutinise their reporting and audit and companies within scope will need to meet new transparency requirements.
Companies traded on the Alternative Investment Market (AIM) or other multilateral trading facilities, Limited Liability Partnerships and third sector entities will also be PIEs if they meet this 750:750 test. The Government also commits to allowing an adequate period between an entity exceeding the new 750:750 threshold and being subject to any new requirements.
Further the Government plans to implement a tiered approach which will mean that entities which are PIEs because the new size-based threshold will not be required to have an audit committee, to retender the audit every 10 years and to rotate auditor every 20 years to entities that are PIEs because of the new size-based threshold.