What is a public interest entity?

When we talk about company stakeholders, we usually mean their employees, their pension-owning ex-employees, their customers and their investors and shareholders. But sometimes we also mean the government and wider society of the place they operate within. 

Whether these last two groups are considered stakeholders generally depends on how important and influential the company in question is. There are some companies whose collapse would have such large ripple effects that it would shock the economy as a whole, and/or make the government feel compelled to step in and help, usually with taxpayer money. Obviously in cases like these, pretty much everyone has an interest in making sure the auditors spot and disclose any potential problems as soon as they arise! 

The UK attempts to mark out companies like this, which it calls public interest entities (PIEs). However, the way PIEs are defined is a bit bizarre. From the name, you’d think a PIE is any company that the British public has a substantial interest in. But officially, a PIE is “an issuer whose transferable securities are admitted to trading on a UK regulated market”. 

Roughly translated, this means ‘a company that is doing financial stuff, like issuing shares, on British stock markets’. Alongside its incomprehensibility, a big problem with this definition is that it ignores private companies (who aren’t listed on the stock market), regardless of how many people they employ or how many people use their services or how entwined in the economy they are. 

The UK government has therefore issued a proposal which it hopes might fix this problem. For a start, it would change the definition of a PIE so that it is instead based on a business having a certain number of staff and making a certain amount of money. The government is also considering making all third-sector companies, i.e. charities, PIEs automatically. This change would instantly classify a lot more companies as PIEs. 

Simultaneously, the government is proposing that PIE directors and auditors should be bound to much more stringent rules around detecting fraud and assessing financial risks.  

Some auditors are pretty unhappy about the new PIE proposals, however. They say it would be such a huge amount of extra work that the auditing industry might collapse under its weight.