FRC proposed enhancements to Company Reporting and Audit to deliver greater value to investors
10 January 2011
The FRC published recommendations aimed at improving the dialogue between company boards and their shareholders.
The FRC’s report, ‘Effective Company Stewardship: Enhancing Corporate Reporting and Audit,’, contains seven key recommendations. It responds to lessons of the financial crisis and builds on changes already made, such as the new UK Corporate Governance Code and the introduction of the Stewardship Code for institutional investors.
The report proposes that the whole of the annual report and accounts should be balanced and fair, including the chairman and chief executive reports, rather than just specific parts of it as at present. While the best annual reports continue to improve, research by the FRC shows that some companies fall short of fulfilling their Companies Act requirements. Of 50 companies studied, a half to two thirds fell short in some areas, including in their reporting of principal risks.
The FRC also proposes a more substantial communication role for Audit Committees so that they provide fuller reports to shareholders, particularly in relation to the risks faced by the business. The auditors’ report should, in turn, include a new section on the completeness and reasonableness of the Audit Committee report, particularly in relation to the dialogue between them and the Committee.
To assist the FRC in promoting high quality corporate governance and reporting it the paper proposes to create a new market participants group to spot market developments and identify best practice. It also proposes to form a ‘financial reporting lab’ which will test financial reporting opportunities and enable trials to take place to encourage greater innovation in the market.
In July 2010 the FRC formed an advisory group made up of senior business leaders and members of the accountancy profession to help the FRC examine lessons from the financial crisis as they apply to corporate reporting, accounting and auditing of non-financial services companies. The advisory group has supported the FRC in identifying and evaluating the recommendations contained in this report.
The FRC will consult on any specific proposals resulting from this publication and, in particular, will seek the views of investors, company directors and auditors. The deadline for stakeholder responses is 31 March 2011.
Key recommendations included in the report:
1. Directors should take full responsibility for ensuring that an Annual Report, viewed as a whole, provides a fair and balanced report on their stewardship of the business.
2. Directors should describe in more detail the steps that they take to ensure:
· The reliability of the information on which the management of a company, and therefore directors’ stewardship of the company, is based; and
· Transparency about the activities of the business and any associated risks.
3. The growing strength of Audit Committees in holding management and auditors to account should be reinforced by greater transparency through:
· Fuller reports by Audit Committees explaining, in particular, how they discharged their responsibilities for the integrity of the Annual Report and other aspects of their remit (such as their oversight of the external audit process and appointment of external auditors); and
· An expanded audit report that:
· includes a separate new section on the completeness and reasonableness of the Audit Committee report; and
· identifies any matters in the Annual Report that the auditors believe are incorrect or inconsistent with the information contained in the financial statements or obtained in the course of their audit.
4. Companies should take advantage of technological developments to increase the accessibility of the annual report and its components.
5. There should be greater investor involvement in the process by which auditors are appointed.
6. The FRC’s responsibilities should be developed to enable it to support and oversee the effective implementation of its proposals.
7. The FRC should establish a market participants group to advise it on market developments and international initiatives in the area of corporate reporting and the role of assurance and on promoting best practice.
© FRC
