FAQs: Questions from companies who receive a letter from FRC about their report and accounts
Why were my report and accounts selected for review?
As explained in the corporate reporting review section, we adopt a risk-based approach to our selection of reports and accounts for review. Your report and accounts may have been chosen for any one of the following reasons:
- FTSE 350 company reports and accounts are reviewed on a rotational basis – from 2016 we aim to review their reports and accounts at least once every 5 years with certain aspects of their reporting subject to at least one thematic review in between times
- Your company may operate in one of the industries identified by FRC as being under particular strain
- A specific topical accounting issue may be relevant for your company
- We may have received a complaint about your report and accounts
- We may have received a referral from another regulator about your report and accounts
- Our review may have been prompted by press comment or other material in the public domain
- Your report and accounts may have been chosen at random
Can I find out which prompt applied in my case?
There are a number of reasons why a company’s report and accounts may be chosen for review. We will not generally disclose the specific reason for selection. In particular, we will not disclose whether the review was prompted by a complaint unless the complainant has given us permission to do so or has otherwise made the complaint public.
I believe that the Conduct Committee letter is the result of a malicious complaint. Can I find out whether this is the case?
No – except as noted above, we do not reveal whether our review was prompted by a complaint or our own review programme. However, we will carefully consider the complaint before writing to you and will only write if we believe that there may be a case to answer.
There seem to be a lot of caveats attaching to the outcome of your review. Why is that?
We have included some standard wording in our initial letters to help explain the context of our review.
Our review is, fundamentally, a desk-top review of your report and accounts for compliance with the relevant reporting requirements. It is not an audit. Your report will have been read by FRC staff who are familiar with the relevant legal and accounting framework but they will not have a close understanding of your business or the types of transaction you enter into. They can only respond to the material that is disclosed. Your auditor and audit committee, however, will have a detailed understanding of your business and underlying transactions. They may have other comments and suggestions about how to improve the quality of your reporting which we would encourage you to consider.
As we cannot give any assurance that your report and accounts comply with relevant reporting requirements in all material respects, we accept no liability for reliance on them either by you or any other third party. This includes your shareholders and potential investors.
Why has the letter been copied to the Finance Director and Audit Committee Chair?
Our questions are about the company’s published reports and accounts to which the Finance Director and Audit Committee Chair can be expected to have had considerable input and who may be best placed to answer our queries. Copying our initial letter to them means that they are immediately aware of the questions raised and can begin to plan how to manage the response.
What should I do when I receive a letter?
This depends on what type of letter you receive.
You may receive a letter explaining that your report and accounts have been reviewed but that there are no questions or queries that we want to raise with you at the moment. We refer to this at times as a ‘no substantive issues letter’.
Alternatively, your letter may not raise any substantive issues but does include a schedule of other items that you have been asked to consider when you prepare your next report and accounts. You need only consider additional disclosures if they are relevant and material to your next report and accounts. Some of these points may relate to suggestions to improve the quality of your reporting – specifically, where we see opportunity for making your reports clearer and more concise.
You are only asked to acknowledge receipt of these types of letter and, where there is a schedule of other matters, to note these as points to consider for your future reporting.
The third type of letter is one which asks you for additional information and explanation to help us better understand your report and accounts. This type of letter does require a substantive response from you.
First, you should acknowledge receipt of the letter. We usually expect to receive a full response within 28 days. If, exceptionally, you consider that it will take you longer to respond - for example, if you are approaching a reporting date, or key personnel are not available - then you should refer to that in your acknowledgement letter for the CRR Director to consider. It is in everyone’s interest that we receive a well considered and full response to our questions and we do agree extensions when there is good reason. In our experience, helpful and comprehensive responses can lead to earlier closure of our enquiry. We expect companies to respond to our questions reasonably promptly and reserve the right to comment adversely on those who do not without good reason and without our agreement.
Your letter asks me to respond by e-mail. Do I have to?
We expect companies to prepare their response as a formal letter. In all cases, a signed copy of the letter should be posted to the FRC address. To avoid postal delays, however, the company may like to e-mail a copy of the letter, in PDF format, to the inbox at email@example.com. We would prefer to receive a copy by e-mail but it is your choice whether or not you do so.
I would like to receive your reply by e-mail. How do I indicate this?
If you would like us to reply by e-mail, as a PDF attachment, to the signatory of the company’s letter, simply say so in your response. You will need to indicate the e-mail address(es) to use at the end of your letter. In all cases, our signed letter will follow by post.
What do I need to consider in preparing my response to a substantive letter?
We often raise questions because it has not been possible to tell from the published accounts whether the accounting treatment adopted for a particular transaction complies with relevant accounting and reporting requirements. In many cases, the matter can be resolved simply by providing full information about the policy or transaction and the rationale supporting your chosen treatment. This should include, for example, reference to the accounting standard or other reporting requirement.
There are a number of good practices we have experienced which, if followed, tend to result in earlier closure of matters under review. A good first response:
- addresses all of the questions raised;
- offers additional, but relevant, information or explanation to bring our level of understanding to that of the company;
- explains fully the Board’s judgements;
- evidences Board and, where applicable, Audit Committee involvement;
- evidences full and early engagement with the auditors;
- demonstrates a willingness to consider alternative viewpoints expressed by the FRC.
- conversely, where we do not receive a sufficiently detailed response to allow us to reach a conclusion, the company can expect to receive further requests for information.
If, as a result of considering the matters raised, you believe that a change in accounting policy, or a correction of numbers or disclosures, is advisable, you should discuss this with us before taking action.
The reason that we have not given a specific disclosure is because the amount is not material. Will you still insist on the disclosure being made?
No. Accounting standards do not apply to immaterial items and we take the same approach. We may, however, ask why the company believes that an item is immaterial if this is not evident from the accounts. We discourage companies from including unnecessary information in their accounts and would encourage you not to include further disclosures unless the additional information is material. We may, however, indicate that you might need to reconsider your accounting treatment should a matter become material in future.
Should I discuss the letter with my auditors?
There is no requirement to do so, but it is generally advisable to discuss matters with your auditors at an early stage. Your auditors may already have considered the issue that has been raised and will be able to assist in drafting a response. They can also attend any meetings with the CRR team, CRRC or Review Group, as appropriate, should you so wish.
Should I discuss the letter with the Audit Committee?
There is no legal requirement to do so, but the consequences of a Conduct Committee investigation can be serious and the Conduct Committee would expect an Audit Committee to be involved from the outset. That is why a copy of our letter is automatically sent to the Chair of the Audit Committee if there is one.
Do I need to inform the market?
Companies must take their own decisions about informing the market, with the assistance of advisers where necessary.
We will generally only issue a press notice at a stage where agreement has been reached either to amend a set of accounts, or to revise the accounting treatment in future or where the Conduct Committee has decided to pursue a matter to court. A request for information would not usually be considered inside information as, in many cases, the matter will be resolved by the provision of further information. The company directors are, however, responsible in each case for deciding whether the request for information or the setting up of a Review Group constitutes inside information and whether to inform the market without delay.
Will there be a press notice?
The vast majority of cases are resolved without a press notice. Press notices are issued only where there is a significant correction to published accounts, including an agreed significant change to future accounts, or where there is a case that the Conduct Committee considers otherwise merits publicity.
Will you keep matters confidential?
Our rules on confidentiality are set out in the Conduct Committee’s Operating Procedures. Apart from the Chairman and Deputy Chairs of the FRRP, FRRP members are normally not aware of our enquiries unless and until they are invited to join a Review Group. Information relating to each corporate reporting review case is maintained securely in the FRC office and is retained in accordance with the FRC’s retention policy. Care is taken to ensure that there is no unauthorised access to such information by other persons within the general FRC office.
Is the Conduct Committee subject to the Freedom of Information Act?
In what circumstances might a press notice be issued?
We reserve the right to make an announcement where, following a review, a company makes a significant change, whether corrective or clarificatory, to its report or accounts. The company will be invited to comment on any draft press notice. In some cases, if the fact of a Review Group enquiry has become public, we may consider making an announcement.
The Conduct Committee may also make an announcement on any application to court and at the end of court proceedings.
The Conduct Committee reports publicly on the results of its monitoring activity on a regular basis.
If you issue a press notice, will it say that the company has broken the law?
The Conduct Committee is not a court and has no authority to make legal decisions. If we believe that a company's annual report and accounts may not comply with the law, we will try to persuade the company to make its reporting compliant either by restatement or, more often, by making appropriate improvements in future accounts. Our press notice will identify the matter at issue and, typically, will focus on the restatement and/or agreed improvements.
In what circumstances would you require a company to publicly refer to the review in its next report and accounts?
We may ask you to refer to our review where it has resulted in a significant change to your reporting which you reflect in your next report and accounts. The reference should explain the change that is being made and the reasons for it. It should also confirm whether or not the review is closed. This is so that readers of the report know whether further changes might be expected.
If we ask you to refer to our review, we also ask to be given the opportunity of commenting on your proposed text.
Do you share otherwise confidential information about your reviews with other authorities?
The Conduct Committee is permitted, under the Companies Act, to disclose information to a number of specific bodies, including the Secretary of State, the Department of Enterprise, Trade and Investment for Northern Ireland Treasury, the Treasury, the Bank of England, the FCA, the PRA and HM Revenue and Customs.
The Companies Act also allows the Conduct Committee to disclose information to assist bodies who carry out certain functions. These include those designated by the Secretary of State to exercise his functions relating to the supervision of auditors for the purposes of disciplinary proceedings relating to the performance of an accountant or auditor of their professional duties or to assist bodies similar to the Conduct Committee in other countries.
Where information is forwarded to other bodies, we usually inform the company, but reserve the right not to do so.
Your second letter has asked me to ensure that my response letter is signed by a Board director – why is this?
We expect the Board to take responsibility for responding to our enquiries. A letter signed by a main Board director is the clearest evidence of this.
You have asked for copies of certain documents. Do I have to provide them?
We rely upon the voluntary co-operation of companies. The Conduct Committee does, however, have reserve power to require information and explanations under the Companies Act. It aims to use this power sparingly but will tell you when it is doing so.
I would like to discuss the matters raised. Can I ask for a meeting?
We recognise that matters are sometimes easier to progress face to face. In order to get the best out of a meeting, we generally find it more effective if all matters have been progressed as far as possible by correspondence first. Our experience is that the great majority of issues can be resolved in this way.
When we believe it appropriate, we will suggest a meeting. Broadly, there are two types.
The first type is a technical meeting. This is an informal meeting and is usually with one of the Deputy Chairs of the FRRP and/or staff from the corporate reporting review team. The usual purpose of a technical meeting is to discuss complex accounting issues that may have arisen to ensure that both parties fully understand the issue raised. Such a meeting may also be appropriate where the company’s business is specialised and we feel that we need a better understanding of that business. No decision on corrective action would be taken at a technical meeting. You may want to invite your auditor to attend.
The second type of meeting is one with a Review Group. This formal meeting provides an opportunity for the company to provide further information, to discuss the various matters at issue and to make representations about the accounting treatment used. At this meeting, the corrective action to be taken, if any, may be discussed. We would normally expect a company’s finance director to attend and we would suggest that you invite your auditor as well. It is unusual for legal representatives to attend.
FRRP members act on a voluntary basis and are often fully employed in senior positions elsewhere. To ensure that meetings take place on a timely basis, it is helpful if companies can be flexible in providing availability for such meetings.
I don’t agree with your findings. Can I appeal?
If a company disagrees with our findings, the Conduct Committee can seek to enforce its view by going to court to obtain an order requiring directors to restate their report or accounts . The ‘appeal’ is therefore the court case, including any further appeal process that may be invoked by either party following an unfavourable judgement.
What penalties can the Conduct Committee enforce if it concludes that there has been a breach of reporting requirements? Can the directors be made personally liable?
The only remedy open to the Conduct Committee is to obtain a court order requiring directors to restate the defective report and accounts. The court could require the company directors to pay the costs of restatement personally, including the costs of circulating revised statements to shareholders. The Conduct Committee has no powers against directors, but can refer matters to other authorities, including appropriate professional bodies.
We generally expect to reach agreement with a company on the appropriate action to be taken in any case where a breach of accounting or reporting requirements has been identified. This often takes the form of prospective correction, with improved or amended disclosures or accounting in future sets of accounts. In some cases, all that is needed is fuller disclosure to enable transactions and accounting treatments to be better understood by users.
This is a very busy time for my company. Can I ask for the accounts review to be delayed?
As defective accounts could mislead the public, the Conduct Committee’s procedures need to allow for timely rectification. We do not, therefore, generally allow companies to delay the initiation of a review into its accounts. We do, however, recognise that there may be circumstances that make it difficult for a company to respond to our enquiries within what it considers to be a reasonable timeframe. For example, the company may be engaged in a takeover or acquisition, or the Chairman or finance director could be absent. Where a company anticipates difficulty in responding to our letter within a reasonable time, it should contact the CRR Director, as soon as possible to discuss its proposed timings.
We have incurred considerable cost dealing with your review. Can we claim compensation?
No. We do not enter into a substantive exchange of correspondence with a company unless there are matters that have come to our attention that lead us to believe that there may have been a breach of accounting or reporting requirements.
We do, however, aim to be proportionate in our approach. We usually write to companies for additional information only where there is a risk that the accounts may be materially in breach of reporting requirements which may, in turn, affect the decisions of users of the accounts.
We try not to raise trivial matters but to assist companies in focussing their efforts on significant matters by distinguishing between points of substance and other points set out in a separate appendix which do not require a response.
I am not sure about the correct accounting treatment to adopt for a particular transaction. Can I ask the FRC for clearance in advance of publishing my accounts?
The FRC does not operate a system of advance clearance and is unable to give advice to an entity or its auditors as to whether, in its opinion, a particular accounting treatment would or would not meet the requirements of the law, including accounting standards, or listing rules.
I have received a letter relating to a review of my company’s half yearly report and accounts in accordance with the Companies (Audit, Investigations and Community Enterprise) Act 2004 (the “2004 Act”). I see from the Operating Procedures that the CRRC might report directly to the Conduct Committee, without establishing a Review Group in some circumstances, in order not to cause delay. What might cause the CRRC to take that approach?
A Review Group is established only in rare circumstances where CRR, supported by CRRC, has not been able to satisfy itself on questions raised following an exchange of correspondence. This is usually in respect of complex issues or matters where precedent might be established. The CRRC might consider reporting direct to the Conduct Committee in respect of reviews conducted under the 2004 Act where there is a clear and material breach of an accounting requirement which the company has acknowledged but where it has not offered any remedial action. In this circumstance, prompt reporting by the Conduct Committee to the Financial Conduct Authority might assist the authority in taking early and appropriate action given its more extensive powers.
The Conduct Committee’s Operating Procedures explain that my report and accounts will be reviewed by FRC staff who may, however, consult with the CRRC. Will I know whether or not there has been a consultation?
Generally, you will not know whether or not the CRRC has been consulted on one or any of the issues raised with you.
The Operating Procedures expect a premium listed company’s Audit Committee report to include reference to any interaction with the FRC’s Corporate Reporting Review function in its next public report, in accordance with the FRC’s Guidance on Audit Committees. My company received a letter saying that CRR had reviewed my last report and accounts and had no substantive questions to raise. Would you expect me to refer to that letter in our next report?
Yes. We would expect this letter to be referenced. The fact that your last published report and accounts was reviewed and did not give rise to any substantive questions is a matter in which investors, potential investors and other readers of the accounts are likely to have an interest.
My company does not have a premium listing – we are not even listed and do not have an Audit Committee. Would the Conduct Committee expect me to disclose the fact that my last report and accounts had been subject to review and to include the same type of information expected of Audit Committees of premium listed companies?
As explained above, the fact that a company has had its report and accounts reviewed is likely to be of general interest to any reader of the next year’s accounts. The Conduct Committee encourages all Boards to be transparent about the extent of any interaction with the FRC’s CRR function in its subsequent report and accounts.
Your Operating Procedures explain that the FRC will periodically publish lists of the companies whose reports have been reviewed and where its enquiries are now closed. Will you publish any additional information about the review or its outcome?
The FRC only intends publishing the company name together with a reference to the specific report and accounts that were reviewed and whether the review was a regular review or part of a thematic review. It will only do so when you have published your next report and accounts and where you, or your Audit Committee, will have had opportunity to comment on the intervention.
Will you tell me when you are going to publish the name of my company?
Yes. As a matter of courtesy, we will let you know when we are going to publish our reference to your review.