In its Corporate Reporting Review work, the FRC seeks to ensure that the provision of financial information by public and large private companies complies with relevant reporting requirements.
The FRC reviews the directors’ reports and accounts of public and large private companies for compliance with the law. It also keeps under review interim reports of all listed issuers and annual reports of certain other non-corporate listed entities.
The FRC Board’s remit and powers in respect of corporate reporting review come primarily from the Companies Act 2006 (CA 2006).
Directors prepare accounts and auditors audit and report on them. The FRC’s corporate reporting review work does not duplicate what directors and auditors do. Directors are responsible for the accuracy of the accounts and for their judgements. It is the role of the FRC to enquire into cases where it appears that the requirements have not been followed - primarily where it appears that there is, or may be, a question whether the directors’ report or accounts complied with the requirements of the CA 2006.
The FRC carries out its responsibilities on behalf of the Secretary of State in relation to annual accounts and other documents falling within its remit. It has delegated its responsibilities to the Supervision Committee, which is a sub-committee of the FRC Board.
The Supervision Committee:
- develops and operates a programme of review of annual accounts based on risk assessment which is informed by priority sectors that are determined annually;
- enquires into accounts falling within its remit which come to its attention, whether through selection for review or through complaints;
- ensures that any published findings of the Supervision Committee in respect of the corporate reporting of an entity are brought to the attention of other authorities so that they can decide whether disciplinary or other sanctions should be applied;
- liaises with the Financial Conduct Authority and other authorities in the United Kingdom and internationally to foster the consistent application of accounting requirements and to improve the compliance of financial information with reporting requirements;
- contributes to and seeks to sustain an approach to enforcement that is vigorous, consistent and cost-effective; and
- seeks an appropriate level of recognition within the financial reporting community so as to maximise the deterrent effect of the Supervision Committee’s corporate reporting review activities.
In carrying out its corporate reporting review work the Supervision Committee takes cost-benefit considerations fully into account. The FRC, maintains operating procedures that take account of best practice, are consistent with those of other regulators world-wide and promote an effective and efficient enforcement process.
The Supervision Committee aims to ensure:
- timely but fair dealings with entities whose financial information comes under scrutiny;
- respect for the confidentiality of the process and the information provided by such entities, subject to the legitimate needs and responsibilities of other regulators;
- opportunities for companies to make voluntary corrective changes to their accounts prior to any court application; and
- appropriate public reporting of enforcement actions.
The Supervision Committee can ask directors to explain apparent departures from reporting requirements. If the Supervision Committee is not satisfied by the directors’ explanations it aims to persuade the directors to adopt a more appropriate accounting treatment. The directors may then voluntarily withdraw their accounts and replace them with revised accounts that correct the matters in error. Depending on the circumstances, the Supervision Committee may accept another form of remedial action - for example, correction of the comparative figures in the next set of annual financial statements. Failing voluntary correction, the Supervision Committee can exercise the FRC’s delegated powers to secure the necessary revision of the accounts through a court order. The FRC maintains a legal costs fund of £2million for this purpose.
The Supervision Committee’s predecessor bodies, the Conduct Committee and Financial Reporting Review Panel, succeeded in resolving all cases on a voluntary basis and without having to apply for a court order.
The Supervision Committee does not offer advice on the application of accounting standards or the accounting requirements of the Companies Act 2006.