Communicating and interacting with CRR
Published: 28 September 2023
6 minute read
The majority of our interactions with companies are conducted through formal letters. However, in some circumstances it may be more appropriate and efficient to have face-to-face meetings with company representatives.
Correspondence and meetings
The majority of our interactions with companies are conducted through formal letters – our experience is that the great majority of issues can be resolved in this way. We have a strong preference for sending and receiving written correspondence via our email inbox, [email protected], as this avoids postal delays but companies may still correspond with us by letters sent to the FRC’s postal address. We expect formal letters to be signed by a director of the company; this is the clearest evidence that appropriate responsibility has been taken for responding to our enquiries.
There are, however, occasions when an alternative to formal letters may be more appropriate. In particular, 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 written correspondence first. This ensures that discussions can be focused on the key aspects of any open matters.
Meetings between CRR and the company are generally informal. Their purpose is often to discuss complex accounting issues that may have arisen to ensure that both parties fully understand the issue raised. They may also be appropriate where the company’s business is specialised and we would appreciate a better understanding both of it and the environment in which it operates. Final decisions on corrective action will only very rarely be taken at a meeting; usually they will still need to be confirmed through formal written correspondence. We normally expect a company’s finance director (or equivalent) to attend a meeting with CRR. We also recommend that the company invites its auditor, as this may help the enquiry to proceed more efficiently. It is unusual for legal representatives to attend. Meetings may be suggested by either CRR or the company.
Meetings can also occur either as part of the Executive Director of Supervision’s consideration of the case, or during the FRC Board’s consideration of whether to apply to court. These more formal meetings allow the company an opportunity to provide further information, to discuss the various matters at issue, and to make representations about the accounting treatment used. At these meetings, the corrective action to be taken, if any, may be agreed.
How a company should respond to a letter from CRR
The appropriate response that a company should have to a letter from CRR depends on the type of letter received.
‘No issues’ and ‘Appendix’ letters are sent when we have reviewed a company’s report and accounts or interim report and have identified no substantive questions that we want to raise as a result.
No issues letters simply inform companies of our review without making any further observations.
Appendix letters include a schedule of observations that the company is asked to consider when preparing its next report and accounts and/or interim report but for which we do not require a specific response. A company generally need only provide additional disclosures if they are relevant and material to its next report and accounts or interim report. Some of these points may relate to suggestions to improve the quality of a company’s reporting – specifically, where we see opportunity for making it clearer and/or more concise – rather than highlighting non-compliance with reporting requirements.
We ask companies to acknowledge receipt of these types of letters and, for Appendix letters, to undertake to consider any points included the schedule of observations appended to the letter in their future reporting. We generally expect this acknowledgment letter to be signed by a director of the company; this is the clearest evidence that appropriate responsibility has been taken for responding to our enquiries.
When considering how to address matters highlighted in an Appendix to our letters, it is important to remember that accounting standards do not apply to immaterial items, and we take the same approach. A company should not include unnecessary information in its corporate reporting and we encourage management not to add further disclosure to the report and accounts or interim report unless that additional information is relevant and material.
‘Substantive’ letters ask for additional information and explanation to help us better understand a company’s report and accounts or interim report. This type of letter requires a full and formal response from the company.
Initially, the company should acknowledge receipt of the letter and, when doing so, let us know when we should expect to receive its full reply.
As we are committed to completing our enquiries within a reasonable period of time, we expect companies to respond to our questions promptly. We usually expect to receive a full response to our letter within 28 days. We do, however, recognise that there may be circumstances that make it difficult for a company to respond to our enquiries within this timeframe. For example, if key personnel are not available or if the matter is particularly complex. Where a company anticipates difficulty in responding to our letter within this time, it should contact us as soon as possible to discuss its proposed timings.
Where possible, CRR also aims to respond to companies’ letters within 28 days. However, the response time may increase on more complex cases. Consequently, if for example, the company has an external reporting deadline approaching, it may be beneficial to discuss the likely timing of our response and how our enquiries might be most efficiently concluded. If such circumstances exist, it should be indicated in the company’s acknowledgement of our letter, in its formal response or, otherwise, by email to [email protected].
It is in everyone’s interest that we receive a well-considered and full response as, in our experience, helpful and comprehensive responses can lead to earlier closure of an enquiry. We expect a company’s response to a Substantive letter to be signed by a director of the company; this is the clearest evidence that appropriate responsibility has been taken for responding to our enquiries.
We often raise questions because it has not been possible to tell from the published report and accounts or interim report whether the accounting treatment adopted for a particular transaction complies with relevant accounting and reporting requirements. The matter can often be resolved simply by providing full information about the policy or transaction and the rationale supporting the chosen treatment. In many cases, however, companies offer to make voluntary corrective changes to their reporting. This usually takes the form of prospective correction, with improved or amended disclosures or accounting in future reports and accounts and/or interim reports.
If, as a result of a CRR enquiry, a company considers that a change in accounting policy or a correction of numbers, or a correction or improvement to disclosures is appropriate, this should be discussed with us and its auditors before any action is taken.
When responding to our questions, it is important to remember that accounting standards do not apply to immaterial items, and we take the same approach. Companies should not include unnecessary information in their corporate reports. We discourage management from adding further disclosures to their reports unless that additional information is relevant and material. Conversely, we may ask why a company believes that an item is immaterial if this is not evident from the published financial information; we may indicate that an accounting treatment might need to be reconsidered should a matter become material in future.
A Substantive letter also commonly includes a schedule of other matters, similar to that included in an Appendix letter described above. These should be considered similarly, including the provision of an undertaking by the board to consider the points included in it in future reporting.
We normally address our first letter in an enquiry to the company Chair (or equivalent); however, as our questions are about the company’s published report and accounts or interim report, into which the finance director (or equivalent) will have had considerable input and who may be best placed to answer our queries, they are also copied into our initial letter. This means that they are immediately aware of the questions raised and can begin to plan how to manage the response. For similar reasons, where one exists, our letters are also copied to the Chair of the Audit Committee.
Unless the company indicates that it does not wish us to do so, we notify its external auditor that we have written a letter to it. It is advisable to discuss the matters we raise in our letter with the auditor at an early stage, as it may already have considered those issues and have views. It may also have experience of responding to a CRR enquiry and could be well placed to assist in replying to our letter from both a technical and practical perspective. A company may also wish to invite its auditor to attend any meeting with CRR, alongside representatives from its management team.
Where a company’s audit committee and/or auditor has been involved in the preparation of a response to a substantive question, it is helpful if that fact is stated in the company’s letter.
There are a number of good practices which, if followed, tend to result in the achievement of a more efficient conclusion of our enquiries. A good response:
- clearly identifies the question that is being answered;
- addresses all questions included in the main body of our letter (substantive questions);
- clearly states if the issue at hand is not material and why;
- raises our understanding of the issue to the level of management;
- explains fully any judgements made and how they comply with the financial reporting requirements;
- candidly and clearly addresses the issue – vague responses only prompt further questions;
- admits a deficiency in reporting and suggests a way of putting it right;
- doesn’t argue a lost cause;
- volunteers other helpful explanations to aid our understanding; and
- is clear to what extent the board, audit committee (where relevant) and auditors have been involved.
Conversely, where we do not receive a response that is sufficiently detailed to allow us to reach a conclusion, the company can expect to receive further requests for information, which may delay the closure of our enquiries.