FRC acts to increase transparency in corporate reporting
News types: Publications
Published: 1 September 2011
Companies should improve the way they report to investors on the key strategic risks facing their businesses, according to two new reports published today by the Financial Reporting Council (FRC).
As a result of detailed consultations with companies, investors, auditors and other interested parties, the FRC proposes to ensure that company narrative reports focus primarily on strategic and major operational risks, rather than indiscriminate lists of risks that all companies face.
The ‘Turnbull Guidance’ will be updated, and the FRC will consider whether changes may also be needed to the UK Corporate Governance Code to reflect lessons from its work on risk and ensure the conclusions of the on-going Sharman Enquiry on going concern and liquidity risks are taken fully into account.
The FRC’s proposals on risk are part of a wide-ranging set of measures aimed at improving the quality of company reporting, and increasing the information provided by audit committees and auditors about the work that they have done and the judgements or decisions they have made. These include:
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A proposal that the audit committee’s remit should be extended to include consideration of the whole annual report and to ensure the report, viewed as a whole, is fair and balanced; and
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Amending auditing standards to ensure that auditors always report the outcome of their review of the whole annual report, rather than, as at present, only when they encounter information that is inconsistent with the information contained in the financial statements;
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Establishing a new Financial Reporting Laboratory to remove roadblocks to effective reporting and promote innovation;
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A proposal to require companies to put their audits out to tender at least once in every ten years, or explain why they have not done so.
These proposals form part of the FRC's response to the financial crisis of 2007 and 2008 and are the result of an extensive process of consultation with market participants since January this year.
Effective Company Stewardship: Next Steps is the FRC's response to over 100 submissions to its consultation published in January 2011. Boards and Risk summarises detailed discussions the FRC has held over the past six months with directors and specialists from listed companies.
Commenting, FRC Chief Executive Stephen Haddrill, said:
"These reports represent another step forward in applying the lessons we have learnt from the financial crisis, to improve the overall transparency of the reporting process and the accountability of all those involved in the financial reporting chain.
"Our conversations with companies have revealed a step change in the efforts made by directors to manage risks. However, company reports often do not get to the heart of the matter. We hope that by putting an emphasis on the reporting of risks that could undermine the company’s strategy or long-term viability, companies will give investors the information they need to help them decide how to allocate capital".
Commenting on the proposals relating to the role of audit committees and auditors, Richard Fleck, Chairman of the Auditing Practices Board (APB), said:
“A recurring theme in the responses to our consultation paper has been the importance of providing greater insight into the key judgements that underlie financial statements.
Under these proposals, in future audit committees will report the key judgements and decisions made in the course of preparing and finalising financial statements, and auditors will report whether their review of the annual report as a whole – and not just the financial statements – has revealed any information that is inaccurate, or any other material that is inconsistent with information they obtained in the course of their audit."
Notes to Editors
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The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment.
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Effective Company Stewardship: Next Steps can be found here: Effective Company Stewardship - Next Steps (PDF)
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Boards and Risk can be found here: Boards and Risk - A Summary of Discussions with Companies, Investors and Advisers (PDF)