Investor confidence enhanced by good practice audit committee reporting
18 December 2017
Audit Committee reports create trust and confidence among investors according to a new report
from the Financial Reporting Council (FRC). Investors gain valuable insight into the effectiveness of audit committees and the quality and rigour of their work from the reports which they have been obliged to provide in the company’s annual report, since 2012.
Investors welcome that the interests of the company’s shareholders are represented in matters of financial reporting, external and internal audit, and internal control. However investors and audit committees consider that lengthy, compliance driven reports risk hiding key information. Investors encourage ‘comply or explain’ reporting instead. Furthermore investors and audit committee chairs recognise that there is scope for more engagement between them.
The report is a pilot project of the FRC’s Audit and Assurance Lab, which encourages audit committees, companies, investors and auditors to collaborate on best practice on audit related issues.
This Phase 1 report, which looks at external reporting by audit committees, highlights that investors particularly look to the audit committee, to give them confidence in the appointment of the external auditor, to monitor the auditor’s independence and objectivity and promote audit quality. Phase 2 will review external auditors’ reports to audit committees.
Marian Williams, Director, Audit, said
“This pilot Audit & Assurance Lab report highlights real-life, good practice examples of audit committee reporting across the range of the committee’s responsibilities; and includes questions to assist audit committees and investors to prompt further good practice reporting.
On external audit appointment and tendering, both audit committees and investors overwhelmingly agree that audit quality should be the key selection criteria. Investors want confirmation in the committee report that quality, and not cost, is paramount.
Investors want the audit committee to be open and specific in their reporting of significant issues. Audit committees recognise the importance of disclosing the key decisions and judgements made during the year.”
Many investors would welcome more specific reporting on:
- upcoming and recent audit tenders and the approach to audit quality and independence;
- the justification of non-audit services;
- the rationale for financial reporting judgements, and the committee’s responsibility for internal control and risk management; and
- the outcome of the committee’s own effectiveness reviews..
Notes to editors:
1. The Financial Reporting Council’s (FRC) mission is to promote transparency and integrity in business. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
2. Audit committees are a requirement for listed companies and while all directors have a duty to act in the interests of the company the audit committee has a particular role, acting independently from the executive, to ensure that the interests of shareholders are properly protected in relation to financial reporting and internal control.
3. The Audit & Assurance Lab seeks to promote best practice on audit related issues in a safe environment, by engaging with stakeholders including audit committees, companies, investors, and auditors in a safe and collaborative environment. It is not intended to form policy, interpreting or monitoring requirements. Phase 2 will be reported on during the first half of 2018.
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