News October 2013 FRC publishes Financial Reporting Lab report on Reporting of Audit Committees

FRC publishes Financial Reporting Lab report on Reporting of Audit Committees

24 October 2013
PN 91

The FRC’s Financial Reporting Lab has published its report on ‘Reporting of Audit Committees’ (PDF) which provides insight from companies and investors on effective approaches to audit committee (AC) reporting including the content and the way information is presented. 19 companies and 25 investor and analyst organisations took part in the project that has been timed so that companies can benefit from the report’s observations when drafting their reports for this calendar year.

Revisions to the UK Corporate Governance Code made in October 2012 introduced requirements for audit committees to describe in more detail the work that they do. The Code calls for descriptions of the significant issues considered by AC’s in relation to the financial statements and how they were addressed, how the AC assessed the effectiveness of the external audit process and their approach to appointing the auditor and safeguarding objectivity and independence relative to the use of non-audit services. The Competition Commission has proposed that AC reports should be subject to an advisory vote.

The Lab found that investors are keen to gain an understanding of what issues have been the subject of the audit committee’s focus for the year. Taking time to ensure information is disclosed in the most appropriate place in the annual report, allows cross referencing to be used to help investors locate the related information quickly, while avoiding repetition. The report gives examples of what investors are asking for.

The report suggests that audit committee chairmen should:

 

  • Demonstrate ownership and accountability by personalising their report
  • Ensure reports are specific to their company and current year’s activities  
  • Describe in detail actions taken rather than just the functions they serve
  • Depict their specific activities during the year and their purpose, using active, descriptive language
  • Disclose judgements made for the year, and the sources of assurance and other evidence used to satisfy themselves of the appropriateness of the conclusion
  • Consider their audience in describing issues and their context 

Director of the Financial Reporting Lab, Sue Harding said:

“Investors have told us that they will pay more attention to audit committee reports if they provided more meaningful information. This report sets out clearly how audit committee members can make their reports do just that. Audit committee reports should form part of the conversation between companies and investors building confidence in this important area of governance and showing how it contributes to good financial reporting.”

 

Notes to editors:

 

  1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
  2. The Financial Reporting Lab provides a unique environment where investors and companies can come together to develop pragmatic solutions to today’s reporting needs:
    1. As a learning space, companies can use the Lab to test new and advanced reporting formats with investors, and investors can indicate areas where management can add greater value through the information they provide;
    2. As a hub to support innovation in reporting, the Lab’s focus on gathering and sharing evidence from the market provides the broader corporate community with feedback from investors on the value that new reporting formats bring. More information about the Lab’s work can be found here.