The UK’s Financial Reporting Council (FRC) today publishes recommendations aimed at improving the dialogue between company boards and their shareholders.
The FRC’s report, ‘Effective Company Stewardship: Enhancing Corporate Reporting and Audit’, contains seven key recommendations. It responds to lessons of the financial crisis and builds on changes already made, such as the new UK Corporate Governance Code and the introduction of the Stewardship Code for institutional investors.
The report proposes that the whole of the annual report and accounts should be balanced and fair, including the chairman and chief executive reports, rather than just specific parts of it as at present. While the best annual reports continue to improve, research by the FRC shows that some companies fall short of fulfilling their Companies Act requirements. Of 50 companies studied, a half to two thirds fell short in some areas, including in their reporting of principal risks.
The FRC also proposes a more substantial communication role for Audit Committees so that they provide fuller reports to shareholders, particularly in relation to the risks faced by the business. The auditors’ report should, in turn, include a new section on the completeness and reasonableness of the Audit Committee report, particularly in relation to the dialogue between them and the Committee.
Key recommendations included in the report:
- Directors should take full responsibility for ensuring that an Annual Report, viewed as a whole, provides a fair and balanced report on their stewardship of the business.
- Directors should describe in more detail the steps that they take to ensure:
- The reliability of the information on which the management of a company, and therefore directors’ stewardship of the company, is based; and
- Transparency about the activities of the business and any associated risks.
- The growing strength of Audit Committees in holding management and auditors to account should be reinforced by greater transparency through:
- Fuller reports by Audit Committees explaining, in particular, how they discharged their responsibilities for the integrity of the Annual Report and other aspects of their remit (such as their oversight of the external audit process and appointment of external auditors); and
- An expanded audit report that:
- includes a separate new section on the completeness and reasonableness of the Audit Committee report; and
- identifies any matters in the Annual Report that the auditors believe are incorrect or inconsistent with the information contained in the financial statements or obtained in the course of their audit.
- Companies should take advantage of technological developments to increase the accessibility of the annual report and its components.
- There should be greater investor involvement in the process by which auditors are appointed.
- The FRC’s responsibilities should be developed to enable it to support and oversee the effective implementation of its proposals.
- The FRC should establish a market participants group to advise it on market developments and international initiatives in the area of corporate reporting and the role of assurance and on promoting best practice.
The report can be downloaded from the
FRC website.