In an open letter to Finance Directors and Audit Committee Chairs, the Financial Reporting Council (FRC) has called for improvements in key areas of corporate reporting, including key accounting judgements and estimates, eliminating basic errors and how companies have applied the Principles of the UK Corporate Governance Code.
The FRC reviewed 220 annual and interim reports for its 2017/18 monitoring activity and conducted three substantive thematic reviews on significant reporting issues. Companies and their auditors cannot overlook the basics and must ensure observance of the specific rules and requirements of accounting standards on which investors rely.
Key findings of corporate reporting:
- The most significant concerns with financial statements include judgements and estimate disclosures and cash flow statements.
- Frequent challenges in the strategic report include the use of Alternative Performance Measures and whether reports are fair, balanced and comprehensive.
- Viability Statements have brought a greater focus on risk management but could be enhanced to show more clearly how companies have assessed their prospects and viability.
Key findings of corporate governance:
- Reported compliance with the Code is high. 95% of FTSE 350 companies report that they comply with all but one or two of the 55 provisions. However, reporting on how companies have applied the Principles in the Code has been inadequately covered due to an excessive reliance on compliance with the provisions,
- Companies remain reluctant to explain clearly when they don’t comply with Code provisions. The quality of explanations is disappointing - such explanations are essential to the successful operation of the Code. They must be thoughtful and provide a clear rationale for the action the company is taking.
Paul George, Executive Director of Corporate Governance & Reporting at the FRC, said,
“A lack of transparency in financial and governance reporting, undermines trust in business. More accurate reporting and better governance practices are needed to reverse this trend. The UK faces challenges with corporate reporting after EU Exit. Companies should therefore do more to meet the expectations of the market and society in order for the UK to maintain its position as an attractive home for global capital.
Recent developments in narrative reporting have raised fundamental questions about the purpose of companies’ annual reports. Reporting will need to evolve as a result and the FRC will begin a project to address the future of corporate reporting in response to these developments.”