Business Risk Should Be Clearer in Financial Reports, FRC Says
Key strategic risks facing businesses should find wider space in financial reports rather than focusing on “indiscriminate” lists of risks that all companies face, the Financial Reporting Council said.
The FRC urged companies to improve the way they report to investors on the key strategic risks facing their businesses, following a detailed consultations with companies, investors, auditors and other interested parties.
These proposals are 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. Last May, the International Accounting Standards Board, in response also to the financial crisis, improved the accounting standards for off balance sheet activities and joint arrangements in addition to IASB’s and the Financial Accounting Standards Board’s (FASB) new guidance on fair value measurement and disclosure requirements for International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP).
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 array of measures aimed at improving the quality of financial reports, 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.
The proposals stated that the audit committee’s remit should also include consideration of the whole annual report and to ensure the report, viewed as a whole, is fair and balanced. Further, the proposals require 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; establishing a new Financial Reporting Laboratory to remove roadblocks to effective reporting and promote innovation; 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.
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.”