FRC: Most Boards Lack Clear Risk Identification
The Financial Reporting Council’s Financial Reporting Review Panel has urged directors of companies to go over their risk identification techniques and disclosure of uncertainties facing their businesses following observation of lax compliance with the Companies Act of 2006.
“The Financial Reporting Review Panel of the FRC is concerned about how companies are reporting the principal risks and uncertainties facing their business,” the FRC noted.
The Companies Act of 2006 provides for the inclusion of principal risk identification and description of uncertainties facing the business in the directors’ reports. This is part of the business review which aims to “inform members of the company and help them assess how the directors have performed their statutory duty to promote the success of the company,” the FRC said.
In assessing whether directors’ reports comply with this requirement, the Financial Reporting Review Panel has observed a lack of clear identification of uncertainties and actual risk believed by directors to face companies. The panel added that the long list of principal risks and uncertainties raises the question as to whether everything included in it is really principal.
“The description given of a risk or uncertainty is in generic terms and it is not clear how that risk or uncertainty applies to the company’s circumstances,” according to the panel.
Furthermore, the panel has observed inconsistency with the principal risks and uncertainties included in the list as compared with the other information given in the report and accounts.
“The directors’ report does not state how the company manages its principal risks and uncertainties,” the panel said.
“Any board should be able to describe in their accounts, simply and clearly, the principal risks and uncertainties facing the company. Many boards do this, but too many do not. Boards who retreat behind boilerplate give the impression that they have not themselves understood the risks they face,” said Bill Knight, Chairman of the Panel.
The Panel has proposed that directors consider whether their disclosures have clear principal risk and uncertainties identification, and if the identified principal risks and uncertainties are the actual ones that face the business.
The panel has categorized principal risks as those that have been previously included in board discussions and audit committee meetings.
If principal uncertainties and risk identification are clearly included in the director’s report and are consistent with how they are discussed within the company, shareholders will understand the real magnitude of that risk or uncertainty, the panel added.