The UK’s Financial Reporting Council (FRC) has published 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.
Stephen Haddrill, chief executive officer (CEO) of the FRC, said: “Corporate reports have improved in many respects in recent years. At the same time they have become more cluttered and this has reduced their value in the eyes of investors. The aim of these recommendations is to provide more balanced and comprehensive information to investors and thereby support the effective operation of the capital markets.
“Annual reports are more than marketing documents: they are a vital source of narrative and financial data which are used by shareholders to make investment decisions. We want to encourage all companies to follow the example of the best. We believe it is particularly important that directors explain clearly how they identify and manage risk and what keeps them awake at night,” he added.
To assist the FRC in promoting high quality corporate governance and reporting it proposes to create a new market participants group to spot market developments and identify best practice. It also proposes to form a ‘financial reporting lab’ which will test financial reporting opportunities and enable trials to take place to encourage greater innovation in the market.
In July 2010 the FRC formed an advisory group made up of senior business leaders and members of the accountancy profession to help the FRC examine lessons from the financial crisis as they apply to corporate reporting, accounting and auditing of non-financial services companies. The advisory group has supported the FRC in identifying and evaluating the recommendations contained in this report.
The FRC will consult on any specific proposals resulting from this publication and, in particular, will seek the views of investors, company directors and auditors. The deadline for stakeholder responses is 31 March 2011.
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