Companies should improve the way they report to investors on the key strategic risks facing their businesses, according to two new reports by the Financial Reporting Council (FRC). As a result of detailed consultations with companies, investors, auditors and other interested parties, the FRC proposes to ensure that company narrative reports focus primarily on strategic and major operational risks, rather than indiscriminate lists of risks that all companies face.
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 set of measures aimed at improving the quality of company reporting, 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. These include:
- A proposal that the audit committee’s remit should be extended to include consideration of the whole annual report and to ensure the report, viewed as a whole, is fair and balanced.
- 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 10years, or explain why they have not done so.
These proposals form 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.
FRC chief executive officer (CEO) 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.”
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