Financial Reporting Council Update: Annual Report 2015 and Culture Project
Annual Report 2015 On 22 October, the Financial Reporting Council (“FRC”) published its Corporate Reporting Review Annual Report 2015; it covers the year to 31… Read more
Annual Report 2015
On 22 October, the Financial Reporting Council (“FRC”) published its Corporate Reporting Review Annual Report 2015; it covers the year to 31 March 2015. Its findings can be summarised as follows:
- Despite the good overall quality of corporate reporting, the FRC is concerned about how some boards assess materiality. The FRC states that materiality determinations must be both quantitative and qualitative and not simply used to conceal errors or achieve a particular objective. The main question on the board’s mind should be: “what do investors expect to see”?
- Smaller companies are failing to explain their story and comply fully with relevant standards. To address this, the FRC has issued a consultation paper with the aim to improve the quality of reporting by smaller companies.
- Although the strategic report was the most frequently raised area of corporate reporting by companies over the year, boards made appropriate effort to implement and produce the new strategic report and most companies effectively explained their strategy and described their business model.
- The other frequently raised issues were: accounting policies, critical judgments, clear and concise reporting, business combinations, exceptional and similar items, revenue, pensions, taxation and cash flow statements.
- Good practices for company responses to the FRC outlined in the report include: early disclosure of all information directly relevant to an issue; accompaniment of audit firm representatives with clients when meeting with the FRC to facilitate the discussion; the board is responsible for all information included in its report and accounts, including items prepared by external service providers; and overseas based companies need to establish internal processes for ensuring prompt correspondence with regulators.
According to the FRC, a company’s board has a vital role in shaping and embedding a healthy corporate culture as it is the board that sets the values and standards of behaviour within the company and there exists a strong link between governance and culture which, if harnessed correctly, can lead to long-term commercial success.
It is with this in mind that the FRC is launching an initiative to gather practical insight into corporate culture and the role of boards. Its aim is to understand how boards can shape, embed and assess culture and to identify and promote best practice.
The FRC will research the role of boards in corporate culture within the following framework made up of four workstreams:
- Delivering Sustainable Success – the role of an effective board.
- People issues – aligning culture, values, human resource practices and performance reward systems.
- Stakeholder issues – relationships between culture and business models, with shareholders, customers and suppliers, and the impact on the wider community and environment.
- Embedding and assurance – measuring and monitoring culture, the role of internal audit, risk management and public reporting of cultural indicators.
These findings will form recommendations to be included in the FRC’s updated Guidance on Board Effectiveness and UK Corporate Governance Code.
For more information, please contact John Alder, corporate associate