Friday, 7 January 2011

UK: FRC publishes 'Enhancing Corporate Reporting and Audit' discussion paper

The Financial Reporting Council has today published a discussion paper titled Effective Company Stewardship: Enhancing Corporate Reporting and Audit. The report, available here (pdf), outlines the following recommendations, including some relating to the role and powers of the FRC:
  • Directors should take full responsibility for ensuring that an Annual Report, viewed as a whole, provides a fair and balanced report on their stewardship of the business. In this regard, the FRC proposes that the Accounting Standards Board should issue a Narrative Reporting Standard which would set out the principles governing the preparation of Annual Reports (including narrative reports) and establish the responsibility of directors for ensuring that Annual Reports are balanced and fair.
  • Directors should describe in more detail the steps that they take to ensure: [a] the reliability of the information on which the management of a company, and therefore directors’ stewardship of the company, is based; and [b] transparency about the activities of the business and any associated risks.
  • The growing strength of Audit Committees in holding management and auditors to account should be reinforced by greater transparency through: [a] fuller reports by Audit Committees explaining, in particular, how they discharged their responsibilities for the integrity of the Annual Report and other aspects of their remit (such as their oversight of the external audit process and appointment of external auditors); and [b] an expanded audit report that: [i] includes a separate new section on the completeness and reasonableness of the Audit Committee report; and [ii] identifies any matters in the Annual Report that the auditors believe are incorrect or inconsistent with the information contained in the financial statements or obtained in the course of their audit.
  • Companies should take advantage of technological developments to increase the accessibility of the annual report and its components.
  • There should be greater investor involvement in the process by which auditors are appointed.
  • The FRC’s responsibilities should be developed to enable it to support and oversee the effective implementation of its proposals. In the context of this recommendation, the FRC states that consideration should be given to how, in the event of a corporate failure, a review might be carried out of that company's governance, accounts, and audit to ensure lessons, where appropriate, are learned and to ascertain whether further investigations or regulatory actions are necessary.
  • The FRC should establish a market participants group to advise it on market developments and international initiatives in the area of corporate reporting and the role of assurance and on promoting best practice.

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