Thursday, 1 September 2011

UK: FRC proposals published - narrative reporting, risk and going concern, the role of the audit committee and auditors

At the start of this year the Financial Reporting Council published a consultation paper titled Effective Company Stewardship - Enhancing Corporate Reporting and Audit: see here (pdf). Today, in a paper titled Effective Company Stewardship - the Next Steps, the FRC has set out some of the actions it proposes to take: see here (pdf).

With regard to narrative reporting, the FRC notes that the Government will be publishing proposals in the autumn following the consultation which ended last year. The autumn will also see the FRC launch its 'Financial Reporting Laboratory' (on October 14 to be precise) and the continuation of work to consider whether there is support for the development of narrative reporting standards. In the FRC's view, narrative reports should, in the future, focus primarily on strategic risks and should disclose the risks inherent in companies' business model. An update of the Turnbull guidance is promised but there will not be a comprehensive review. Instead, the updating will reflect improvements in practice and will clarify the board's responsibilities with regard to determining the nature and extent of the significant risks it is willing to take. With regard to boards and risk, the FRC has published a summary of its discussions with companies, investors and advisors: see here (pdf).

With regard to auditing, the FRC proposes to review and revise the auditing standards concerned with the audit report and reporting by the auditor to the audit committee - ISA (UK & Ireland) 260 and ISA (UK & Ireland) 700 - reflecting its view that more needs to be done to demonstrate that auditors are achieving the fundamental purpose of the audit. Perhaps one of the most interesting proposals is that concerning the debate about audit firm rotation. The FRC is proposing to amend the UK Corporate Governance Code to require companies to put the external audit out to tender at least once every ten years or to explain why this has not been done and the reasons for not doing so. Other changes are proposed to the Code in order to extend the remit of the audit committee with regard to the whole of the company's annual report.

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