Audit committees need to get cracking on Companies Act reform

by Rachael Singh

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14 Jun 2013

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CHANGES TO THE COMPANIES ACT will mean businesses have to get moving on collating and assuring new data they may never have tried to obtain before.

From 1 October this year annual reports will have to include information about a company's human rights approach, gender representation and greenhouse gas emissions.

"A fair number of quoted companies do not currently report this data. They will need to start thinking about how they will manage to do so - and fast, said Paul Holland, director in the sustainability advisory services team at KPMG in the UK.

"We expect audit committees to be raising this and asking what plans the companies have in place to ensure compliance. We are expecting a rush of calls now that the regulations have been laid before parliament."

Changes to the Act are part of reforms to simplify and strengthen non-financial reports and intend to produce a more fair representation of the company.

The amendments will see the introduction of a "strategic report" which will replace the current "business review". The change is designed to help companies "tell their story" which will include strategy, business model, principle risks and challenges the organisation has faced.

Business minister Jo Swinson says, "In order for shareholders to fully hold a company to account they need to have the right information to hand. Annual reports are a key tool for shareholders to get a good understanding as to how a company is performing, but they need to be produced in an open and transparent way."

Requirements include a breakdown of the gender of the board, senior management and the company as a whole; disclosure of greenhouse gas emissions; human rights issues the will explain the company's future direction.

Some reporting requirements were removed so that in theory there is no overall increase on the burden on businesses.

Two government consultations with stakeholders and investors revealed that reporting standards could be improved with concerns highlighting that many reports had become bogged down in corporate jargon, confusing readers.

In 2012 the government announced it would introduce greenhouse gas emission reporting for companies in accordance with the Climate Change Act 2008.

The wording has since been softened from a very descriptive data heavy requirement on GHG emission reporting, to putting the responsibility on companies to decide for themselves what emissions it is responsible for, allowing for greater flexibility.

However, although this gives greater flexibility the government may need to produce more guidance and reassurance on what is and is not acceptable, explains operations director Gary Davis from carbon accounting business Ecometrica.

"For instance is it reasonable that a hire car company does not report any emissions from its vehicle fleet on the basis that it does not control those emissions, or that a company hiring a car does not report those emissions because it doesn't own the vehicle?" he says.

However the changes have largely been welcomed by industry as moving reporting requirements in line with 21st century needs.

"The increased transparency provided by mandatory carbon reporting and the growing investor interest in environmental, social and governance issues will create a new reporting risk for companies," said associate director at Verco Andrew Prosser.

Ecometrica CEO Dr Richard Tipper added that: The statutory significance of environmental reporting has now been elevated to the same level as financial information. Companies and their directors have a particular responsibility in this respect, as the regulations explicitly require the directors' report to set out the methodologies used to calculate the emissions information and the ratio that confirms the relationship between an organisation's emissions and activities.

"Directors will not only want assurance that such numbers are correct, but also, a thorough understanding of how these break down across the business, by type of greenhouse gas and geography."

The changes will affect all reports that relate to financial years ending on or after 20 September 2013. 

International Integrated Reporting Council's CEO Paul Druckman said: The recent amendments to the Companies Act are part of a continuing process of increasing corporate transparency.

"Transparency is important, but it must have a purpose: to influence the behaviour of the management of businesses and how capital is allocated.

"Disclosure for its own sake will not bring about this behavioural change. These measures will not achieve their full potential until integrated thinking is embedded within business culture.

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