BDO gives mixed assessment on audit committee reports

AUDIT committee reports continue to be backward-looking and riddled with generic or boilerplate language.

The concerns are flagged up in BDO’s latest annual audit committee reporting survey ‘A Gathering Storm‘, which reviewed the annual reports of 90 FTSE-listed companies with year ends falling between 30 September 2014 and 31 July 2015.

Among several areas of concern raised by the report are that material on the work of the internal auditors, and their effectiveness, “continues to be sketchy” in many reports with few “making reference to significant future changes in GAAP”. Such a stance “may have a considerable effect on the financial statements” such as those relating to leasing or revenue recognition or further significant changes in governance-related reporting requirements like the longer-term viability statement, it notes.

Another criticism is that the audit committee report is “still largely disconnected from the other material in the publication as a whole and rarely refers to or discusses other matters dealt with in the wider document which may be relevant to the work of the committee”. Descriptions of significant financial reporting issues also continued “to be disappointing”.

BDO audit partner James Roberts, said: “The brief period of stability in reporting requirements enjoyed by audit committees this year is coming to an end; the storm clouds of regulatory change are once again gathering on the horizon.

“Some real challenges await for the audit committee next year, as the new 2014 UK Corporate Governance Code comes into force, and beyond, as the significant reforms introduced by the Audit Directive begin to take effect.

“The requirement for a longer-term viability statement and for more material around risk management and wider internal control matters, and their review, in particular will test committees’ commitment to transparency and emphasise their increasing accountability. It will be fascinating to see how they respond.”

On a more positive note, BDO found that the disclosure of what involvement the audit committee had in the board’s assertion that the annual report is fair, balanced and understandable saw “some improvement” but sometimes overemphasised generic process-oriented information.

It also noted an “appreciable improvement” in the overall quality of audit committee reporting in 2015. The report said this may be “partially reflective of the brief period of stability in reporting requirements that are effective this year but it cannot have happened without effort on the part of the preparers of annual reports”.

“It is heartening that companies have, in general, focussed on how they can better represent the increasingly important work being carried out by their audit committeees.”

The top six firm also identified improvements in the descriptions of how audit committees assess external audit effectiveness and their work on appointing the auditor and safeguards on non-audit services.

Material around the advice given to the whole board on the assertion that the annual report is fair, balanced and understandable had also improved.

The average number of meetings held by audit committees continues to creep up, as does the proportion of female committee members.

Among its key action points that audit committees should consider to ramp up future reporting improvements include “truly embracing the spirit of transparency and openness that the Lab Project Report championed in 2013“.

Key elements of this are that audit committee reports should be more integrated with other parts of the annual report and embrace a forward-looking and retrospective stance. Another recommendation includes explaining “why and how things have been done, as well as just what has been done”.