MAJOR OPERATIONAL RISK should be the primary focus of corporate reporting, cutting “indiscriminate lists of risks that all companies face”, the Financial Reporting Council (FRC) has advised.
Two new FRC papers detail ways in which businesses can provide information that is useful to investors, keeping narrative reports zoomed in on strategic risk rather than exhaustive details.
Companies, investors and auditors helped the regulator with its Effective Company Stewardship: Next Steps consultation, while Boards and Risk summarises discussions with directors and listed business specialists held in recent months.
Chief executive Stephen Haddrill (pictured) said: “Our conversations with companies have revealed a step change in the efforts made by directors to manage risks. However, company reports often do not get to the heart of the matter. We hope that by putting an emphasis on the reporting of risks that could undermine the company’s strategy or long-term viability, companies will give investors the information they need to help them decide how to allocate capital”.
Proposals include auditors giving their view on the annual report as standard, rather than only when it does not tally with financial information. At the same time, the audit committee’s remit would be extended to ensuring the report is complete, fair and balanced.
Audit rotation is another focus of the papers, with companies being encouraged to put their audit out to tender every ten years on a comply-or-explain basis. This is a softer version of a policy currently up for consideration in the US, where watchdog the PCAOB is looking into mandatory audit rotation on a ten-year basis.
The work ties in with the FRC’s recently launched Financial Reporting Lab, a forum designed to bring together investors and companies to work through sticky issues.
Spokeswoman Alison Thomas described it as “a safe environment for companies and investors to identify bugbears in reporting and come up with a grounded and pragmatic solution.”
Effective Company Stewardship: Next Steps and Boards and Risk are an attempt to work through issues thrown up by the financial crisis. Richard Fleck, chairman of sub-body the Auditing Practices Board, said that chief among these is investor desire to understand judgements underlying financial statements.
The FRC will now consider whether the UK Corporate Governance Code needs to be updated accordingly.
Deloitte senior technical audit partner Isobel Sharp cautiously welcomed the documents, warning against “piecemeal” alterations to the code and calling for “any proposed change [to] be subject to proper research, cost/benefit analysis and full consultation”.
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