FRC investigation into company reporting finds evidence of straightforward non-compliance in smaller companies
THE FRC is considering taking action to strengthen company reporting after discovering serious flaws in several company reports as part of an investigation into more than 200 financial statements.
In its annural corporate reporting review, the FRC found that smaller listed or quoted companies suffer from a lack of appropriate resource, and cited evidence of of straightforward non-compliance with reporting standards.
The FRC said it will consider “actions” to strengthen reporting in these types of companies in the next year.
Seven areas of corporate reporting that are commonly raised as a challenge by the FRC are: Business reviews, revenue, cash flow statements, alternative performance measures, investment property valuations, business combinations, impairment.
• Business review – they found that in these the narrative appeared inconsistent with what was reported in the accounts. They are supposed to be balanced and comprehensive however, there were several reports where there was only good news, which the FRC challenged
• Revenue – they found many to be bland and contain repetition of extracts of IFRS. Also, inconsistency between revenue recognition policy and the company’s business model.
• Cash flow statements – evidence was found where it was misclassified or misstated, as well as reported non-cash movements as cash flow.
• Alternative performance measures – some were not clearly defined or explained and could be confused with similar IFRS measures.
• Investment property – although valuations by the Royal Institute of Chartered Surveyors was deemed not enough, the FRC appreciated it had made it harder for this part of the report, however, it added that the IFRS requirements need to be complied with.
• Business combinations unclear where board identified all separately acquired intangible assets.
• Impairment, failure to provide sensitivity disclosures. The heroic nature of assumptions supporting a significant short term turn-around in a loss-making business.
Richard Fleck, chairman of the FRC’s conduct committee, said: “We operate in an environment where reputation is enhanced by transparency and openness supports integrity. It is important that boards are willing to hold open and constructive dialogue with investors and respond well to suggestions for improvements to the quality of their reports.”
Business Reviews are to be succeeded by the introduction of a strategic report from 1 October. The change is designed to help companies “tell their story” which will include: strategy, business model, principle risks, and challenges the organisation has faced.
The Corporate Reporting Review Annual Report for 2013 covered reviews conducted to the year 31 March 2013.