AC reports should not be dismissed as mere compliance

THE FRC’s September 2012 Guidance on Audit Committees mandates extensive reporting by the audit committees of listed companies on a range of potentially sensitive subjects. These changes have been well signalled, and one might have expected audit committees to have moved some way down the road of adoption in the last reporting season.

But research by BDO shows that, by and large, they haven’t. Only 30% of FTSE companies provided a separate audit committee report.

This is a missed opportunity for companies. Investor activism and the ‘shareholder spring’ have radicalised some stakeholders’ views on corporate reporting. Uninformative and boilerplate disclosure is more likely to breed distrust in investors’ minds as to the robustness and independence of thought of non-executive directors. The audit committee report is a powerful tool for giving stakeholders insight into the culture and integrity at the top of a company. Companies that wish to engage may be foolish to dismiss it as a mere compliance obligation.

Companies can take a few simple steps to produce a report that gives insight and reassurance, without unnecessarily airing all their dirty washing to the world at large:

• Write the report from the committee chair – it’s direct, personal, can give character, and it emphasises independence of thought.
• Rather than just trot out what responsibilities the committee has, give a flavour of how it discharges them. Clearly, some things happen between the three or four meetings a year – give that some airing.
• Most audit committees are composed of experienced and skilled business people. Don’t hide that – give an indication of committee members’ experience and of how they keep up to date.
• Don’t go for the minimum disclosure option every time. Where there are important matters, they should be dealt with. Our research showed an average quality score of just over 2.5 out of five for FTSE companies – an improvement on the previous year but really rather poor by any standard. Some discussion of what the committee considered in relation to, for example, the integrity of financial reporting might be illuminating, but is rarely found.

These improvements could radically improve audit committee reporting ahead of the implementation of the FRC’s changes and the issue of guidance from the Financial Reporting Lab. They require little effort or cost, carry little risk, and their absence fuels a simmering distrust in the integrity of reporting.

James Roberts is senior audit partner at BDO