FRC publishes annual report 2013/14

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16 Jul, 2014

The Financial Reporting Council (FRC) has today published its 2013/14 annual report (“the annual report”). The annual report reviews the activity of the FRC over the last year, highlights the achievements of the FRC in 2013/14 and also identifies areas that it will address in 2014/15.

The annual report provides an assessment of the progress that the FRC has made against its three year strategy, set in 2013.  The strategy, focusing on five areas, seeks to promote:

  • High quality corporate governance and investor stewardship which foster trust in the way companies are run.
  • High quality corporate reporting that is fair, balanced and understandable.
  • High quality audit and confidence in the value of audit.
  • Actuarial oversight and standards which underpin high quality actuarial practice, and integrity, competence and transparency of the actuarial profession.
  • Effective, proportionate and independent investigative, monitoring and disciplinary procedures.

The annual report highlights:

  • That “the quality of governance amongst larger listed UK companies is generally sound” as indicated by the high levels of compliance with the UK Corporate Governance Code (“the Code”) found in the annual review of the Code and Stewardship Code published in December 2013.  However the FRC comment that many companies “still struggle to articulate clearly why they have chosen not to comply with the Code”.  The FRC also indicate that it has “concerns about whether companies, markets and policymakers take a sufficiently long-term view” and that, going forward, it will be looking to provide thought leadership in the EU on the developing role of risk capital.
  • That corporate reporting has generally been “good” but notes that improvements could be made in the reporting by smaller listed and AIM companies.  The annual report highlights the initiatives, such as the publication of the Guidance on the Strategic Report that the FRC is undertaking to improve the overall quality of corporate reporting in order to address the needs of investors. 
  • That the quality of auditing in the UK is “generally good” most notably in relation to the largest listed companies.  The FRC highlight that “there is scope for improvement in the banking sector in particular, including a concern about the lack of sufficient challenge when testing key assumptions underpinning loan loss provisions”.  This was highlighted in the 2013/14 Audit Quality Inspections Annual Report.  The FRC also highlight that there has been a “positive response” to their efforts to promote audit re-tendering and that its work, alongside UK stakeholders, on the new EU audit Regulation and Directive will “ensure that UK audit regulation can remain effective and proportionate”.

Looking ahead, key priorities for the FRC include:

  • Undertaking a project to evaluate and plan how it might assist smaller listed and AIM companies to address the quality of their reporting so as to improve confidence in the integrity of their financial statements and of the markets as a whole.  The project will aim to achieve a step change in the quality of financial reporting of smaller listed and AIM companies over a three year period. 
  • Undertaking a thematic review of UK bank audits, focusing on how these are conducted, identifying why improving their quality has been slow and seeking to understand what needs to be done to improve them.
  • Developing further guidance for audit committees focusing how audit quality and effectiveness might best be assessed by audit committees.
  • Implementation of aspects of the EU Audit Regulation including reviewing auditor independence requirements.
  • Reviewing audit firm governance.
  • Supporting the application of the new UK GAAP standards.
  • Implementation of Lord Sharman’s recommendations on going concern. reporting.
  • Promoting Clear and Concise reporting in annual reports.

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