Financial Reporting Lab publishes report on how companies are approaching Audit Committee reporting in response to investor demands
01 Jun, 2015
The Financial Reporting Lab (“the Lab”) has published an implementation report (“the implementation report”) which highlights how companies are responding to investor demands in relation to effective Audit Committee reporting.
In October 2013, the Lab published a project report (“the project report”) which provided insight from 19 companies and 25 investors on effective approaches to Audit Committee (AC) reporting including both the content and style of presenting information. The report provided insights on the three areas of AC reporting under the revised (2012) UK Corporate Governance Code (“the Code”):
- Addressing significant financial statement reporting issues;
- Assessing external audit effectiveness; and
- Appointing the auditor and safeguards on non-audit services.
The implementation report considers specifically how companies have implemented investors’ preferences highlighted in project report. The results are drawn from a random sample of 34 companies from the FTSE 350.
The implementation report highlights:
- Style of the AC report. All companies complied with the Code requirement for the Audit Committee report to be a separate section within the annual report and 82% of companies presented their AC report as a separate report which was preferred by investors in the project report – this was most commonly shown in the governance section of the annual report. Investors in the project report indicated that they prefer personalisation in the AC report and the results of the implementation review indicated that all committees wrote in the first person, 62% included a photo and 24% included the signature of the AC chair. The implementation report indicates that “overall, companies have implemented the Lab’s findings well, but personalising the report by adding in the AC chair photo and signature would go further to meet investor preferences based on building the perception of accountability”.
- Significant reporting issues. The implementation report indicates that “reporting of significant issues has been implemented to varying levels”. 59% of the companies were rated by the Lab as “good” or “average” in terms of their reporting of significant issues. The project report indicated a number of attributes that significant issue disclosure should contain. The implementation report identifies that 94% of issue disclosures contained clear context and 84% detailed the AC’s actions. However, the Lab highlight that “improvement in explanations to make each issue disclosure specific to the company and to include the conclusion reached by the AC and the rationale could be made”.
- Assessing external auditor effectiveness. Investors demand “more detailed, but concise disclosure of the assessment of external auditor effectiveness”. Results showed that only 41% companies provided a “reasonably” good level of detail of their assessment process. The implementation report indicates that “most companies have significant room to improve reporting in this area by providing more detail on the activities undertaken and each of their outcomes”. To assist companies, the FRC has recently issued a practice aid to assist audit committees in assessing the effectiveness of the external audit process.
- Appointing the auditor. The project report indicated a number of attributes of good disclosure around appointment of the auditor. The implementation report indicates that “disclosures largely meet investor preferences, but clarity in relation to timing of next audit tender, and current audit partner tenure, rotation, and name should be considered”.
- Safeguards on non-audit services. The project report indicated a number of attributes of good disclosure around safeguards in non-audit services. Of those, 94% of AC reports included the non-audit services policy and 73% described the criteria for AC approval. The implementation report highlights that “improvement in reporting of the nature of non-audit services received, together with the relevant fee, and clearly stating the ratio of non-audit to audit fees, could be made by many companies”.
Further observations are available in the full implementation report which is available on the FRC website.