FRC issues a position paper on next steps to reform the UK's audit and corporate governance framework

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14 Jul, 2022

The Financial Reporting Council (FRC) has issued a position paper setting out the next steps to reform the UK’s audit and corporate governance framework.

The paper follows the Government Response to the Department for Business, Energy and Industrial Strategy (BEIS) White Paper ‘Restoring trust in audit and corporate governance’, published in May 2022, which summarises the feedback that BEIS received from stakeholders on the White Paper and sets out the measures it intends to progress with.

The document focuses on those areas of the Government Response that fall within the FRC’s remit, providing a high level summary for stakeholders on how and when the work of reform will be delivered ahead of government legislation recognising that this will require some complex sequencing to ensure that revisions to Code, Standards and Guidance can be addressed in a single pass.

The outline plan also provides an overview of activities proposed in relation to the actuarial profession and the local audit market.

Revisions to the UK Corporate Governance Code ('the Code')

The position paper states that there will be a consultation on changes to the Code and supporting material in Q1 2023 with a view to the new Code applying to periods commencing on or after 1 January 2024.

The consultation will focus on:

  • provision of a stronger basis for reporting on and evidencing the effectiveness of internal control around the year end reporting process.
  • inclusion of wider responsibilities of the Board and Audit Committee for expanded Sustainability and Environmental, Social and Governance (ESG) reporting and, where commissioned by the company, assurance of that reporting.
  • consideration of how audit tendering undertaken by the company takes account of the need to expand market diversity.
  • strengthened reporting on malus and clawback remuneration arrangements.
  • areas of reporting already identified by the FRC as being weaker as set out in their most recent reviews of governance reporting.

Minimum Standards for Audit Committees

Initially for adoption on a voluntary basis, the FRC will develop a set of Minimum Standards for Audit Committees setting out expectations on how Audit Committees should work to address the issues raised by the CMA in its April 2019 report in relation to the appointment and oversight of auditors.

These minimum standards will be developed through stakeholder roundtables to take place in the second half of 2022 with a view to the standards being available to Audit Committees for 2023 financial year ends. Subject to the appropriate legislation being introduced, regulatory supervision of the standards will commence in 2024.

Corporate Reporting matters

The Government Response set out plans for four new statutory reporting requirements applicable to all large Public Interest Entities (PIEs) (companies with 750 or more employees and at least £750m annual turnover), covering:

  • The Resilience Statement
  • Fraud Reporting by Directors
  • The Audit and Assurance Policy and related disclosure requirements
  • Capital Maintenance and Dividends, including distributable profits

The FRC will be working in support of these reforms by developing a number of pieces of implementation guidance.

On sustainability reporting, the FRC plans to actively engage with the International Sustainability Standards Board to raise the profile of its work and to make recommendations to further its proposals. In addition, the FRC will be working closely with BEIS to propose for consideration ways to reduce the current non-financial reporting burden on companies.

In advance of the statutory powers required to extend the scope of the FRC’s Corporate Reporting Review (CRR) team, the FRC intends to commence formal inclusion of corporate governance disclosures in line with the intended implementation of the revised Code (periods commencing on or after 1 January 2024). In the meantime, they will continue to include corporate governance reporting in a sample of routine CRR reviews, initiate a pilot for remuneration reporting and seek to engage with companies on a voluntary basis.

Audit matters

The FRC plans to develop and consult on a policy paper setting out the approach in respect of the Government’s proposed market resilience/competition objective for the new regulator Audit, Reporting and Governance Authority (ARGA) and the work which will be undertaken to prepare ahead of legislation. This will include a framework for ARGA’s competition objective and how success measures for the effectiveness of market opening measures will be set.

In addition, there will be a number of activities proposed in relation to the Ethical Standard for auditors. These include launching a consultation regarding whether it is desirable to exclude sustainability assurance work (carried out in accordance with a performance standard adopted by the FRC) from the UK aspect of the non-audit services fee cap and also whether to maintain the ‘Other Entity of Public Interest’ definition. The effective date for any resulting changes is proposed to be periods commencing on or after 15 December 2024 and this will follow a consultation on a revised Standard in Q1 2023.

A press release and the position paper are available on the FRC website.

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