Overview

In its Cor­por­ate Re­port­ing Review (CRR) work, the Fin­an­cial Re­port­ing Council (FRC) reviews the strategic reports, directors’ reports and annual accounts (the annual report and accounts) and interim reports of companies included on the FCA’s Official List (e.g. companies listed on the Main Market of the London Stock Exchange), and the annual reports and accounts of UK-incorporated public companies (including those listed on AIM) and large private companies, for compliance with the Companies Act 2006 (the Act) and other relevant reporting requirements. Its remit also extends to the members' report and accounts of Limited Liability Partnerships (LLPs).

The Supervision Committee, which is a sub-committee of the FRC Board, is responsible for the oversight of CRR. The Supervision Committee and CRR may also seek advice from Senior Advisors and members of the Advisory Panel (independent, non-executive subject matter specialists), and staff from other parts of the FRC (e.g. lawyers and audit specialists), when performing the FRC’s statutory functions.

The principal activities carried out by CRR are:

• de­vel­ops and op­er­ates a pro­gramme of review of reports and accounts and interim reports using an annually determined risk-based selection of companies that fall within its remit
• en­quires into ac­counts falling within its remit which come to its at­ten­tion, whether through se­lec­tion for review or through com­plaints
• undertakes thematic reviews that focus on areas of corporate reporting where it is considered there is scope for improvement and which are of particular interest to stakeholders, with the aim of driving continuous improvement in quality through the identification of good examples of clear and concise disclosures
• ensures that, subject to any legal restrictions on sharing of information, any findings in respect of the corporate reporting of a company are brought to the attention of other authorities, including other parts of the FRC, so that they can decide whether they need to take any action within the scope of their remit and powers
• liaises with the Fin­an­cial Conduct Au­thor­ity and other au­thor­it­ies in the United Kingdom and in­ter­na­tion­ally to foster the con­sist­ent ap­plic­a­tion of ac­count­ing re­quire­ments and to improve the com­pli­ance of fin­an­cial in­form­a­tion with re­port­ing re­quire­ments

Se­lec­tion of reports and ac­counts for review

CRR takes a risk-based approach when selecting which reports and accounts and interim reports to review covers the annual report and accounts and interim reports of companies. In view of the significance of the FTSE 350 to the investing community, these companies are reviewed on a more frequent, rotational basis. They review a sample of listed company reports and ac­counts each year, fo­cus­sing on pri­or­ity sectors such as:

• travel, hos­pit­al­ity and leisure;
• retail;
• prop­erty; and
• fin­an­cial ser­vices.

In ad­di­tion they may review ac­counts that are the subject of a com­plaint.

The CRR team also carries out them­atic reviews of par­tic­u­lar topics and shares reports on its find­ings and better prac­tice iden­ti­fied to drive im­prove­ments in the quality of cor­por­ate re­port­ing.

Un­der­tak­ing a review

CRR reviews selected reports and accounts and interim reports to determine whether there is, or may be, a question whether they comply with the Companies Act 2006 (the Act) or other relevant reporting requirements.

If no such question arises as a result of CRR, the FRC will write to the company Chair (or equivalent), explaining that a review of the report and accounts or interim report has been conducted but that there are no substantive points to address at that stage. Often, such letters will include a schedule of other matters that a company is asked to consider when its next report and accounts and/or interim report is prepared; these are known as ‘Appendix’ letters. Where the letter does not contain a schedule of other matters, it is known as a ‘No issues’ letter.

If a question arises as a result of CRR, the FRC will write to the company Chair (or equivalent) setting out the issues and asking for further information and explanation to help us better understand the reporting that has been adopted (a ‘Substantive’ letter). Substantive letters will often also have a schedule of other matters as described above.

Depending on the issues involved, there may be several rounds of correspondence with the company. In some cases, phone calls, emails or meetings will be suggested to help progress an enquiry efficiently.

There is an opportunity for companies to make voluntary corrective changes to their reporting, and generally expect to reach agreement with a company on the appropriate action to be taken in any case where a breach of accounting or reporting requirements has been identified. Where, however, CRR and a company are unable to reach agreement in this way, the case will be escalated as follows:

Firstly, the case will be referred to the Executive Director of Supervision (the Executive Director) who will engage in a further round of correspondence with the company. If disagreement remains, the Executive Director will then decide whether to refer the case to the FRC Board. When making this decision, the Executive Director may seek the views of the Supervision Committee. The company will be notified in writing of this escalation and will have an opportunity to make representations on any views expressed by the Executive Director or provided by the Supervision Committee.

Where a case is referred to the FRC Board, it will decide whether to use its statutory power to request information from the company or apply to court for an order requiring the directors of the company to prepare revised accounts or a revised report. When deciding whether to apply to court, the FRC Board considers the recommendations of the Executive Director, and any views expressed by the Supervision Committee and CRR, the basis for the recommendations, and relevant explanations and proposals provided by the company during the process. In making its decision, the FRC Board may consult with its advisors or seek other independent advice. It may also request further enquiries be made or representations sought. When an application to court is made, other authorities will be informed of the application, as appropriate, and a public announcement will normally be made.

The matter may be closed at any point in the process, without referral to the court, if the company provides adequate explanation, or volunteers to make the required revisions to its report and accounts or interim report.

En­force­ment action

The FRC Board will con­sider the report and, after due con­sid­er­a­tion of all the cir­cum­stances, it may resolve to apply to court for an order re­quir­ing the dir­ect­ors of the company to prepare revised ac­counts or a revised report. Other au­thor­it­ies will be in­formed of the ap­plic­a­tion as ap­pro­pri­ate and a public an­nounce­ment will nor­mally be made.

In making its de­cision, the FRC Board may consult with the FRC’s ad­visors, the Su­per­vi­sion Com­mit­tee or seek other in­de­pend­ent advice. It may also request further en­quir­ies and/or rep­res­ent­a­tions to be made.

Pub­li­city for cases

The CRR publishes, on a quarterly basis, summaries of its findings from recently closed,sum­mar­ies of its find­ings of re­cently closed cases that res­ul­ted in sub­stant­ive en­quir­ies on its website. Based on current law, CRR must obtain a company’s consent to publish the case summary.

In certain cir­cum­stances, the FRC may make a press an­nounce­ment in respect of its in­vest­ig­a­tion into the ac­counts or another report of an entity. The most common situ­ation will be on the con­clu­sion of a case where the dir­ect­ors have agreed that the ac­counts were de­fect­ive and cor­rect­ive and/or cla­ri­fic­at­ory action has been agreed. This may also arise where the FRC decides that it is in the public in­terest to respond to a request to confirm or deny whether a spe­cific review is being un­der­taken.

The FRC also pub­lishes an annual review of cor­por­ate re­port­ing sum­mar­ising its activities and findings for the year, in­clud­ing most common find­ings from reviews and case studies from queries to share im­prove­ments, and out­lining dis­clos­ure ex­pect­a­tions. Ac­com­pa­ny­ing this review the FRC also pub­lishes a doc­u­ment sum­mar­ising key matters to be con­sidered for future re­port­ing.

Click here for a link to Cor­por­ate Re­port­ing Review at the FRC website.