The Financial Reporting Council (FRC) has published revisions to both the content and structure of the Conduct Committee’s operating procedures for reviewing corporate reporting, effective 1 April 2017.
So could your company be subject to an FRC review and inquiry? If so, what should you do if you receive a letter about your report and accounts? How should you respond, what declarations might you have to make in your accounts; and what publicity can you expect?
Whose report and accounts could be subject to an FRC inquiry?
You are eligible for review if:
- you are a public limited company (PLC) or a company within a group headed by a PLC; or
- you are a large private company or a company within a group which does not quality as a small or medium sized group.
Whilst all these companies are eligible for review, the FRC takes a risk based approach to its selection process. It is therefore more likely that you will be selected if:
- you are a FTSE 350 company as you will be selected on a rotational basis;
- your company operates in one of the industries identified by FRC as being under particular strain;
- you have a specific topical accounting issue;
- the FRC has received a complaint about regarding your report and accounts;
- the FRC has received a referral about from another regulator; or
- material in the public domain or a press comment has raised concerns over the application of certain accounting and reporting requirements.
Which types of letters require a limited response?
A limited response may be provided, if you receive one of the following:
- a letter explaining that your report and accounts have been reviewed but that there are no questions or queries to raise at this stage; or
- a letter including a schedule of other items that you have been asked to consider when you prepare your next report and accounts.
In these circumstances, you should acknowledge receipt of the letter and, where there is a schedule of other matters, to note these as points to consider for your future reporting. You need only consider additional disclosures that are relevant and material to your next report and accounts.
Your report and accounts
The FRC encourages boards to be transparent with stakeholders about the extent of any interaction with the FRCs’ Corporate Reporting Review function. They consider the fact that your last published report and accounts was reviewed and did not give rise to any substantive questions is a matter in which investors, potential investors and other readers of the accounts are likely to have an interest. An expectation is therefore raised that reference to such interaction be included in the next annual report even if there is no mandatory requirement to disclose.
Which letters require a detailed response?
A letter which asks you for additional information and explanation requires a substantive response.
In such circumstances, you should firstly acknowledge receipt of the letter and tell the FRC when you expect to be able to provide a substantive response. This is expected within 28 days although if you think it will take longer to respond you can request an extension. The FRC is only likely to grant an extension in exceptional circumstances and when a good reason is provided.
Secondly, you should prepare your response.
The FRC generally advises that you discuss matters with your auditors at an early stage. They may already have considered the issue that has been raised and may be able to assist in drafting a response. They can also attend any meetings with you should you so wish.
A good first response should:
- address all of the questions raised;
- offer additional, but relevant, information or explanation to bring the FRC’s level of understanding to that of the company;
- explain fully the board’s judgements;
- evidence board and, where applicable, Audit Committee involvement;
- evidence full and early engagement with the auditors; and
- demonstrate a willingness to consider alternative viewpoints expressed by the FRC.
Subsequently you should provide any information or documentation requested by the FRC.
As a result of consideration of the matters and following explanations provided by the company and/or proposals made (such as a revision of the relevant aspect of a report) the review may be closed at this stage.
If a company disagrees with the findings, the FRC can seek to enforce its view by going to court to obtain an order requiring directors to restate their report or accounts.
Your report and accounts
If, as a result of considering the matters raised, you believe that a change in accounting policy, or a correction of numbers or disclosures is required, it is advisable, that you discuss this with the FRC before taking action.
You may be asked to refer to the review in your next report and accounts where it results in a significant change to your reporting. The reference should explain the change that is being made and the reasons for it. It should also confirm whether or not the review is closed. The FRC will also ask for the opportunity to comment on the proposed text before the report is published.
Where a premium listed company’s report has been the subject of review, in accordance with the Guidance on Audit Committees, the company’s Audit Committee is expected to report on a number of matters including the nature and extent of interaction (if any) with the FRC’s corporate reporting review team.
What publicity could you expect?
The vast majority of cases are resolved without a press notice. Press notices are issued only where:
- a significant correction is being made to accounts that have already been published;
- a significant change is being made to accounts that will be published in the future;
- where the matter is being pursued through the courts; or
- the FRC believes that the case otherwise merits publicity.
In addition, the FRC will periodically publish lists of the companies whose reports have been reviewed and where its enquiries are now closed, identifying whether there has been an exchange of substantive correspondence or otherwise.
Informing the market
Companies must take their own decisions about informing the market, making use of professional advisers where necessary.
For further information, contact Danielle Stewart or speak to your usual RSM contact.