Greater transparency for audit review findings
Companies' audit committees should take account of Audit Quality Review (AQR) findings, but it remains the committee's responsibility to determine what level of disclosure of these is appropriate, and to make its own assessment of the audit's effectiveness. Disclosure of the review's inspection grade could be potentially misleading and be in breach of rights of confidentiality.
Those are among the key messages from the Financial Reporting Council (FRC), which has outlined how it intends to implement proposals to enhance transparency of its AQR findings recommended by the Competition Commission (now the Competition and Markets Authority).
The CMA has recommended that audit committees of FTSE 350 companies whose audit had been reviewed by the FRC should disclose the principal findings and grade assigned to it in the annual report and accounts, together with how they and the auditors were responding to the issues raised.
The FRC announced in April 2014 that it would consult on the CMA's recommendation in time for updates to the UK Corporate Governance Code to be made in 2016. This is in line with the FRC's commitment not to amend the Code more than once every two years.
Adopting the CMA proposals
The FRC notes that some audit committees may wish to adopt the CMA proposals early and notes: "...audit committees should take into account, in making such disclosures, that the AQR's work is focused on the audit. It is not designed to comment on the contents of the report and accounts. The inspections also generally cover selected aspects of the audit and are not designed to confirm the audit opinion. Therefore, in considering how to report on an inspection it is important that companies do not give false assurance to investors or raise unnecessary concerns."
The FRC's advice is that audit committees should report how they have made their own assessment of the effectiveness of the audit process. Where a company's audit has been reviewed by the AQR, the FRC would expect audit committees to discuss the findings with the auditors and consider whether any of those findings are significant and, if so, to make appropriate disclosures. Such disclosures should be in the audit committee's own words, the FRC recommends, and deal with what action they and the auditors plan to take.
Audit committees should not disclose the inspection grade, the FRC advises, stating: "The current grading system was designed to help audit committees understand the significance of the issues identified and their implications... the grades are not intended to provide an assessment of the reliability of the financial statements as a whole or the audit opinion and there is concern that the publication of such a 'single figure' could mislead and distract attention from the key issues… The question of whether these grades should be published will therefore be considered more fully through the consultation in 2015 and 2016."
The FRC says that it will waive its confidentiality rights to the information in AQR reports, other than the grade awarded to the audit, for the sole purpose of allowing the company and its auditor (which also has confidentiality rights) to determine how and what information arising from the inspection is reported to shareholders.