FRC issues wide-ranging announcements in February 2020
The Financial Reporting Council (FRC) made a series of announcements in February on a wide range of topics. These included climate change; plans for greater regulatory oversight; board ethnic diversity; gender balance on boards; and audit, accounting and corporate reporting during the UK/EU transition period. This article summarises these announcements.
In the year that Glasgow will host the 26th UN Climate Change Conference of the Parties (COP 26) from 9 to 20 November, the Financial Reporting Council (FRC) has announced a major review of how UK companies and auditors assess and report on the impact of climate change. The review will assess the extent to which such companies and auditors are responding to the impact of climate change on their business to ensure reporting requirements are being met. Additionally, it will consider how the quality of such information can be improved to support informed decision-making by investors and other stakeholders. For further details please refer to the FRC announcement on climate change.
The FRC has issued an update to the advice it provided to companies and auditors in October 2019 in terms of risk disclosures they should have in mind during the reporting season. This update pertains to the emergence and spread of the coronavirus (COVID-19). Given the current global spread of the virus this is particularly relevant for companies either operating in, dependent on supply chains in, or having close trading associations with China. It is also recognised that depending on the extent to which this virus spreads outside of China, other companies could become affected.
The FRC encourages companies to consider carefully what disclosures they might need to include in their year-end accounts relating to these events. It accepts that the extent of the risk and the degree to which it might crystallise and on which reporting might be necessary is very much dependant on a company’s’ specific business circumstances. It also provides examples where there could be an impact, e.g. companies which have extensive operations or manufacturing in China with consequential staff shortages and production delays.
Additionally, it highlights that other companies that do not have a presence in the country might also be impacted if they have significant trading links or global supply chains that are dependent on goods that are manufactured in China that are being exported to the UK or elsewhere. If mitigating actions can be taken, then these should also be reported alongside the description of the risk itself. The FRC also highlights that as the carrying value of assets and liabilities might be affected, there may be a need to perform additional impairment tests and to assess whether leases have become onerous. Given that this is still very much a developing situation, disclosures will likely change over time as more information about the epidemic emerges. Therefore, companies will need to monitor developments and ensure that they are providing up-to-date and meaningful disclosure when preparing their year-end reports. For further details please refer to the FRC announcement on coronavirus.
Firms undertaking group audits under ISA (UK) 600, who have concerns about the impact of Coronavirus (COVID-19) on these audits, are asked to contact the FRC directly. Any further questions from ICAS members relating to group audits and the potential impact of COVID-19 on these audits should submit these queries through the ICAS Technical Helpdesk.
FRC plan for greater regulatory oversight
The FRC has announced a major shakeup of its oversight and supervisory functions to speed up the pace of Enforcement investigations. Ahead of expected wider legislative reform, the FRC plans to speed up the investigation and conclusion of Enforcement cases by increasing the number of lawyers and forensic accountants and strengthening its case examination function to fast-track decisions on whether to open an Enforcement case. To improve coverage, the number of Audit Quality and Corporate Reporting Reviews is set to increase by 25%, while Audit Firm monitoring will be further expanded from the Big 4 to challenger firms. For further details please refer to the FRC announcement on greater regulatory change.
Board ethnic diversity
Research undertaken by Cranfield University’s School of Management on behalf of the FRC has revealed that over half of FTSE 250 companies (52%) fail to mention ethnicity in their board diversity policy, and most of the FTSE 350 do not set measurable ethnicity targets.
In the FTSE 100, only 14% of companies set measurable objectives for board ethnic diversity while for FTSE 250 companies the figure is just 2%. Even where objectives have been set, no FTSE 350 companies report progress against them. To address this failing, the FRC expects much improved reporting by companies under the new UK Corporate Governance Code which promotes diversity in appointments and succession plans, including ethnic diversity.
The research also found that whilst 11% of FTSE 100 and 4% of FTSE 250 companies plan to increase ethnic diversity in the succession pipeline, most focus on general progression rather than specifically focusing on senior management.
This research also formed part of the 2020 Parker Review which published an update entitled ‘Ethnic Diversity Enriching Business Leadership’ in February. This revealed that 37% of FTSE 100 companies, and 69% of FTSE 250 companies, do not currently meet the Parker Review target which includes amongst its recommendations that each FTSE 100 Board should have at least one director of colour by 2021; and each FTSE 250 Board should have at least one director of colour by 2024.
For further details please refer to the FRC announcement on board ethnic diversity.
Board gender diversity
Despite one third of board seats at FTSE 100 companies now being held by women, ten months ahead of the December 2020 target, progress remains slow to develop the succession pipeline across the FTSE 350. These were the findings of research from the Hampton-Alexander Review. Under the 2018 UK Corporate Governance Code the Financial Reporting Council (FRC) expects companies to clearly set out how they plan to develop their diversity pipeline with much improved reporting, including progress towards any measurable targets. In January 2020 the FRC published its review of early adopters of the Code. They found that many of the early adopters reporting against the code had included limited reporting on diversity, including on how they plan to tackle the lack of women in senior leadership positions. Those companies that had reported well, had clear plans to meet diversity targets – beyond just gender – and understood the long-term value diversity brings.
Audit, accounting and the corporate reporting during the transition period
Joint letters from the FRC and Department for Business, Energy and Industrial Strategy (BEIS) have been published for accountants and auditors. These contain information regarding auditing, accounting and corporate reporting standards during the transition period following the UK’s exit from the EU. For further details please refer to the information issued for accountants during the Brexit transition period the FRC announcement on Audit, Accounting and Corporate Reporting during the Transition Period and information issued for auditors and firms during the Brexit transition period.
The FRC has written to the UK’s largest audit firms setting out its expectations for operational separation to bring about audit quality improvements and audit market resilience.
In the letter the FRC sets out that it expects the firms to put in place independent governance for the audit practice and to ensure that the audit practice is appropriately ring fenced from the rest of the firm so that financial results are clear and transparent.