Selection and review
Published: 28 September 2023
4 minute read
We select reports and accounts and interim reports to review using a risk-based approach. We then consider if there is, or may be, a question whether they comply with the law or other relevant reporting requirements.
How CRR selects reports and accounts and interim reports for review
CRR’s remit covers the annual report and accounts[1] and interim reports of companies included on the FCA’s Official List (eg 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), large private companies and Limited Liability Partnerships (LLPs).
CRR adopts a risk-based approach when selecting which reports and accounts and interim reports to review. We consider the probability of non-compliant reporting and the potential effect of any errors on the company, the industry in which it operates and the market more widely. In view of the significance of the FTSE 350 to the investing community, these companies are reviewed on a more frequent, rotational basis – we aim to undertake at least one full-scope review of a FTSE 350 company’s annual report and accounts and at least one limited-scope review every five years.
Each year, we consider the risks facing corporates and identify a small number of industries that are considered to be under particular stress. This may, for example, be due to economic factors, regulatory developments or the effect of new reporting requirements. The identified industries are a focus for both the FRC’s Audit Quality Review (AQR) and CRR monitoring activities. We ensure that a proportion of our selection is taken from these industries. Selection is also sometimes prompted by specific topical accounting issues that may give rise to issues of increased subjectivity, judgement and risk of misstatement in corporate reporting.
Our risk-based selection is supplemented by an element of random selection to ensure that all companies within our remit stand a chance of having their report and accounts or interim reports being reviewed.
We also receive referrals from other regulators, welcome well-informed complaints about individual reports and accounts or interim reports within our remit and may select an individual company where articles in the press, or specific events or circumstances, raise a question about its compliance with the Companies Act 2006 or other relevant reporting requirements.
We will not generally disclose the specific reason for selecting a company’s report and accounts or interim report for review. In particular, we will not disclose whether the review was prompted by a complaint unless the complainant has given us permission to do so or has otherwise made the complaint public.
We will not normally review the accounts of a company in administration or liquidation.
How CRR reviews reports and accounts and interim reports
Selected reports and accounts and interim reports are reviewed by CRR 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, as a result of that review, no such question arises, we 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.
Where it appears from the review that there is, or may be, a question whether the report and accounts or interim report complies with the Act or other relevant reporting requirements, we 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.
We aim to ensure that, where relevant, 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. This usually takes the form of prospective correction, with improved or amended disclosures or accounting in future reports and accounts and/or interim reports. In some cases, all that is needed is fuller disclosure to allow users of the report and accounts to better understand a transaction or accounting treatment, or to clarify any judgements, estimates or assumptions that management have made.
Historically, in the overwhelming number of cases, the matters we raise have been satisfactorily addressed by the company through the constructive engagement approach described above. The process is intended to combine efficiency with fairness. 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. 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 .
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 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.
Footnotes
-
[1]
Currently, only the strategic report, directors’ report and financial statements of a company, and the strategic report, energy and carbon report and financial statements of an LLP, are formally within the scope of CRR’s activities.