The FRC’s Operating Procedures for Corporate Reporting Review
Published: 25 September 2023
3 minute read
The FRC’s formal powers relating to corporate reporting review are derived from the Companies Act 2006 and other relevant law. The Operating Procedures set out how the processes through which these powers are exercised.
The CRR principally engages with companies on a voluntary basis. We ask directors to explain apparent departures from reporting requirements and, if we are not satisfied by the explanations, we aim to persuade them to adopt a more appropriate accounting treatment. Depending on the circumstances, a range of remedial actions may be accepted that correct the matters in error. For example, correction of the comparative figures or disclosures in the next report and accounts and/or interim report, or the voluntary withdrawal of the company’s report and accounts and replacement with revised accounts.
Failing voluntary correction, CRR may ask the FRC Board to exercise its powers to secure the necessary revision of the accounts through a court order. The FRC maintains a legal costs fund of £2 million for this purpose. The FRC and the predecessor bodies that held these powers have, to date, succeeded in resolving all cases on a voluntary basis and without having to apply for a court order.
The FRC’s powers in respect of the review of corporate reports and accounts derive from the Companies Act 2006 (the Companies Act), the Companies (Audit, Investigations and Community Enterprise) Act 2004 (the C(AICE) Act) and The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008.
The FRC is authorised by the Secretary of State for the purposes of section 456 of the Companies Act. This means that it may make an application to the court for a declaration (in Scotland, a declarator) that the annual accounts of a company do not comply, or its strategic report or directors’ report does not comply, with the requirements of the Companies Act and for an order requiring the directors of the company to prepare revised accounts or a revised report. Similar powers have been given to the FRC in respect of Limited Liability Partnerships via sections 23 The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008.
The FRC is also appointed to exercise the functions set out at section 14(2) of the C(AICE) Act to keep under review periodic accounts and reports that are produced by issuers of transferable securities and are required to comply with any accounting requirements imposed by Financial Conduct Authority (FCA) rules. This includes, for example, undertaking monitoring activities in respect of the application of the requirements relating to the TCFD Recommendations and Recommended Disclosures set out in the FCA’s Listing Rules. Where it thinks fit, the FRC informs the FCA of any conclusions it reaches in relation to any such accounts or reports, so that the FCA can consider whether any enforcement action might be appropriate. If requested by the FCA, the FRC will also exercise these functions in relation to any particular issuer of transferable securities in relation to whom those functions would not otherwise be exercisable.
Section 459 of the Companies Act empowers persons authorised (namely the FRC) to directly require a company, or any of its officers, employees or its auditor, to provide information and explanation where it appears to the authorised person that there is, or may be, a question whether the annual accounts of a company comply with the requirements of the Companies Act. This power extends to former officers, employees or auditors who were associated with the company at the time to which the document or information required by the FRC relates. Similar information gathering powers also exist in respect of reviews under the C(AICE) Act by virtue of section 15B of that Act and in respect of LLPs via section 23 The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008.
The FRC’s Operating Procedures for reviewing corporate reporting set out the procedures adopted by the FRC, through CRR, for its corporate reporting review work. The procedures were considered by the relevant Secretary of State prior to the making of the Authorisation Order for the purposes of section 456 of the Companies Act (SI 2012/1439, as amended by SI 2021/465).
The Operating Procedures provide that the FRC will deal with the accounts of public and large private companies. The companies concerned are public limited companies (PLCs) (except PLCs that are subsidiaries in a small or medium-sized group), companies within a group headed by a PLC, any company not qualifying as small or medium-sized as defined by section 382 of the Companies Act, or any company within a group that does not qualify as small or medium-sized as defined by section 466 of that act.
The latest version of the Operating Procedures have effect from 6 May 2021.