In Conversation: The FRC’s Annual Review of Corporate Reporting 2023/2024
Published: 24 September 2024
6 minute read
To mark the FRC’s Annual Review of Corporate Reporting 2023/2024, Kate O’Neill, Director of Stakeholder Engagement and Corporate Affairs, and Geoff LeGouais, Corporate Reporting Review Case Director, discuss the review's purpose and the key findings from a year of corporate reporting.
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Transcript
0:04
Good morning and welcome to another FRC In Conversation podcast.
0:09
My name is Kate O'Neill.
0:10
I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC.
0:14
And today I am joined by Geoff LeGouais, who is the Corporate Reporting Review case Director.
0:19
Welcome, Geoff.
0:20
We're talking about what we talk about this time every year, the Annual Corporate Reporting Review report.
0:26
And can we jump straight in there and remind our listeners what's CRR does and why do we do this annual review of company reporting?
0:33
Sure.
0:34
So CRR is the corporate reporting review team, and our remit is to review company's annual reports and accounts and make sure they comply with the relevant requirements.
0:42
If we think a company hasn't complied, we write them and ask for an explanation.
0:45
And if necessary, we typically ask them to make changes to next year's reports.
0:49
So the key reason we produce this report is to share those top ten areas where we've had to challenge companies essentially because it's in everyone's interest to help companies avoid those problems coming into the next reporting season.
1:00
Geoff, when you talk about requirements, what you're talking about is how do they report against the accounting standards?
1:05
Sure.
1:06
So it's accounting standards, IFRS, FRS102, it's Companies Act requirements, and there are some other rules like the FCA's listing rules, for example, on sustainability reporting, right?
1:14
That is a lot, but I guess those are really central to a company's reporting accounts, those standards and requirements.
1:22
Sure.
1:23
So the annual review, as you said, is there to help, I suppose companies think about these areas that perhaps some companies having issue with or coming to terms with, there might be new requirements for them as a company.
1:34
So who's the report targeted at?
1:37
Is it the whole of the FTSE 350?
1:39
Is it advisors who really should be reading this and taking away views and lessons for next year?
1:45
So the key audience is companies and their auditors.
1:47
So those involved in preparing and auditing reports, as you say, we focus generally on the largest FTSE 350 and other listed companies, but also some larger companies are within our remit.
1:57
And we pitch it at 2 levels.
1:59
There's a kind of overview section which gives a higher level view of the problem areas aimed at senior people, audit committee chairs, CFOs, etcetera, so they can challenge their teams.
2:07
And then there's a more expansive section for those that are involved in the technical detail.
2:11
So the report is telling us that the quality of FTSE 350 reporting has been pretty consistent and has been maintained.
2:19
But what were the areas that you and the team saw that really show consistently good reporting?
2:25
Yes, so I think our evidence is that the overall quality of reporting in the UK and that largest court of companies is good.
2:30
So for the most part, we challenge a small number of disclosure or presentation requirements and we don't see a significant number of restatements which actually affect the bottom line profits.
2:38
So we should take some comfort from that.
2:39
And we've also seen some areas that we pushed year on year fall out of or down the top ten list.
2:44
So for example, alternative performance measures dropped out of our top ten last year.
2:48
Provisions have gone this year and we're seeing judgments and estimates moving down the list and also sustainability reporting those TCFD listing rules, we're seeing some issues, but given how new and complex it is, we're pleased that there are comparatively few what we would call major compliance issues.
3:02
So some issues continue to recur year on year.
3:05
What are those common issues and I mean what's your thinking behind why they are recurring - how should companies avoid similar issues in the future?
3:14
So as you say, some issues we see every year at the top of the list, the top five this year are impairment, cash flow statements, financial instruments, revenue and presentation and financial statements, all of which were quite near the top last year.
3:26
Now each of those top five are coming out on about 10% of all of our reviews.
3:29
Now cash flows and presentation points we think are particularly disappointing because we pick those up from a desktop review and we think basic checks would find these.
3:37
Some of them like financial instruments, some aspects of impairment reporting are more complex and technical, but again, still we've picked them up from a desktop review.
3:44
So our best advice for companies and auditors is to look at the issues in this report.
3:48
It sets out exactly what the problems are and dedicating a little bit more review time there could prevent a CRR inquiry later down the line.
3:55
Thanks, Geoff.
3:56
And as you say, if they're recurring year on year, there have to be areas that companies should be devoting resource to making sure they don't happen in the future.
4:04
Sure.
4:04
So also the reports saying that there's a growing reporting gap between those companies within the FTSE 350 and non FTSE companies.
4:12
Why is this?
4:13
And are there any specific areas where these companies need to improve?
4:18
I mean, I guess are there any trends around sectors or types of companies that are falling into these two different camps?
4:24
I think we've always had this gap, but we could see it widening this year and we put the numbers in the report.
4:29
So just to give us a high level view, fewer than one in three FTSE 350 reviews get an inquiry letter, but that nearly doubles when you move outside the FTSE 350.
4:37
And in terms of the reasons, we only see the result, not the company's process, but some things we know both companies and auditors are missing the issues that we're seeing the top ten look very similar whether it's in the FTSE 350 or outside.
4:48
And we also still see this gap even you cut it by audit firm and you look at Tier 1 firm clients.
4:53
So there are a couple of things we think we might expect.
4:55
One is that larger companies might have better resource finance teams and more technical specialists.
5:00
And we also think maybe auditors are pushing those larger companies through a more robust pre-issuance process.
5:05
That's something that we're going to increase our focus on.
5:07
And again, I'd reiterate where your resource is limited either for companies or auditors, putting some focus on those bigger problem areas that we put in the report is the right place to start.
5:16
So Geoff, when you talk about the widening gap between (FTSE) 350 and other companies, what do you mean in that category of kind of the other group?
5:25
Who does that mean?
5:26
Who does that address?
5:28
Yes, I think it's really important context there is that we're not talking about SMEs.
5:32
These are the companies we're putting into that box are main market aim listed companies together with very significant often household name large private companies.
5:41
So not small companies, really quite large significant companies in many cases.
5:46
And Geoff, in the report you've emphasised that the FRC takes a proportionate and targeted approach and that we don't expect companies to go beyond the reporting requirements.
5:54
Why do you feel that you've had to re-emphasise that important information?
5:58
Yes, I think, you know, our remit is to make sure companies comply with the requirements and we have to balance what investors, lenders and other stakeholders would expect us to challenge along with the burden on companies.
6:08
So it's a continuing debate for us and how we manage that.
6:11
We put a huge amount of emphasis on whether it's proportionate and appropriate to send an inquiry letter, for example.
6:16
So the key point to get across is that we are only sending inquiry letters if based on what we see, we think there is or there was or there may be a material breach the reporting requirements.
6:25
So, so we're not sending letters in the case where we think, you know, unless we hit that threshold.
6:29
So another thing to emphasise is that we do ask companies how they think we do on this in our survey and the overwhelming majority, over 95% think we are proportionate.
6:38
So we take some comfort from that.
6:39
But I mean, not just the CRR team at the FRC, other teams talked about this as well, that it is really important that the annual report on accounts needs to tell a consistent and coherent story to the stakeholders of the company.
6:53
Now what exactly do you mean by that?
6:54
From a CRR perspective it's interesting, it's commonly used language, this consistent and coherent story, but it's not an abstract, nice to have point.
7:02
It's something fundamental companies need to get right there just to comply.
7:05
So if we look at the origin of many of our inquiries in CRR, it's because something in one part of the report is inconsistent with something somewhere else.
7:13
So for example, we have questions about the accounting, let's say revenues, because the accounting policy note in the back seems to be saying something completely different to the commercial arrangements that are described in the front end.
7:23
And similarly, we'll often see evidence of a major transactional balance, but there's not enough information for users to understand the accounting position and that might breach individual standards or overarching requirements.
7:33
So we understand that there may be different authors and processes between the front end and the back end, but it's a key sense check for us, which does throw up quite a few hard compliance issues.
7:41
As you say, they don't kind of match up, the figures don't support the story and Vice that inconsistency could create confusion amongst the readers of the report and the users of the information.
7:53
Sure.
7:53
Well, thanks Geoff.
7:54
It's great to get another very interesting and always well received annual report on corporate reporting review work.
8:02
And I guess you'd want to be telling all of our listeners that this is giving you some valuable information on how to address some of these issues in the future, but also the rationale for why you and the team have really come to focus on these particular issues given how important they are.
8:19
Sure.
8:19
Just to reemphasize, the intention of this report is to share what the issues we're finding so that companies can avoid them effectively, which is in everyone's interests.
8:27
Thanks, Geoff, and well done on another annual review.
8:30
Thank you.