'Completeness' and 'reasonableness' needed in audit reports – FRC

"Shareholder engagement" and "stewardship" are much in the air now, but when it comes to the guts of it, corporate governance still has a lot to do with monitoring, controlling and reporting. As part of its drive to facilitate the "stewardship" of institutional investors over their investments in equities, the UK Financial Reporting Council wants to see companies produce an enhanced report from their auditors. A report contains seven key recommendations, among them:

• Audit committee reports: Audit committees should provide fuller reports to shareholders, particularly in relation to the risks faced by the business.
• Auditor report on the audit committee: The auditors' report should include a new section on the "completeness" and "reasonableness" of the Audit Committee report, particularly in relation to the dialogue between them and the Committee.

The FRC proposes that the whole of the annual report and accounts should be balanced and fair, including the chairman and chief executive reports. Isn't that the way it's always been? Well, no, just specific parts of it needed to be balanced and fair. At the moment, the rest of the annual report can, by implication, be imbalanced and unfair. "While the best annual reports continue to improve, research by the FRC shows that some companies fall short of fulfilling their Companies Act requirements. Of 50 companies studied, a half to two thirds fell short in some areas, including in their reporting of principal risks," it said.

Stephen Haddrill, FRC chief executive, said:"Annual reports are more than marketing documents: they are a vital source of narrative and financial data which are used by shareholders to make investment decisions." It plans to create a new market participants group to spot market developments and identify best practice and to form a "financial reporting lab" to test financial reporting opportunities and enable trials to take place to encourage greater innovation in the market.

Source document: The FRC statement, "Effective Company Stewardship: Enhancing Corporate Reporting and Audit," is a 23-page pdf file.