The UK Financial Reporting Council has leapt ahead in the debate over the future of corporate narrative reporting. It published a manifesto called "Effective Company Stewardship" that in some ways pre-empts a host of other discussions about companies ought to communicate with shareholders. Following a consultation but ahead of a government announcement on narrative reporting and the results of deliberations in the European Union, the FRC has declared its intention that corporate disclosure should focus on strategic risks rather than operational ones. Companies should disclose the risks inherent in the business model and in their strategies for implementing the business model. It will update guidance on risk management – the so-called Turnbull recommendations – after it gets result from the Sharman inquiry looking into liquidity reporting. Separately it issued a summary of views on how companies can respond to heightened and more differentiated risk.
The initiative comes in conjunction with other measures of considerable significance. It is looking into asking audit committees to become responsible for vetting the whole annual report, rather than focusing on financial matters, to "enable effective interaction" with shareholders, and thus buttress the comply-or-explain regime in corporate governance. It favours putting this responsibility in the hands of the audit committee, rather than following the approach of the US Public Company Accounting Oversight Board, which made it a responsibility of auditors.
Auditors report changes, too: The FRC believes "auditors can and should provide increased insight into the audit process so as to reassure users of financial statements that all material matters have been properly disclosed", so there will be changes coming in how auditors discuss their findings that go beyond the boiler-plate of the typical audit report.
Source document: The FRC report "Effective Company Stewardship: The Next Steps" is a 25-page pdf file.
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