How we Review Reports and Accounts
Selecting accounts for review
We adopt a risk-based approach to our selection of reports and accounts for review. We consider the probability of non-compliant reporting and the potential impact 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. From 2016 onwards, we aim to review the FTSE 350’s report and accounts in full at least once every five years with at least one thematic review in between times.
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 be, for example, due to economic factors, regulatory developments or the impact of new reporting requirements. The identified industries are a focus for both AQR and CRR monitoring activities. Company reports and accounts are selected from these industries across the full range of those within CRR remit – that is, listed companies, UK AIM quoted companies, large private companies and limited liability partnerships. 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 sampling to ensure that all companies within remit stand a chance of having their report and accounts being reviewed by the FRC.
We welcome well informed complaints about individual company reports and accounts. We also respond to articles in the press that raise a question about a company’s compliance with relevant reporting requirements.
Review by FRC staff
Selected reports and accounts are reviewed by FRC staff within the corporate reporting review team (CRR), to determine whether there is, or may be, a question whether they comply with relevant accounting and reporting requirements of the Companies Act 2006 (the “2006 Act”).
If, as a result of that review no such question arises, the CRR Director will write to the company Chairman, explaining that a review of the company’s report and accounts has been conducted but that there are no substantive points to address at that stage. Alternatively, the review may have given rise to a number of less substantive points, included in a schedule of other matters, that we would like the Board to consider when it prepares its next report and accounts. You are only asked to acknowledge receipt of these types of letters and, where there is a schedule of other matters, to note these as points to consider for your future reporting.
Where it appears from the review that there is, or may be, a question whether the report and accounts comply with relevant accounting and reporting requirements, the CRR Director will write to the company Chairman setting out the relevant issues and asking for further information and explanation to help us better understand the reporting that has been adopted.
The FRC encourages directors to consult their auditors, to involve their audit committee and to take any other advice they feel they need in order to properly address the points that have been raised.
As our questions will have been prompted by what is in the company’s published report and accounts, we generally expect a substantive response within 28 days.
Depending on the issues involved there may be several rounds of correspondence with the entity. In some cases, informal phone calls or technical meetings will be suggested to help progress an enquiry. Historically, in the overwhelming number of cases, matters raised are satisfactorily addressed by the company through this type of engagement without the need for further action.
The process is informal but is intended to combine efficiency with fairness.
Establishing a Review Group
Where, however, a review is not concluded through review by FRC staff, the CRRC will be asked to consider setting up a Review Group to enquire further into the matters outstanding.
A Review Group is normally made up of five members including the Chairman of the FRRP and one of the deputy chairs – that is, two of the three members of the CRRC. Other members are chosen from the ordinary membership of the FRRP to provide a balance of experience relevant to the enquiry but not where their appointment would give rise to a potential conflict of interest. Other FRRP members are not involved as the Review Group’s exchanges with the company are confidential.
We will write to the entity on behalf of the Review Group explaining its concerns. There may be a number of rounds of correspondence with the Review Group and a number of meetings may be held. As defective accounts could mislead the public, the procedures need to allow for timely rectification whenever possible. The Review Group aims to reach agreement with the directors of the company by persuasion. If it is satisfied by the company’s explanations and is of the view that no remedial action is required beyond any proposed by the entity, the Review Group will report its findings to the Conduct Committee and the case is closed. Where the directors agree to take remedial action, the Conduct Committee may decide on some form of publicity. The Conduct Committee does not comment on or discuss its conclusions further.
Having heard the entity’s explanations, the Review Group may not agree with the entity and may conclude that the matter represents a breach of accounting and reporting requirements that the Conduct Committee should pursue. The Review Group will write to the entity explaining that it is minded to report to the Conduct Committee recommending that the Conduct Committee make an application to the court. The entity will be given a further opportunity to respond and put forward proposals for corrective or clarificatory action. If the entity’s explanations and proposals do not satisfy the Review Group it will send a final letter to the entity and, if not satisfied by any response, the Review Group will refer the matter to the Conduct Committee.
The Conduct Committee will consider the report produced by the Review Group and, after due consideration of all the circumstances, as set out in the Operating Procedures, it may resolve to apply to court for an order requiring the directors of the company to prepare revised accounts or a revised report. Other authorities will be informed of the application as appropriate and a public announcement will normally be made.
The powers of the Conduct Committee in respect of the review of corporate reports and accounts derive from the Companies Act 2006 (the “2006” Act) and the Companies (Audit, Investigations and Community Enterprise) Act 2004 (the “2004” Act).
The Conduct Committee is authorised1 by the Secretary of State for the purposes of section 456 of the 2006 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 a strategic report or a directors’ report does not comply, with the requirements of the 2006 Act (or, where applicable, of Article 4 of the IAS Regulation) and for an order requiring the directors of the company to prepare revised accounts or a revised report.
The Conduct Committee is also appointed to exercise the functions set out at section 14(2) of the 2004 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) rules2. Where it thinks fit, the Conduct Committee informs the FCA of any conclusions it reaches in relation to any such accounts or reports. If requested by the FCA, the Conduct Committee 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.
The 2006 Act empowers persons authorised to apply to court under s456 to require documents, information and explanations to be produced by a company, or any of its officers, employee or auditor 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 Act. This power is vested in the Conduct Committee and is extended to reviews under the 2004 Act by s15 of that Act.
Section 461 of the 2006 Act lists a number of persons with whom the Conduct Committee is entitled to share information which would otherwise be confidential under the Act. These persons include the Secretary of State for Business, Energy and Industrial Strategy, the Treasury, the Bank of England, FCA, and HMRC. If requested by one of these authorities, we will normally be prepared to review a set of accounts and report its findings to the authority concerned. We will draw to the attention of that authority any matters apparent from its review which we believe to be relevant to that authority’s regulatory function.
Companies in Liquidation or Administration
We will not normally review the accounts of a company in administration or liquidation, as the cost to the company, which is borne by shareholders and creditors, is unlikely to be matched by any benefits which might be available from the revision of accounts. In such cases, the administrators or liquidators are charged with identifying and realising the company’s assets and settling liabilities in accordance with the company’s obligations and that task is best left to them.
1 See the Supervision of Accounts and Reports (Prescribed Body) and Companies (Defective Accounts and Directors Reports) (Authorised Person) Order 2012.
2 Rules which have the meaning provided for by section 103(1) of the Financial Services and Markets Act 2000.