The Financial Reporting Council (FRC) has published its 2017/2018 report on corporate governance and reporting. The report sets out the findings from the FRC’s review of 220 annual reports and accounts, predominantly with December 2016 year-ends.
For the first time, the review also covers compliance with the UK Corporate Governance Code (the Code).
The key points arising from the report are as follows:
- The FRC’s most common areas of concern involved judgments and estimates used in preparing accounts, and alternative performance measures (APMs). The FRC had already highlighted these as areas for improvement in its 2016/2017 review.
- The review also revealed a rise in “basic errors and non-compliance” in some areas, including misclassification of cash flows.
- The FRC is encouraging companies to ensure, in particular, that their strategic reports are balanced and comprehensive and contain a fair review of the company’s business.
- Compliance with the Code was high. 95% of FTSE 350 companies reported compliance against all but one or two of the Code’s 54 provisions. However, the FRC notes that companies are still reluctant fully to explain non-compliance. It is encouraging investors to do more to hold companies to account for poor explanations of non-compliance.
- Too few companies are providing information about board evaluations. The FRC would like to see more detail on the nature of evaluations, their findings and follow-up actions.
- The quality of remuneration committee reporting neither improved nor declined, but reporting on the relationship between directors’ remuneration and employee pay was poor.
- Echoing the FRC’s comments in its recent Lab report, many companies’ longer-term viability statements are not sufficiently illuminating. Not enough companies are explaining the processes they have undertaken to prepare their statement or the stress-testing they have carried out.
- Companies could be more transparent in explaining how they have engaged with stakeholders and how they allocate capital resources.
- Going forward, the FRC will be concentrating on the quality of reporting on how directors have complied with their duty under section 172 of the Companies Act 2006. This follows the new requirement for large companies to include a section 172(1) statement in their strategic report for financial years beginning on or after 1 January 2019. Last week, the GC100 published new guidance on how directors can demonstrate they have complied with this duty.