Essential Corporate News – Week ending July 15, 2022

FRC: Restoring Trust in Audit and Corporate Governance – Position Paper

On July 12, 2022 the Financial Reporting Council (FRC) published a Position Paper setting out the next steps to reform the UK’s audit and corporate governance framework. The Position Paper follows the Government’s recent response to the White Paper consultation conducted in 2021 on strengthening the UK’s corporate governance, corporate reporting and audit systems, including the creation of the Audit, Reporting and Governance Authority (ARGA), to replace the FRC. The Position Paper builds on the areas of the Government’s response that fall within the FRC’s remit.
Key areas covered in the Position Paper include the following:

Revisions to the UK Corporate Governance Code (Code) 

The Position Paper states that the focus of revisions to the Code will be as follows:

• Providing additional support in the existing Code Provisions, where reporting is currently weaker, taking account of issues raised in the FRC’s recent research and reports and as outlined in the FRC’s recent annual report on corporate governance reporting and its report on creating a positive culture. 
• Revising those parts of the Code which deal with the need for a framework of prudent and effective controls to provide a stronger basis for reporting on and evidencing the effectiveness of internal control around the year end reporting process. 
• Making necessary revisions to reflect the wider responsibilities of the board and audit committee for expanded sustainability and ESG reporting and, where commissioned by the company, appropriate assurance in accordance with the company’s audit and assurance policy; 
• Including a Provision for boards to consider how audit tendering undertaken by the company takes account of the need to expand market diversity. 
• Updating the Code to ensure that it covers proposed changes to legal and regulatory requirements as set out in the Government’s response, including strengthening reporting on malus and clawback arrangements. 

The FRC’s intention is that the revised Code will apply to periods commencing on or after January 1,  2024 to allow for sufficient implementation time, so the FRC will consult on a revised Code and supporting material (see below) from Q1 of 2023.

Guidance and standards

The revised Code will be supported by updated guidance. The FRC plans to revise the Guidance on Audit Committees and Guidance on Board Effectiveness to align with the revised Code and to support the reforms in the Government’s response. The FRC will also revise the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting specifically to take account of changes to Principles and Provisions on internal control and its effectiveness.

In response to the recommendation made by the Competition and Markets Authority (CMA), the FRC will develop for use initially on a voluntary basis a set of minimum standards for audit committees, setting out expectations on how audit committees should work to address the issues raised by the CMA in its report. The FRC proposes to hold round tables with stakeholders in the second half of 2022 to develop these standards, so they are available to audit committees for 2023 financial year ends. Where possible these standards will consolidate multiple pieces of existing guidance and provide a single source of information. These standards will also address how audit committees can support greater market resilience and diversity when tendering for audit services ahead of legislation. Supervision against the standards could commence in 2024, subject to legislation.

The Position Paper notes that when ARGA is created, the Government’s intention is that the scope of its Supervision Division’s Corporate Reporting Review team will extend to include the whole annual report and accounts. While the precise legislative detail regarding the content which will constitute the ‘annual report’ for these purposes has yet to be published, the FRC expects that corporate governance disclosures will be in scope. As a result, the FRC plans  to commence formal inclusion of these disclosures from the first year of Code implementation. In the meantime, it will continue to include corporate governance reporting in a sample of routine reviews, initiate an initial pilot for remuneration reporting, and seek to engage with companies on a voluntary basis.

Corporate reporting

While a number of the changes proposed in the Government’s response will require primary or secondary legislation, the FRC will work on preparing implementation guidance for the resilience statement, fraud reporting by directors, the audit and assurance policy and related disclosure requirements, and  capital maintenance and dividends (including distributable profits) to succeed the existing ICAEW/ICAS guidance in this area.

The FRC will also revise its guidance on the Strategic Report but will delay the completion of this work until the Government has set out its policy in respect of the use of International Sustainability Disclosure Standards in the UK, so that this can also take account of reporting changes that will be driven by their implementation. On sustainability reporting, the FRC will actively engage with the International Sustainability Standards Board (ISSB) and make recommendations to further their proposals. More broadly, the FRC will work closely with the Department for Business, Energy and Industrial Strategy to propose ways to reduce the current non-financial reporting burden on companies.

Among other things, the FRC also intends to expand its “What Makes a Good…” series to include “What Makes a Good Annual Report and Accounts, and the FRC Lab will carry out a series of projects to assist with the development of the new reporting requirements set out in the Government’s response (including resilience statements, capital maintenance disclosures and audit and assurance policies). These projects will set out how companies might apply the new reporting requirements to provide useful and meaningful information to users.

Audit

While the scope of an audit is not being changed, the FRC will consult on changes to address some of the policy points in the Government’s response through revisions to standards, including revisions to its Ethical Standard to reflect stakeholder feedback, evidence gathered through the FRC’s inspection programme and its enforcement work. The Position Paper sets out other proposals in relation to audit in addition.

(FRC, Restoring Trust in Corporate Governance and Audit – Position Paper, 12.07.2022)

LSE: Extension of consultation on changes to the Admission and Disclosure Standards (N12/22), to include expansion of the proposed Voluntary Carbon Market designation and Stock Connect - N14/22

On July 8, 2022 the London Stock Exchange plc (LSE) published Stock Exchange Notice N14/22 announcing that the consultation period relating to the proposals in N12/22, previously scheduled to close on July 11, 2022 is being extended to August 1, 2022. This is to enable the LSE to pose further questions and make further changes on the proposed launch of the Voluntary Carbon Market designation and to accommodate changes to the Standards in respect of Stock Connect.

Voluntary Carbon Market designation 

In N12/22, the LSE noted that it would be considering extending the proposed Voluntary Carbon Market designation beyond fund structures and it reports that it has received interest to extend the designation at launch to permit companies operating in the voluntary carbon sector. This would require amendments to the proposed new Schedule 8 of the Admission and Disclosure Standards. The LSE asks for views generally as to the proposal that, in addition to funds, such operating companies that are admitted to either Main Market or AIM are also eligible for the designation, and specifically what protections would be appropriate in the absence of a fund structure and an authorised fund manager. The LSE also seeks views on what proportion of such a company's business should be operating in the voluntary carbon sector. 

Expansion of Stock Connect 

Following the launch of Shanghai-London Stock Connect in June 2019, among other things, the LSE now proposes to extend the markets eligible for Shanghai-London Stock Connect. In addition to Shanghai Stock Exchange Main Board issuers, qualifying issuers admitted to the Science and Technology Board of the Shanghai Stock Exchange will also be able to apply for admission to trading via Shanghai-London Stock Connect. Views on these proposals are sought.