Essential Corporate News – Week ending 20 October 2023

DBT: Draft reporting regulations withdrawn in latest move to cut red tape for businesses

On 16 October 2023 the Department for Business and Trade (DBT) announced that the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023, which were laid in Parliament on 19 July 2023, have been withdrawn. 

The draft regulations would have added certain additional corporate and company reporting requirements to large UK listed and private companies with “a high level of employees and turnover“ (broadly companies with 750 or more employees and turnover which equals or exceeds £750 million). These would have included an annual resilience statement, distributable profits figure, material fraud statement and triennial audit and assurance policy statement. In consultation, companies raised concerns about these additional reporting requirements which would have involved them incurring extra costs by requiring them to include additional corporate information in their annual reports.

The Government has now completed a separate Call for Evidence on existing non-financial reporting requirements, which has identified a strong appetite from businesses and investors for reform, including to simplify and streamline existing reporting. This has led the Business Secretary to decide to withdraw the draft regulations, and options to reform the wider framework will be set out shortly with the aim of reducing the burden of red tape on businesses.

The announcement states that the Government remains committed to wider audit and corporate governance reform, including establishing a new Audit, Reporting and Governance Authority (ARGA) to replace the existing Financial Reporting Council. Legislation to deliver these reforms will be brought forward when Parliamentary time allows.

(DBT, Burdensome legislation withdrawn in latest move to cut red tape for businesses, 16.10.2023)

DBT: Smarter regulation and the regulatory landscape – Call for Evidence overview

On 17 October 2023 the Department for Business and Trade (DBT) published a Call for Evidence to inform its smarter regulation programme of regulatory reform, aimed at improving outcomes for businesses and consumers. This follows publication in May 2023 of Smarter regulation to grow the economy,  an introductory report which set out the Government’s vision for regulation and committed to a series of regulatory reform announcements across the year to benefit businesses and drive innovation and growth.

The DBT are particularly interested in success stories and areas for improvement on regulatory agility, proportionality, and consistency of approach. They are also interested to understand any further steps that can be taken to reform the existing stock of regulation on the UK statute book.

Responses are requested from all stakeholders (businesses, consumers, regulators and other bodies) but the DBT are particularly interested in responses from small businesses and consumers. While responses from all stakeholders across all sectors in the economy are requested, it is noted that the DBT are not seeking views on financial services regulators and regulations which are dealt with by HM Treasury.

The Call for Evidence is structured as follows:

• Section 1: Preliminary questions, asks for some high-level views on the regulatory landscape. 
• Section 2: Complexity and Ease of Understanding the Regulatory System, asks questions on how easy it is to navigate the landscape of regulators and understand what their objectives are. 
• Section 3: Regulator Agility, Responsiveness and Skills, covers the speed with which regulators make decisions and whether they have the right balance of skills to deliver effectively. 
• Section 4: Proportionality in Implementing Regulation, is concerned with whether the approach of regulatory authorities to delivering outcomes is proportionate. 
• Section 5: Process and Governance, is concerned with whether the governance structures of regulatory authorities are conducive to delivering the best outcomes and whether the rationale for decisions is well communicated. 
• Section 6: Regulator Performance, asks for views on whether regulators are delivering on their objectives and whether there is sufficient performance monitoring in place. 
• Section 7: Concluding questions, asks some general closing questions on regulation as a whole, including whether there are international examples of best practice that regulatory authorities could adopt. 
• Section 8: Closing Questions, asks some background questions on the respondent, including the capacity in which they are responding to this Call for Evidence. 

The closing date for responses is 7 January 2024.

(DBT, Smarter regulation and the regulatory landscape: Call for Evidence, 17.10.2023)

DESNZ: Scope 3 emissions in the UK reporting landscape – Call for Evidence

On 19 October 2023 the Department for Energy Security and Net Zero (DESN) launched a Call for Evidence to gather feedback on the benefits, costs, and practicalities of Scope 3 greenhouse gas (GHG) emissions reporting in the UK, including links to the existing Streamlined Energy and Carbon Reporting (SECR) framework.

The Call for Evidence follows the publication, on 26 June 2023, by the International Sustainability Standards Board (ISSB) of its inaugural standards for sustainability-related disclosures, including requirements for entities to report their Scope 1, Scope 2 and Scope 3 greenhouse gas (GHG) emissions.

The GHG Protocol classifies a company’s emissions into 3 scopes:

• Scope 1 emissions are the direct emissions from owned or controlled sources.
• Scope 2 emissions are the indirect emissions from the generation of purchased energy.
• Scope 3 emissions are all indirect emissions, not included in Scope 2, that occur in the value chain of the reporting company.

Some of the largest organisations in the UK are currently required to disclose their Scope 1 and Scope 2 emissions in their annual reports in line with the Streamlined Energy and Carbon Reporting (SECR) framework, but Scope 3 emissions remain largely voluntary and the Call for Evidence notes that calculating Scope 3 emissions can be difficult and complex; they are both the most significant and most challenging source of emissions for businesses to identify, quantify and address. The SECR framework aims to increase awareness of energy costs and emissions within organisations by providing them with data to inform the adoption of energy efficiency measures and help them to reduce their impact on climate change. It also aims to provide greater transparency and consistency of disclosures for investors and stakeholders to enable them to hold businesses to account.

• The costs, benefits and practicalities of Scope 3 greenhouse gas emissions reporting to help inform the Government’s decision on whether to endorse the ISSB standards in the UK. The Call for Evidence points out that the endorsement process aims to result in the production of a UK-endorsed version of IFRS S2 that businesses will be able to use on a voluntary basis. The Government will consider the appropriateness of future reporting requirements against UK-endorsed ISSB standards for UK-registered businesses once the endorsement process is complete. This will include requirements to report any Scope 3 disclosures included within the UK-endorsed version of IFRS S2. It also notes that the Financial Conduct Authority (FCA) will also consult on amending rules for listed companies to refer to UK-endorsed standards in early 2024, with a view to bringing in new obligations for listed companies for accounting periods from 1 January 2025; and
• The current SECR framework to inform a Post-Implementation Review of the policy.

Responses are requested by 14 December 2023. The DESNZ aims to publish the Government response to this Call for Evidence within 12 weeks of the closing date.

(DESNZ, Scope 3 emissions in the UK Reporting Landscape – Call for Evidence, 19.10.2023)

(DESNZ, UK greenhouse gas emissions reporting: Scope 3 emissions – Call for Evidence, 19.10.2023)

FRC: Consultation on strengthening auditor reporting requirements of breaches of laws and regulations - International Standard on Auditing (UK) 250

On 18 October 2023, the Financial Reporting Council (FRC) launched a consultation aimed at strengthening auditor requirements to detect and report material misstatements from non-compliance with laws and regulations and to clarify instances when auditors should report such breaches, and other significant matters, to the relevant regulators. The purpose of this is to enhance the useability and informativeness of the audit and provide greater assurance to users of financial statements that potential material misstatements have been properly assessed by the auditor.

The consultation concerns proposed revisions to both ISA (UK) 250 Section A and ISA (UK) 250 Section B. ISA (UK) 250 is titled “The Auditor's Responsibilities Relating to Laws and Regulations in an Audit of Financial Statements” and it was last revised in 2019. For both standards, the FRC is proposing an effective date for audits of financial statements for periods beginning on or after 15 December 2024.

Section A—Consideration of Laws and Regulations in an Audit of Financial Statements

Non-compliance with laws and regulations can result in potential fines, litigation or other consequences which could have a material effect on the audited entity. Auditors will be expected to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, arising from non-compliance with laws and regulations. 

The FRC acknowledges that auditor's responsibilities cannot be open-ended to the effect of identifying and determining compliance with all laws and regulations relating to the entity. To assist, a more robust risk assessment process will be introduced to help auditors identify those laws and regulations that have, or may potentially have, a material effect on the financial statements.

Section B—The Auditor’s Statutory Right and Duty to Report to Regulators of Public Interest Entities and Regulators of Other Entities in the Financial Sector

The changes to this Section of ISA (UK) 250 build on existing UK laws whereby auditors of public interest entities are expected to comply with statutory duties to report to regulators if significant matters relevant to the regulator, such as breaches in law or regulation, come to the auditor’s attention. The FRC is proposing to introduce a more principles-based approach so that information that is of such significance is reported to regulators even where law, regulation or relevant ethical requirements do not require it.

The consultation period closes on 12 January 2024.

(FRC, Proposed International Standard On Auditing (UK) 250 (Revised) Consideration of Laws and Regulations in an Audit of Financial Statements, 18.10.2023)

(FRC, FRC to strengthen auditor reporting requirements of breaches of laws and regulations, 18.10.2023)