Essential Corporate News - Week ending April 29, 2022

FRC: Modern slavery reporting practices in the UK

On April 25, 2022 the Financial Reporting Council (FRC) published new research, in conjunction with the UK Anti-Slavery Commissioner and Lancaster University, which has identified significant shortcomings in the quality of companies’ modern slavery reporting. The research looked at a sample of 100 major companies’ (comprising FTSE 100, FTSE 250, and Small Caps) modern slavery statements  and their strategic and governance reports. Overall, the research found reporting on modern slavery in both modern slavery statements and annual reports to be lacking the information needed for shareholders and wider stakeholders to make informed decisions. The FRC notes that the findings of the research are an opportunity for companies to present a more joined up approach to reporting and provide information on the effectiveness of their policies.

Modern slavery statements

The research found that around one in ten companies did not provide a modern slavery statement at all, and so failed to comply with the reporting requirement in section 54 Modern Slavery Act 2015. Where companies did comply, only one third of modern slavery statements were considered clear and easy to read. The majority of statements were fragmented, lacking a clear focus and narrative, or were unduly complicated.

Key performance indicators (KPIs) to measure the effectiveness of the steps taken to minimise modern slavery risks was an area where disclosure was particularly poor. Only 25% of companies disclosed results against their KPIs and only 12% confirmed they have made informed decisions based on those KPIs. Within modern slavery statements, less than 50% provided a clear and comprehensive discussion of modern slavery concerns in the context of their organisational structure, operating and supply chains. Only 46% described their policies on slavery and human trafficking in an informative manner and so disclosure often lacked detail, and failed to provide information on how policies operated in practice, or how their effectiveness was measured.

While FTSE 100 companies provided significantly more information in comparison with other size groups, the difference between FTSE 250 companies and Small Caps was much less pronounced, and in their descriptions of organisational structure, Small Caps provided better disclosure than FTSE 250 companies.

The report notes that the vast majority of modern slavery statements were wholly backward-looking, with only a minority clearly identifying emerging issues or a long-term strategy and that this finding is consistent with companies opting for a reactive, rather than proactive, approach to addressing modern slavery risks. A related finding is that, although the majority of companies report that they assess modern slavery risk in their own business and supply chain, only 28% disclosed an action plan based on the risks identified.

Reporting on modern slavery in annual reports

The research, which looked in particular at section 172 statements in the annual reports, found that among the 100 companies sampled, reporting on modern slavery issues was surprisingly minimal. The report notes that although the UK Corporate Governance Code (the Code) does not include specific provision on modern slavery or human rights issues, a number of the Code’s principles and provisions cover the board’s ability to assess and manage the company’s risks and to consider the interests of wider stakeholders in making key decisions. The research suggests that many companies appear not to view human rights issues in their workforce and supply chain as a principal source of risk for their business and in some cases, the lack of disclosure raises questions over whether sufficient attention is being paid to such issues.

Evidence from section 172 statements suggested that most companies appear not to view modern slavery issues as sufficiently important to be considered within the wider category of interests covered in section 172 statements. The report comments on the lower level of engagement reported in section172 statements compared with modern slavery statements, with only 9% of companies reporting evidence of engagement with stakeholders on slavery issues and just 2% providing information on how stakeholder views have helped inform decisions.

Only 14% of annual reports provided a direct link to the corresponding modern slavery statement and the report comments that the lack of appropriate cross-referencing not only reduces visibility and transparency on modern slavery issues but undermines efforts to address the risks.

The research found that companies were more likely to discuss governance-related aspects of slavery and human trafficking, including stakeholder engagement, in their modern slavery statement than in their annual report. Only 13 companies reported on internal controls linked to the oversight of human rights and slavery in their annual report, for example and only 7 provided any information about when and how frequently their modern slavery policies and governance arrangements are reviewed.

The FRC  hopes this report will prompt companies to consider their supply chain and the role that the board has in providing oversight to ensure that effective policies are in place which will drive real action in these important areas. Assessment of the effectiveness of these policies at delivering outcomes should be demonstrated in future reporting.

(FRC, Modern slavery reporting practices in the UK, 25.04.2022)

ICAEW: Disclosure of auditor remuneration – Technical release

On April 26, 2021 the ICAEW Financial Reporting Facility published TECH 01/22FF to provide guidance on the disclosure of auditor remuneration for the audit of accounts and other (non-audit) services, in accordance with the requirements of the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 as amended (Regulations).

The Regulations require companies to disclose in their individual and group accounts the remuneration receivable by the company’s auditor and the auditor’s associates for the audit of accounts and other (non-audit) services. TECH 01/22FF aims to ensure that directors (or their equivalents for entities other than companies) and auditors understand the nature and purpose of the requirements and, in particular, the basis for deciding into which category a service provided by the auditor falls. It supersedes the draft guidance initially published in December 2011 as TECH 04/11 FRF and then updated in December 2013 to be TECH 13/14.

The guidance is provided in the form of answers to a series of questions. These include the following topics/areas: 

• Companies and other entities that have to comply with the Regulations
• Associates of a company’s auditor
• The application of the Regulations to SMEs
• Disclosures in individual accounts
• Disclosures around associated pension schemes
• Audit fee for individual accounts
• Disclosures where there is more than one auditor
• Audit fees for group accounts
• Disclosures of “other services”
• Other issues including whether narrative disclosure is required.

(ICAEW, Disclosure of auditor remuneration, TECH 01/22FF, 26.04.2022)