Essential Corporate News – Week ending November 25, 2022

FRC: Review of Stewardship Reporting 2022

On November 24, 2022 the Financial Reporting Council (FRC) published a report providing an overview of the stewardship reporting against the 2020 UK Stewardship Code assessed in the Spring 2022 period and explaining how the FRC’s expectations for reporting will evolve for the 2023 assessment year. In the report, the FRC also provides guidance for reporting on engagement and exercising rights and responsibilities and gives guidance on its expectations of reporting by asset owners and those investing through a third-party manager.

Results of assessments

In the reports assessed, the FRC has seen effective stewardship reporting that is transparent about the purpose and approach of the organisation, and highlights progress made during the year. The FRC has also noted improvements across many areas of reporting, including the following: 

• The quality of activity and outcome reporting for engagement, collaboration and escalation. 
• Signatories’ contributions to addressing market-wide and systemic risks, and improving the functioning of financial markets.
• How signatories monitor and hold to account third parties, such as asset managers and service providers. 
• Stewardship in asset classes other than listed equity, such as fixed income and real estate. 

However, there still needs to be greater emphasis by signatories on reporting their activities and outcomes during the reporting period, using both quantitative and qualitative evidence.

In 2023, the FRC will place more emphasis in its assessment process on reporting of activities and outcomes. For Principles 4 and 7 to 12, the FRC comments that reporting should include multiple case studies to evidence the activities undertaken in the reporting year and the outcomes of those. While the FRC expects to see more examples from larger asset managers than from smaller asset owners, it points out that high-quality, informative case studies are expected of all signatories.

Future developments

The FRC notes that in July 2022 it published ‘The influence of the UK Stewardship Code 2020 on practice and reporting’. This research showed that investors have made material changes to governance and resourcing, the quality of engagement has improved under the influence of the UK Stewardship Code, and investors are collaborating more. It also identified areas for improvement in the UK Stewardship Code, and the FRC’s Stewardship team is currently interviewing asset owners and their agents to understand how they use stewardship reporting, and their views on content, format and structure. This research will help inform the FRC’s development of the UK Stewardship Code as it works with the government and regulators to review the regulatory framework for effective stewardship, including the operation of the UK Stewardship Code, and the FRC states that it will continue to engage with a wide range of stakeholders to inform its approach.

(FRC, Review of Stewardship Reporting 2022, 24.11.2022)

FRC: What makes a good environment for auditor scepticism and challenge

On November 23, 2022 the Financial Reporting Council (FRC) published a paper setting out the key attributes of a high-quality audit environment that enable professional scepticism and challenge in an audit, linking to the environmental factors outlined in the Professional Judgement Guidance published by the FRC in June 2022. The paper describes what good looks like and provides examples of good practice in each area, identified from the FRC’s supervision work.

Background to the paper

The FRC notes that high-quality auditing is about having the right mindset and behaviours as well as having technical skills and expertise and a critical attribute of an auditor’s mindset and behaviour is exercising professional scepticism and challenge when performing audits. The most significant quality issues identified by the FRC over a number of years involve the inconsistent application of professional scepticism and challenge, resulting in the poor application of professional judgement. Displaying this mindset and behaviour forms the foundation of a high-quality audit.

The June 2022 Professional Judgement Guidance was published to enhance the consistency and quality of professional judgement exercised by auditors. The Guidance highlighted that professional scepticism is a key part of an appropriate auditor mindset, supporting the judgements made on an audit. It outlined the psychological factors and the range of biases that can hinder objective reasoning and challenge. It also outlined the factors that may be present in the environment of those making a judgement (‘environmental factors’) that can impact how easy or difficult it is to exercise scepticism and challenge in an appropriate manner.

Content of the paper

The paper considers four key elements of a good environment for scepticism and challenge: the learning environment, culture and operating model of the audit firm, as well as the interactions that the audit firm has with parties in the wider ecosystem. The paper sets out these four elements, highlighting good practice in each.

Benefits of the paper

The FRC states that audit firms should use the paper to develop a greater understanding of the factors that create a good environment for scepticism and challenge. Further, audit committees and management at the audited entity can use it to develop a greater understanding of the role they play in enabling increased scepticism and challenge on an audit. The FRC points out that audit committees should be aware that the FRC will be consulting soon on minimum standards for audit committees, demonstrating how expectations of all parties in the ecosystem are increasing.

Further report

The FRC has also published a report conducted by BritainThinks based on qualitative research to explore the drivers and barriers to auditors exercising professional scepticism and effective challenge. 

(FRC, What makes a good environment for auditor scepticism and challenge, 23.11.2022)

FRC: Revised Application Guidance to FRS 100 published

Amendments to FRS 100 Application of Financial Reporting Requirements - The Interpretation of Equivalence

On November 18, 2022 the Financial Reporting Council (FRC) issued ‘Amendments to FRS 100 Application of Financial Reporting Requirements – The Interpretation of Equivalence’, which revise the Application Guidance to FRS 100 to reflect changes to company law and decisions on equivalence following the UK’s exit from the European Union.

In December 2020, the FRC issued ‘Amendments to UK and Republic of Ireland accounting standards – UK exit from the European Union’. Paragraph 9 of that document noted that the Application Guidance ‘The Interpretation of Equivalence’ to FRS 100 would be updated for changes to UK company law and decisions on equivalence and these amendments to FRS 100 (which show deleted text struck through and inserted text underlined) replace the previous Application Guidance and make other consequential amendments. 

The revised guidance is based on current legal requirements and is effective immediately.

FRS 100 Application of Financial Reporting Requirements

The FRC also issued a revised edition of FRS 100 Application of Financial Reporting Requirements on November 18, 2022. This revised edition incorporates the revised Application Guidance relating to equivalence and other amendments made since the previous edition was issued in 2018, as well as changes in Irish company law.

(FRC, Amendments to FRS 100 Application of Financial Reporting Requirements -  The Interpretation of Equivalence, 18.11.2022)

(FRC, FRS 100 Application of Financial Reporting Requirements, 18.11.2022)