Essential Corporate News – Week ending September 3, 2021

FRC: FRC Lab Report – Reporting on risks, uncertainties, opportunities and scenarios

On September 2, 2021 the Financial Reporting Council’s Financial Reporting Lab published its latest report on what investors want to understand from company reporting on the connected areas of risks, uncertainties and opportunities. The report notes that that there remains a gap between the information users want and the disclosures that organisations provide and it comments that this disclosure gap is likely to widen with climate-related uncertainty and an increased demand for enhanced Environmental, Social and Governance (ESG) reporting.

From discussions with investors, the report states that it is clear that investors want information that builds their understanding of:

• Governance and processes – Before understanding the nature of the risks, uncertainties and opportunities, investors want to understand how the board and management identifies, monitors and manages these areas and responds in an agile way. As a result, they want to know what relevant governance structures and processes are in place, how effectively these have functioned and how quickly the company can modify these to react to external factors.
• Nature – Investors want to build their knowledge of the risks, uncertainties and opportunities through disclosure addressing: – Context: what is the company’s market position and how does it view the macroeconomic, microeconomic and geopolitical environment and the industry-wide risks and uncertainties faced? – Importance: what is the company’s assessment of the importance of the risks, uncertainties and opportunities faced, and why it has changed, what is the likelihood and impact of the risk, uncertainty or opportunity and has the risk or uncertainty been considered as part of the company’s viability assessment? – Form: how does the company identify and classify the risks, how do the risks align or connect with the opportunities and the wider company narrative and reporting?
• Approach – Investors want to understand how management are responding to the risks, uncertainties and opportunities. This requires information about: – Linkage: to the wider strategy, purpose and business model that allow the monitoring of risks and opportunities and disclosure as to whether and how key performance indicators (KPIs) and other metrics are tailored accordingly. – Response: what is management tangibly doing to mitigate the risk (where relevant) and take forward the opportunity, what have they already done, what will they do in the short, medium and long term and how does this affect wider viability and resilience?
• Scenarios and stress-testing – Investors want to understand more fully what is on the company’s horizon and how this is integrated into the risk and opportunity process. As a result, they want to know about the different scenarios and situations considered, and stress tests performed, and how these tie into other areas of reporting and the company’s view of the future. Useful scenarios are considered those that are company-specific and incorporate information consistent with that provided elsewhere. The report includes suggestions of how scenarios can be enhanced.

The report highlights examples of where more consistent reporting of risks and related uncertainties and opportunities is beginning to emerge and it challenges companies to reflect this progress in their disclosures and make risk and opportunity reporting a key part of their strategic narrative. It also provides several practical examples of corporate reporting that better meet investors’ needs and includes high-level insight into how investors would like reporting on resilience to develop. With the report, a one page Summary has been published.

Following publication of the report, the Financial Reporting Lab is inviting companies, investors and interested parties to participate in a new project that seeks to understand the specific process and disclosure areas emerging around cyber, digital and data risk. This project will consider how company processes are changing and how that is, or might, translate into useful external disclosures.

(FRC: FRC Lab Report – Reporting on risks, uncertainties, opportunities and scenarios, 02.09.2021)

(FRC, What do investors want to understand about risks, uncertainties, opportunities and scenarios?, 02.09.2021)

FRC: Proposed revisions to the Audit Firm Governance Code – Consultation

On August 26, 2021 the Financial Reporting Council (FRC) published a consultation document which sets out proposals to update and strengthen the Audit Firm Governance Code (Code) in support of the FRC’s objectives to promote high-quality audit and audit market resilience. The Code, first published in 2010 to improve the governance in place at the largest audit firms (and last updated in 2016), applies to the “Big Four” audit firms and to other firms auditing FTSE 350 companies. Going forward it will also apply to firms that audit significant numbers of other types of public interest entities.

The Code draws on the approach to governance in companies, as embodied in the UK Corporate Governance Code, and tailors this for an audit firm and partnership context. Among other things, the FRC want to change the format and structure of the proposed 2022 Code to be clearer and sharper and to align it with the structure of the 2018 UK Corporate Governance Code.

The FRC have strengthened the Code in the areas of accountability, culture, sustainability, and resilience. They have added Provisions that the most senior governance body at a firm (the Board) should be comprised of a majority of partners that do not have significant management roles. They have also clarified and strengthened the role of this Board and introduced a separation between the role of chair and that of the managing / senior partner.

The FRC have also incorporated an emphasis on long-term sustainability, people, culture, and employee engagement in line with the UK Corporate Governance Code, with specific responsibilities assigned to the Board and to the independent non-executives (INEs) in these areas. The proposed 2022 Code also seeks to drive more consistency in how INEs are embedded in governance structures and to provide more clarity on the role and status of INEs and their responsibilities under the Code. Further, it establishes the boundary between the responsibilities of INEs and audit non-executives in audit firms with operationally-separate audit practices.

Responses to the consultation are requested by November 18, 2021.

(FRC, Proposed revisions to the Audit Firm Governance Code – Consultation Document, 26.08.2021)