Revised operating procedures for reviewing corporate reporting

Comments from ACCA to the Financial Reporting Council.
June 2014.


Specific comments

Question 1: Do you support the description of the Committee reference and the proposals in paragraphs 67 and 68?


As the Committee does not in practice have to apply to the Court, this will be the main way of publicising issues and the action taken – and we concur that in this context, it is sufficient. The practice of Committee references and their inclusion in the next report and accounts of the company concerned is an appropriate response to circumstances where direct stakeholders in the company need to be informed but there is no wider public purpose to be served in general publication of the details. The measure allows for a proportionate and transparent response to matters which affect the company and its stakeholders but do not have wider impacts or implications. The published accounts are, as noted in the consultation, a matter of public record and can be consulted by anyone, but will in practice usually only be of interest to the directly involved stakeholders who may also be directly affected by the matters dealt with under the reference.  


Question 2: Do you support our proposal to identify companies who have published a Committee reference in the Committee’s next annual report?


There is a balance to be met – the Committee reviews around 250 reports per year; as at March 2014 there were around 2.97m active companies on the UK register, although of these only around 2,200 issue listed securities. Around half of the companies reviewed are engaged in subsequent correspondence with the Committee, and nearly 10% of those are subject to a Committee reference. While direct extrapolation can give no more than the broadest indication of likely levels of errors, it is even so likely that around 5% of all listed company reports incorporate errors which might give rise to a reference if identified; only 1 in 10 of these is actually reported by the FRC.

It is of course the case that matters giving rise to a reference, rather than any more serious censure, are not likely to have resulted in significant detriment for any stakeholder. While it is important that the quality of reports is consistently improved, and the errors identified by the Committee should be corrected and avoided in the future, many investors and their advisers would consider the impact within the tolerance of error which they would allow for in making their own decisions on investments.

While the report will only ever identify a small proportion of the relevant errors, it will nonetheless act as an incentive to prepare compliant accounts for all companies potentially subject to review. Even those companies which are identified and named should not suffer any disproportionate negative impact, as those investors who consider the report will be sufficiently sophisticated to recognise the significance of the disclosures in the broader context.

Consideration must be given to the fact that for every company whose details are published in the FRC annual report, there are likely to be 9 or 10 who have ‘got away with it’. However, the prospect of being subjected to review and potential publicity over time should be sufficient to act as an incentive for businesses to improve the quality of their reporting ahead of time. The incentive to accountability based on transparency confirms the benefits of such reporting, and the advisability of formalising the process.

Given the FRC’s previous experience of companies’ response to being identified in the report, the proposals would not appear to be contentious.