The Financial Reporting Review Panel was established in 1990 as part the Financial Reporting Council. The Panel seeks to ensure that the annual accounts of public companies and large private companies comply with the requirements of the Companies Act and applicable accounting standards. In particular the scope of the Panel’s activity covers companies that are public limited companies (PLCs) (except PLCs that are subsidiaries in a small or medium-sized group), companies within a group headed by a PLC, and any company not qualifying as small or medium-sized under Companies Act rules.
In order to test compliance with relevant legislation and accounting standards, the Panel reviews the annual accounts of companies within its scope and keeps under review interim and final reports of certain other listed issuers; in addition since April 2006 the Panel also reviews directors’ reports. Where apparent departures from the requirements are envisaged the Panel can ask explanations of directors and, if they are not satisfactory, it will aim to persuade the directors to adopt a more appropriate accounting treatment by voluntarily withdrawing their accounts and replacing them with revised accounts that correct the matters in error. Depending on the circumstances, the Panel may accept another form of remedial action - for example, correction of the comparative figures in the next set of annual financial statements. If the directors of a company refuse or otherwise fail to carry out the correction required, the Panel can exercise its powers to secure the necessary revision of the accounts through a court order. To date the Panel has succeeded in resolving all cases brought to its attention without having to apply for a court order.
In June 2008 the Panel announced its approach to the review of accounts whose audit report is qualified for failure to comply with the Companies Act 1985. Previously the Panel had published a consultation paper in which it asked whether auditors would voluntarily report to them when they qualify a set of accounts and from the responses it emerged that auditors were unwilling to make such a report. The Panel then arranged for other means of notification of qualified audit reports and received notification of over 740 qualified accounts. The approach announced by the Panel towards these accounts has been that of writing to more than 50 of the companies concerned, drawing attention to the directors’ responsibilities under the Companies Act to prepare accounts that comply with the law and accounting standards. The Panel will tell directors that, at this stage it will not be opening an enquiry into the accounts which have caused it to write, but it will review their next set of accounts and will take appropriate action in accordance with its operating procedures if the qualification remains. Therefore if the qualification is reiterated in the accounts of the following period, the Panel could ask the directors to revise the accounts and ultimately may apply to the court to seek a revision of defective accounts. The Panel will warn the directors concerned that the court may also order that the costs of the action and the revision should be paid by the directors personally if they were party to the approval of the defective accounts.
The Panel hopes that this approach will encourage directors who presently prepare accounts that do not comply with the law to address the non-compliance so that neither the audit qualification nor a Panel enquiry is necessary in future.