The quality of reporting in smaller listed and AIM companies has regularly been questioned by investors, lenders and regulators and now the Financial Reporting Council (FRC) has launched a three year project to review the position. The FRC is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting in order to foster investment and aims to promote high standards of corporate governance via the UK Corporate Governance Code (formerly the Combined Code). It also sets standards for corporate reporting, audit and actuarial practice and monitors and enforces accounting and auditing standards.
The FRC’s review aims to achieve a step change in the quality of reporting for these companies and will take place in three phases:
Phase 1: Gathering and assessing evidence of the root causes of the challenges and exploring ways in which the FRC can support companies to make improvements.
Phase 2: Looking to implement possible supporting actions (although the FRC gives no indication of how this might be delivered).
Phase 3: Assessing whether the quality of reporting has improved as a result.
In Phase 1, the FRC will undertake various activities to help identify the root causes. It will review samples of annual reports (this already happens under the FRC’s normal operating procedures); review audit procedures at relevant audit firms in relation to the processes and procedures for reviewing the financial statements of smaller companies; engage with key stakeholders including investors, banks, non-executive directors, NOMADs and report preparers and give consideration to governance arrangements at smaller companies.
Following the launch of the FRC’s review, companies should be extra vigilant when preparing their financial reports to ensure they comply with the spirit, and not just the letter, of the rules. The FRC has reported in its annual report into corporate reporting review activities that too many smaller listed companies and AIM quoted companies are continuing to submit poor quality reports. Although corporate reporting by large public companies is generally considered to be of a high standard, poor reporting is by no means the preserve of the smaller listed and AIM sector.
Smaller companies are extremely important to economic growth – whilst they may not generate as much money as larger corporations, they are a critical component of and major contributor to the strength of local economies. An improved quality of reporting and governance should help these companies grow even more strongly and anything that improves confidence in and the integrity of the operation of markets as a whole is welcome.