Last month, the Government released its long-awaited response to the consultation on strengthening the UK’s audit, corporate reporting, and corporate governance landscape.
The corporate reporting reforms announced by the Government are aimed to improve the transparency and usefulness of information for stakeholders and restore their trust.
A range of new measures will be introduced, including those to enhance the quality of reporting and accounting.
Companies will need to achieve these higher standards and directors of public interest entities (PIEs) will be held to account if they fail to fulfil their corporate reporting responsibilities.
What you need to know
We have set out the key areas that finance and corporate reporting teams should focus on:
Stronger regulator: Audit, Reporting and Governance Authority (ARGA), the new regulator, will have stronger and wider powers over corporate reporting.
ARGA’s review powers will extend to the entire contents of the annual report including corporate governance statements, directors’ remuneration and the CEO’s and chairman’s reports.
ARGA will:
- have the power to publish summary findings from its reviews – without the need for consent from the companies reviewed.
- direct changes to companies’ accounts.
- commission the help of third-party experts to investigate matters (at the company’s cost).
- sanction directors of PIEs for breaches of their corporate reporting responsibilities.
Disclosing the minimum information required by the regulations and accounting standards will no longer be sufficient – companies will need to achieve more transparent, comprehensive and robust disclosures. The bar will be raised significantly by this new regulator with sharper teeth.
Resilience Statement: Companies will need to report on the risks that threaten their business model over the short and medium term and their ability to withstand those risks. The Resilience Statement will incorporate the current going concern and viability statements and will form part of the Strategic report.
In assessing the key risks, companies will be required to consider a number of specified issues including threats to liquidity and solvency, dependency on supplier chain, cyber security risks, sustainability of dividend policy and the significant accounting judgements and estimates disclosed in the latest financial statements.
The Resilience Statement will require companies to:
- provide detailed disclosures for each key risk, including the likelihood, impact, time-period over which the risk is expected to remain and mitigating action. Companies will be allowed and expected to incorporate their existing reporting on principal risks and uncertainties within the Resilience Statement.
- perform at least one reverse stress test – beginning with failure and working back the scenarios which would cause this to materialise.
- choose and explain the length of the assessment period for the medium-term analysis.
- identify any material uncertainties to going concern that existed prior to the taking of mitigating actions which are necessary for understanding of the current position and prospects of the business.
Preparing a robust Resilient Statement will require a structured approach, thorough risk assessment, scenario testing, relevant controls and processes and effective and cohesive disclosure and reporting. The finance and reporting teams will be crucial to this. There will need to be careful consideration of the consistency in facts and assumptions when preparing the front and back half.
Distributable reserves: UK parent companies and others will have to disclose their distributable reserves or ‘a not less than figure’ and these amounts will be subject to audit. Though not a requirement, companies will be encouraged to disclose the dividend paying capacity of the group.
Whilst directors are already required to assess the legality of proposed and paid dividends, they will now have to provide an explicit statement confirming this.
Companies will also need to disclose their distribution policy. This will set out their long-term approach to the amount and timing of returns to shareholders, whether through dividends or other means such as share buy-backs.
Companies that have a good record of distributable reserves and an established distribution strategy will be focussed on the audit of these records such that the statement can be made. For those less sophisticated, this may involve a significant amount of work.
Other new reporting requirements that will apply include:
Audit and Assurance policy: Companies will need to explain their approach to assurance over the information reported in the front half of annual report and accounts, including disclosing their internal auditing and assurance process.
Fraud statement: Companies will need to prepare a directors’ fraud statement setting out the actions they have taken to prevent and detect fraud.
Statement on internal controls: The UK Corporate Governance Code will be updated to require an explicit directors’ statement on the effectiveness of internal controls.
Close collaboration of the reporting teams with other functions within the business will be key in delivering informative, consistent, and cohesive reporting.
Who do these apply to?
The definition of PIEs is changing to include large companies with 750 or more employees and a turnover of at least £750m.
Whilst all PIEs will fall into ARGA’s remit, the new corporate reporting requirements – Resilience Statement, Audit and Assurance Policy, fraud statement, dividends and distributable reserves disclosure – will only apply to companies with 750 or more employees and £750m or more in annual turnover.
Getting ready for the reforms
The corporate reporting landscape is changing – though the Government has not announced an effective date for the different reforms, companies need to start preparing for these now as there is a long journey ahead.
Implementing the reforms is much more than a compliance exercise, it is an opportunity for companies to reassess their business model, value creators, risks, governance, reporting and create sustainable value for their business.
The next steps will be for finance and reporting teams to assess their current processes and reporting against the reforms and develop a plan to achieve transparent, integrated and holistic reporting in collaboration with other functions within the business.
Get in touch with Greg Stinson or Manisha Santchurn if you would like to learn more about these reforms.
