SINCE the revised corporate governance code was issued in September 2012 there has been a lot of debate regarding the way that boards, and audit committees, might approach the changes it is bringing in relation to the contents of annual reports.
A number of these changes focus on the section of the annual report that deals with audit committee matters, and are effectively mandatory for the current reporting season. The code, and its associated audit committee guidance, has been revised to include provisions for FTSE 350 companies to put the audit out to tender at least every ten years and the FRC is encouraging companies to say what they intend doing in respect of the audit contract.
Committees are now being encouraged to report the process through which they have assessed external audit effectiveness, rather than just to state at present whether or not they do consider it to be effective. The area that many committees will find most burdensome is that they are required to provide information surrounding significant financial reporting issues and the way that these have been addressed, and to say how they have discharged their duties.
In addition to the above the new requirement for boards to state that the annual report, taken as a whole, is “fair, balanced and understandable” will most often fall upon the audit committee in the first instance. All in all audit committees are under greater scrutiny than they ever have been and that trend is only likely to continue.
In this context we have released our third annual review of audit committee reporting – Waiting is the Most Difficult Bit – an Analysis of Audit Committee Reporting – 2013. Although it also looks at audit committee reporting for AIM companies, the most striking feature of the survey was that overall there was no appreciable increase in the quality of listed company audit committee reporting between the annual reports of 2013 and 2012. There has been surprisingly little anticipation of the revised code in the disclosures and in the descriptive material surrounding audit committee conduct.
So overall we were surprised, and a little bit disappointed, that companies had not used 2013 to advance audit committee reporting along the road to fuller disclosure in 2014.
The reports focused heavily on relationships and communication with the external auditor, and gave lots of information around non-audit services and independence. However little was said about the relationship and communication with internal audit and the absence of disclosure of the focus of their activities was really very apparent.
There are some bright spots. A separate audit committee report is now given by over half of FTSE companies sampled, compared with only some 30% in 2012. There are more women on audit committees with an increase from some 14% in 2012 to 18% in 2013. However, surprisingly, BDO found that only just over 70% of audit committee reports referred to “whistleblowing” arrangements in place in any way at all.
Given that the new governance code only really takes effect from now, why should we worry about this? The worry comes from the apparent lack of enthusiasm to adopt best practice which might herald an approach to future disclosure that relies on boilerplate language. Currently, boards only tell us that they have discharged their responsibilities but that doesn’t actually help investors in understanding how they, and committees have actually gone about discharging their responsibilities.
Practically speaking, there are a number of simple things that companies can do to improve communication in all these areas without creating more of a reporting industry. Presentation is important and audit committee reports which are laid out with clear headings, using charts and boxed presentations will create a more friendly environment in which a user can absorb the report. The use of questions and answers is an easy way to lead the reader through and to put matters into context. Reports should be written by (or as if by) the chairman or chairwoman and address the reader directly and giving some insight into the way the committee works will really inform the reader – it is less about the what than the how.
James Roberts is senior audit partner at BDO