The Financial Reporting Council (FRC) has published a report which looks at how audit committee reporting can be made more effective, in the light of recent changes to the UK Corporate Governance Code, including the ten-year comply or explain approach to audit tenders.
Produced by the FRC's Financial Reporting Lab, Reporting of Audit Committees is based on the views of 19 companies and 25 investor and analyst groups, and discusses approaches to both the content and the way information is presented now that audit committees are required to provide more detail about the work they do.
It looks particularly at how audit committee reports explain the significant issues in relation to the financial statements and how they were addressed, how the audit committee assessed the effectiveness of the external audit process and their approach to appointing the auditor and safeguarding objectivity and independence relative to the use of non-audit services.
The Lab project found that investors and companies are keen to gain an understanding of what issues have been the subject of the audit committee's focus for the year. The report suggests companies should make sure information is disclosed in the most appropriate place in the annual report, and use cross referencing to avoid repetition and make it easier to find material.
The report includes examples of what investors are asking for, using company reports from organisations such as Barclays, ITV and Aveva, which demonstrate best practice. These include making a clear distinction between recurring information and details of current year activities.
Recommendations for audit committee chair include the need to demonstrate ownership and accountability by personalising their report, ensuring reports are specific to their company and current year's activities. They should also describe in detail actions taken rather than just the functions they serve, and depict their specific activities during the year and their purpose, using active, descriptive language.
In addition, audit committee chairmen should disclose judgements made for the year, and the sources of assurance and other evidence used to satisfy themselves of the appropriateness of the conclusion, and should take care to consider their audience in describing issues and their context.
Sue Harding, director of the Financial Reporting Lab, said: 'Investors have told us that they will pay more attention to audit committee reports if they provided more meaningful information. This report sets out clearly how audit committee members can make their reports do just that.
The report is available from the FRC
