Essential Corporate News – Week ending January 8, 2016

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

On January 5, 2016 the Financial Reporting Council (FRC) published its audit quality thematic review on firms’ audit quality monitoring. The review supplements the FRC’s annual programme of inspections of individual audit firms and looks at firms’ policies and procedures in respect of a specific aspect of audit, and their application in practice, to make comparisons between firms with a view to identifying both good practice and areas of common weakness.

In its review, the FRC looks at the following areas:

• Background, scope and key messages: The FRC notes that, while observations are based on the reviews of particular audit firms, the key messages in the review are relevant for all firms to consider in improving their audit quality monitoring procedures and the FRC expects to see improvements in future inspections.
• Principal findings: The principal findings focus on monitoring firms’ quality control systems, monitoring completed audits, root cause analysis, thematic reviews, and group audits and non-UK component audits.
• EU Audit Regulation and Directive: The FRC notes that the EU Audit Regulation and Directive will come into force on June 17, 2016 and that a consultation paper has already been issued on the changes that are required to UK standards. Audit firms should consider any relevant proposed changes as set out in the consultation, as well as the findings in the review.

The review sets out several suggestions for audit committees to consider, intended to enhance the effectiveness of the audit committee's oversight of an audit and their evaluation of audit quality. The suggestions include the audit committee doing the following:

• Enquiring annually for the latest results of their audit firm’s monitoring, and whether their audit has been subject to the firm’s internal quality monitoring. They should also discuss the main findings of any audit review with their auditor, together with any remedial action taken or planned.
• Discussing with the audit partner the scope of the firm’s audit monitoring to ascertain whether any UK components were included, or if the review was restricted to work at group level.
• Asking how the group auditor has assessed the competence of non-UK component auditors, including whether the audit team has received any feedback on the monitoring performed by network firms responsible for audit work on overseas components.

(FRC, Audit Quality Thematic Review: Firms’ audit quality monitoring, 05.01.16)

On January 7, 2016 the Institute of Chartered Accountants in England and Wales (ICAEW) published a guide setting out seven questions on corporate reporting that company directors, audit committee members and auditors should ask themselves in order to communicate clearly and honestly in their reports:

• Is everything in the report material? The needs of the user should be at the heart of reports and companies should ask whether the reader will understand the information presented and whether it is important.
• Are performance measures credible? Performance measures should be used honestly and consistently, be clear over what they measure and provide a fair balance between good and bad news.
• Is tax reporting understandable? Tax reporting should be prepared with a reader’s mentality, and preparers should be challenged where the explanations are unclear or incomplete.
• Does the audit committee report on key issues? The audit committee report should be clear about what the company did during the year, offering an active description of activity and outcomes rather than a passive description of process.
• Is the audit report providing insights? Auditor reports are most useful when they provide insight. Therefore, preparers should avoid the use of boilerplate and less specific or meaningful descriptions, instead focussing on whether the report is fair balanced and understandable so that readers are never left questioning why the information was included.
• Does the remuneration report explain high pay? The information contained in the remuneration report should be meaningful, concise and explain clearly why executive pay is justified.
• Is the company putting enough resources into reporting? Companies should ensure that adequate resources have been allocated to the preparation of their annual reports. Smaller listed companies are at particular risk of investors losing interest if the information provided is insufficient or irrelevant, as it is the one chance the company has to communicate to the market.

(ICAEW, Seven Questions on Corporate Reporting, 07.01.16)