FRC publishes reviews of reporting in 2021/22

The Financial Reporting Council (FRC) has published its annual review of corporate reporting for 2021/22 and its annual review of corporate governance reporting for 2022.

Review of corporate governance reporting

The FRC's annual review of corporate governance reporting discusses the quality of reporting against the UK Corporate Governance Code in 2022 and its expectations for companies reporting in 2023.

The FRC reviewed the corporate governance reports of 100 FTSE 350 and Small Cap companies. Of these, only 27 claimed full compliance with the Code, compared with 58 in 2020 and 36 in 2021. The FRC is pleased that more companies are using the flexibility of the ‘comply or explain’ nature of the Code, and are offering greater detail when reporting departures from the Code. It says companies should be transparent in their reports by naming the specific Code provision(s) that have not been complied with.

Other key messages from the report include:

• Risk management and internal controls – Over half of the companies provided a statement to confirm that their risk management and internal control systems are effective or that no weaknesses or inefficiencies have been identified. However, many of those companies do not explain the steps taken to assess these systems.

• Workforce engagement – The FRC notes that disclosures on outcomes of workforce engagement are almost exclusively in relation to flexible working matters. The most common engagement mechanism was having a designated non-executive director. The FRC says that companies should explain why they have chosen their engagement mechanism and how they monitor it to ensure that it is effective.

• Shareholder and wider stakeholder engagement – Wider stakeholder engagement is generally of a good standard but there is minimal disclosure of specific board members’ engagement with major shareholders. The FRC states that good reporting should include details of how the board engaged with the shareholders and stakeholders (methods of engagement, those involved, the frequency of engagement and topics discussed), what the feedback was and the impact it had on board discussions and decision-making.

Other areas covered by the report include modern slavery and climate change reporting, chair independence and tenure, board diversity and remuneration.

The FRC says that it will consult on amendments to the Code next year – to reflect the FRC's transition to ARGA – but that it doesn't intend to effect a wholesale revision of the Code. It plans to focus on those areas identified in its July 2022 position paper (see our blog post here).

Annual review of corporate reporting

The broader review of corporate reporting provides an overview of the work of the FRC’s corporate reporting review (CRR) team and sets out the FRC’s view on the current state of corporate reporting in the UK.

Despite the challenging environment caused by economic and geopolitical uncertainty, the FRC notes that the quality of corporate reporting by FTSE 350 companies has not declined. Improvements have been seen in the reporting of areas such as judgement and estimation uncertainty, revenue and alternative performance measures (APMs).

The FRC’s review discloses that:

• around 250 companies were reviewed by the CRR team during this review cycle, resulting in just over 100 companies being contacted for further information or explanation. These numbers are similar to those seen in the 2020/21 review cycle;
• the number of companies required to refer to these CRR enquiries in their next annual report (Required References) almost doubled compared to during the previous review cycle, with the majority of these Required References relating to cash flow statements; and
• other topics frequently raised with companies include income taxes, APMs, financial instruments, impairment of assets and strategic report and other Companies Act 2006 matters.

The review also highlights the thematic reviews carried out by the FRC Lab and the CRR team on various issues, including business combinations, earnings per share and TCFD disclosures in financial statements (see our corporate updates 2022/15 and 2022/17 for more details on these reviews).