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24 Oct 2013 01:51pm

What investors want from audit committee reports

Investors should be able to understand from the annual report what issues audit committees have focused on during the year and why, the Financial Reporting Council believes

To this end, its Financial Reporting Lab (FRL) has come up with guidance on the issues audit committees might consider when drafting their reports, particularly since they will have to comply for the first time with the requirement under the revised UK Corporate Governance Code to describe in more detail the work they do.

The suggestions, in Reporting of Audit Committees, are based on insights garnered from FRL discussions with 19 companies and 25 investor and analyst organisations.

For example, the guidance recommends that audit committees take time to ensure information is disclosed in the most appropriate place in the annual report. This would allow for easier cross-referencing, avoid repetition and help investors locate related information quickly.

It also suggests that audit committee chairmen should:

  • personalise their report to demonstrate ownership and accountability
  • ensure that reports are specific to their company and current year’s activities
  • detail actions they have taken – rather than just the functions they serve
  • describe their specific activities during the year and their purpose, using active, descriptive language
  • disclose judgements they made for the year, and the sources of assurance and other evidence they used to satisfy themselves of the appropriateness of the conclusion
  • consider their audience in describing issues and their context.

“Investors have told us that they will pay more attention to audit committee reports if they provided more meaningful information,” said FRL director Sue Harding. “This report sets out clearly how audit committee members can make their reports do just that.

 

“Audit committee reports should form part of the conversation between companies and investors building confidence in this important area of governance and showing how it contributes to good financial reporting.”

 During the discussions, some of the companies expressed concern that the disclosure of significant financial statement issues might be taken out of context and misunderstood by investors. They were also worried that the greater transparency might place them at a disadvantage with investors compared to other companies that disclose less.

The FRL hopes that ideas in the report will alleviate companies’ concerns by helping them to provide “the sort of concise summaries of useful information, in appropriate context, that will over time become more of the norm”.

Julia Irvine

 

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