CG Chapter 9- Financial Reporting to Shareholders and external audit Flashcards
Why is financial and non-financial reporting important?
Reporting is one of the main methods of addressing the corporate governance principles of accountability and transparency. As well as the report and accounts being the means by which directors are made accountable to shareholders, they provide a channel of communication. Reporting enables shareholders and other stakeholders to assess the performance of the company and how well it has been governed and managed.
List 3 legal duties of directors for financial reporting?
• Companies must prepare annual report and accounts which need to be approved by the board and signed by a director
• Directors must file annual report and accounts at Companies House
• Directors must prepare a Directors’ Report, which must (unless the company is subject to the small company regime) include a Strategic Report
• Accounts of a public company must be laid before shareholders in a general meting
• Listed companies must prepare a Directors’ Remuneration Report
(Source: Companies Act 2006)
Name 6 different reports/statements that may form part of a listed company’s annual report.
Directors’ Report/Strategic Report Chairman’s Statement CEO Report CFO Report Directors’ Remuneration Report Auditors’ Report Corporate Governance Report Corporate Social Responsibility/Environmental/Sustainability Report (Above as prescribed by the Companies Act 2006; Listing Rules; and/or DTR)
What is a going concern statement?
It is based on the going concern concept which is the view that a company will continue to trade and be able to meet its liabilities as they fall due for at least the next 12 months. The directors are required to make such a statement in the annual report and confirm that the financial statements have been prepared on this basis.
(Board should make a going concern statement (if appropriate) per Provision 30 of the UK CG Code)
Under the UK Corporate Governance Code, how should the Audit Committee be composed? List four duties of the Audit Committee.
Provision 24 states that it should be composed of all independent non-executive directors and should consists of at least three members (2 if a smaller company). The chair of the board should not be a member. At least one member of the audit committee should have recent and relevant financial experience. The committee as a whole shall have competence relevant to the sector in which the company operates.
Four duties of the audit committee are:
- Monitor the integrity of the financial statements
- Review the company’s internal controls and risk management systems
- Monitor the effectiveness of the internal audit function if there is one; where there is no function consider annually whether there is a need for one (and if so make a recommendation to the board)
- Manage the relationship with and liaise with the external auditor, including their terms of engagement, remuneration, independence, effectiveness
(There are many others! – See Provision 25 of the UK CG Code)
Which factors may impact on the independence of the external auditor? How can these be managed?
Factors which may impact on independence (partly as identified by the International Federation of Accountants’ Code of Ethics for Professional Accountants 2006):
• Long serving auditor and/or audit partner
• Auditor undertakes a significant amount of non-audit work/performs any management functions or takes any management decisions
• Relying on one single client for its fee income
• When anyone in audit firm (such as audit partner) or anyone closely associated with it has mutual business interests with the company or its directors
• Partner of audit firm holds a significant number of shares in the company
These factors can be managed through audit firm rotation, the requirements for audit partner rotation (issued by the Auditing Practices Board) and the various EU regulations that are in place regarding limiting the amount of non-audit work (to no more than 70% of the average fees for audit work over the last three financial periods), putting audit out to tender at least every 10 years and the mandatory requirement to change auditors after 20 years
What elements must a Strategic Report contain?
Under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 a Strategic Report must contain:
- a fair review of the company’s business; and
- a description of the principal risks and uncertainties facing the company
In addition, for a listed company (under Listing Rules/DTR) it must contain:
- the main trends and factors likely to affect the future development, performance and position of the company’s business
- information including that about the company’s policies and the effectiveness of those policies on:
environmental matters
employees
social, community and human rights issues
What is the role of the company secretary in financial reporting?
According to the ICSA a company secretary has to be competent in financial accounting and reporting and they need to understand the significance and relevance of accounting information and the process by which it is acquired.
The company secretary’s roles in financial reporting would typically include:
- ensuring the board complies with the legal, regulatory, standards and codes to financial reporting;
- interpreting in non-financial terms the financial performance and disclosures for the board, shareholders and other stakeholders;
- reading the notes to the financial statements to ensure they clearly and transparently explain the figures in the financial statements, and asking for further clarification to be provided if necessary;
- advising the board on the implications and potential reputational risk of the financial performance and disclosures;
- providing advice and oversight, on behalf of the board, for the preparation of financial reporting documentation, annual and half yearly reports; and
- overseeing the distribution of the documentation/disclosures.
