Financial reporting to shareholders and external audit Flashcards
Users of Financial Reporting
Users of Financial reporting
-Potential investors
-Creditors
-Suppliers
-Employees
-Customers
-Governments
-Regulators
The public
Requirements for Financial Reporting?
Companies Act 2006
- keep adequate accounting records to show and explain transactions (S.386(a))
- disclose with reasonable accuracy, at any time, the financial position of the company (S. 386(b))
- enable directors to ensure that any accounts required to be prepared comply with CA2006 and IAS requirements (S.386(c))
- directors responsibility not to sign off accounts unless satisfied that they give a true and fair view of the financial position (S.393) (linked to Letter of Representation provided to the auditors)
Listing, Disclosure Guidance and Transparency Rules
- going concern/viability statement
- audit requirement for listed companies
Standards
-IFRS required for listed companies
Financial Reporting - UK CG Code
Financial Reporting - UK CG Code:
M & N
Principle M:
The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements.
Principle N:
The board should present a fair, balanced and understandable assessment of the company’s position and prospects.
*This responsibility extends to interim and other price-sensitive public records and reports to regulators, as well as to information required to be presented by statutory instruments.
Financial Reporting – UK CG Code (Continued)
Work of the committees to be described in the annual report:
- Provision 23 – Nomination Committee
- Provision 26 – Audit Committee
- Provision 41 - Remuneration Committee
- Provision 27 – directors should state that they consider the annual report and accounts, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the company’s position, performance, business model and strategy.
- Provision 30 – board should state whether it considers it appropriate to adopt the going concern basis of accounting in preparing them, and identify any material uncertainties to the company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements.
Financial Reporting – FRC Guidance Code
Para 39 – chair to report personally on board leadership and effectiveness
Para 62 – committees reporting on any issues of disagreement between them and the board
Para 110 – chair to give summary of outcomes and actions of board evaluation process
Appendix B – ‘Disclosure of corporate governance arrangements and overlap with the FCA Handbook’
the items that must be included in an annual report and accounts of UK incorporated companies with a Premium listing are details within Listing Rule 9.8.6 R and are summarised on pp. 40-41 of the FRC Guidance
Certain information that should be set out in a listed companies corporate governance statement are detailed within the Disclosure & Transparency Rules (parts of Rule 7) and are summarised on pp. 42-43 of the FRC Code
Role of the board in financial accounting?
Role of the board in financial accounting…
The board should satisfy itself about the integrity of the financial reports by ensuring:
- Compliance with financial reporting standards
- Effective arrangements for oversight over the auditors
- Independence and objectivity of the auditor are assessed periodically
- Dealing with significant audit matters and how these are addressed and disclosed
- Responses provided to queries raised in relation to the auditors report by shareholders (usually at AGM)
Going Concern Statement?
Going Concern Statement..
A company’s ability to continue as a going concern for a period of at least 12 months following the date of the financial statements being audited.
Considers among other issues
- Negative trends in operating results, such as a series of losses
- Loan defaults by the company
- Denial of trade credit to the company by its suppliers
- Uneconomical long-term commitments to which the company is subjected
- Legal proceedings against the company
Section 172(1) Statement
Purpose: to help shareholders assess how the directors have performed their duty under s.172 to promote the success of the company.
Statement must explain:
- How the board has engaged with its employees, how directors have regard to employee interests, the effect of that regard including on principal decisions taken
- How directors have had regard to the need to foster the company’s business relationships with suppliers, customers and other stakeholders, the effect of that regard including on principal decisions taken
Reporting – Directors’ liabilities (Safe Harbor)
Reporting – Directors’ liabilities (Safe Harbor)
It is a criminal offence for a director to approve the Strategic Report knowing that it does not comply with the requirements of the CA2006.
S.414D of The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013
- In respect of the Strategic Report, the Regulations include ‘safe harbor provisions’ for directors. A director can be liable for untrue or misleading statements only if he knew them to be so, or was reckless as to whether there were untrue or misleading.
A director can only be liable for an omission if he knew it to be a dishonest concealment of a material fact.
Role of the Audit Committee
Role of the Audit Committee
- Annual reports and other periodic reports
- Internal control and risk management systems
- Internal audit (if there is such a function)
- External audit
FRC Guidance – recommends no fewer than 3 meetings during the year, held to coincide with key financial reporting dates and audit cycle
The role of the external auditors: the audit report
The role of the external auditors: the audit report…
- To give an expert and independent opinion on whether the financial statements give a true and fair view of the financial position of the company as at the end of the financial year covered by the report, and its financial performance during the year
- To give an expert and independent opinion on whether the financial statements comply with the relevant laws
- To review the company’s compliance with the UK Corporate Governance Code and to obtain evidence to support the company’s compliance statement of its compliance with the code
Responsibilities of Directors vs Auditors
Responsibilities of Directors vs Auditors
Directors:
- Produce Financial Statements
- Fair, balanced and understandable
- Preventing and detecting fraud
- Compliance with UK CG code
Responsibilities of Directors vs Auditors
Responsibilities of Directors vs Auditors
Auditors:
- Reasonable assurance that they are free from mis-statement
- Evaluation of appropriateness of Accounting policies
- Reasonableness of accounting estimates
- Assessing risk of Fraud
- Review compliance of UK CG Code
Liabilities of Auditors
Liabilities of Auditors…
Chapter 6, Sections 532-538, Companies Act 2006
Legal duty of care to the company and its shareholders
- Knowingly or recklessly cause an audit report to ‘include any matter that is misleading, false or deceptive in any material particular
- Knowingly or recklessly cause an audit report to omit a statement that is required by certain specified sections of the act
Audit reports
Audit reports..
Unmodified:
Auditors are stating that the financial statements do present a true and fair view of the financial position.
Modified:
Where there is a potentially serious problem with the financial statements and the auditors have been unable to agree with the directors of the company about what information the financial statements should contain. The auditors have considered it necessary to give a statement to shareholders to this effect:
- A qualified opinion
- An adverse opinion
- A disclaimer of opinion
