Audit committees have had to cope with a lot of new material in 2014 and, in particular, with mandatory reporting for UK Corporate Governance Code companies on the activities of the committee, largely in relation to audit and financial reporting issues. Investors are looking to get under the skin of governance in their investee companies and are looking to audit committee reporting as a means to do so.
So how has the first year of mandatory reporting gone? BDO’s fourth annual survey of audit committee reporting suggests it is a curate’s egg. Some matters have been dealt with well, but there are some surprising exceptions and omissions.
This year’s results for FTSE companies show that reports provided little information on internal audit. Discussions of whistleblowing were generally good. Descriptions of financial reporting issues were disappointing. Contrary to our expectations, we found that it was the audit report that usually gave more detailed information on these for Code-compliant companies. The information on the assessment of external audit effectiveness and appointment of auditors was generally good. The disclosures regarding the provision of non-audit services by auditors were boilerplate and lacked detail. The disclosure of what involvement the audit committee had in the board’s assertion that the annual report was fair, balanced and understandable was sparse, and rarely contained material on what they had done in getting to a conclusion.
AIM rule 26, now requires AIM companies to give governance information on their websites. An increasing number of AIM companies are introducing audit committee material in their annual reports. These are almost exclusively factual and give little insights into governance. We believe AIM companies may be missing an opportunity to positively engage with stakeholders by not being sufficiently communicative.
We identified action points that audit committees could consider in order to make improvements in their transparency in the coming reporting season. In summary, reports should:
- Be more integrated with other parts of the annual report
- Be forward looking as well as retrospective
- Explain why and how things have been done, as well as explain what has been done
The audit committee is increasingly front and centre in governance, as the push for more open narrative gathers pace. Whilst much regulation is directed at Governance Code compliant companies, there will be pressure to adopt what is seen as best practice on all quoted companies. Investors are increasingly expecting it, and reliance on boilerplate can come back to bite if there are subsequent surprises. Transparency is a concept whose time has come and we believe quoted companies would be well advised to embrace it in the way they communicate their governance.
This article was written by James Robert, Partner at BDO LLP.