UK: FRC consultation - Guidance for Directors of Listed Companies on Going Concern and Financial Reporting

Listing Rule 9.8.6 requires listed companies incorporated in the UK to provide in their annual report "a statement made by the directors that the business is a going concern, together with supporting assumptions or qualifications as necessary, that has been prepared in accordance with Going Concern and Financial Reporting: Guidance for Directors of listed companies registered in the United Kingdom, published in November 1994".

The 1994 Guidance is now the subject of review: the Financial Reporting Council has published a consultation paper in which it states:

The Guidance for Directors was written by a Working Group formed under the auspices of the Cadbury Committee that reported on the Financial Aspects of Corporate Governance. The formation of the Working Group arose out of concerns that there had been several high‐profile company failures where there had been no apparent indication of the imminent problems in the previous year’s report and accounts.

The objective of the Guidance for Directors is to support good corporate reporting and, in particular, the requirements of the Listing Rules and Accounting Standards. When a company is not a going concern this does not necessarily mean that it is, or is likely to become, insolvent. The Guidance for Directors is not intended to address aspects of insolvency and, in particular, is not intended to support the requirements of the Insolvency Act 1986.

In the period since 1994 there have been substantial changes to the accounting standards applied by directors of listed companies. This is particularly the case for directors preparing consolidated accounts required to comply with International Financial Reporting Standards (IFRSs) as adopted by the EU.

The FRC observes that current economic conditions are creating particular challenges for companies. Recent developments in global debt markets have led banks to be cautious of lending to one another (the so‐called “credit crunch”). This has severely restricted liquidity which has created unexpected financial difficulties for banks and entities that depend on the availability of loans as a key source of capital. Many market commentators are now forecasting a period of reduced growth and in some cases recession, with the result that going concern questions are likely to need to be considered in more detail by Boards of Directors.

In view of these deteriorating economic conditions the FRC has concluded that this is an appropriate time to consider whether the existing Guidance for Directors is necessary and remains appropriate, or whether it can be improved.

Note: The UK's Combined Code on Corporate Governance (June 2008) provides in Section C ("Accountability and Audit") the following provision (C.1.2): "The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary".

Postscript (2 Sep 2008): For further comment see this short article in the Financial Times newspaper. 

USA: adoption of IFRS - roadmap to be published

The SEC has announced that it will shortly publish for consultation a proposed roadmap for the adoption of International Financial Reporting Standards (IFRS) by US issuers beginning in 2014. The SEC notes in its press release:

Currently, U.S. issuers use U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission. The increasing integration of the world's capital markets, which has resulted in two-thirds of U.S. investors owning securities issued by foreign companies that report their financial information using IFRS, has made the establishment of a single set of high quality accounting standards a matter of growing importance. A common accounting language around the world could give investors greater comparability and greater confidence in the transparency of financial reporting worldwide".

To watch a statement by SEC Chairman Cox, outlining the above, click here (for QuickTime) or here (for Windows Media Player). The roadmap has not yet been published on the SEC website but further information is available in this report in the Wall Street Journal. 

Note:

[a] A useful map, indicating those countries where IFRSs have been adopted, is available on the IASB website here. 

Denmark: corporate social responsibility reporting

Several months ago the Danish Government published its Action Plan for Corporate Social Responsibility. In the Plan the Government explained that it would make it mandatory for large businesses, institutional investors and unit trusts to report on corporate social responsibility matters (further information, in English, is available here).  The UK's Financial Times newspaper has recently reported that legislation introducing these provisions will be voted on in October. 

Germany: foreign investment and the Federal Government

On Wednesday of this week, Germany's Cabinet approved legislation which will, if passed, give the Federal Government the right to veto investment in a German company of 25% or more from outside of the EU or EFTA if it is believed that the investment represents a risk to national security. According to a report in the UK's Financial Times newspaper:

The bill is a reaction to concern in Berlin about the growing weight of state-controlled sovereign wealth funds, the vast investment pools created to manage the currency reserves of fast-growing economies in Asia, Russia and the Middle East. Wednesday’s endorsement by the cabinet marks a significant milestone for the controversial draft, which will now move to parliament for final approval. The decision ends almost a year of protracted work on the text to address fears that it may contravene European Union legislation on the free movement of capital".

ACCA: publication of sustainability agenda

The Association of Chartered Certified Accountants has published a document titled "Going Concern? A Sustainability Agenda for Action". This sets out recommendations for business, government and the accountancy profession, in eight areas including corporate governance. The recommendations concerning corporate governance include:

• Businesses should make sustainability issues a core part of their strategy, and that risk identification and management should be governed at board level.
• Organisations should report on the linkage between the sustainability issues they face and the corporate strategies they choose, including the financial implications of their most significant sustainability risks.
• Businesses should integrate sustainability KPIs [Key Performance Indicators] within their managerial reward evaluation procedures.
• Investors should actively require the organisations in which they invest to demonstrate that CSR and sustainability considerations are appropriately embedded in the system of corporate governance and are a central element in the strategic planning process.
  

IASB exposure draft - Improvements to IFRSs

The International Accounting Standards Board (IASB) has issued a proposed exposure draft titled "Improvements to IFRSs". For further information see this press release and the information here concerning the IASB's Annual Improvements programme.

UK: Walker guidelines on private equity - update

The UK's Financial Times newspaper has published an interview with Sir Michael Rake, chairman of the Walker Guidelines Monitoring Group. In the course of the interview it is noted that 32 private equity firms (list here) and 55 portfolio companies (list here) have committed to comply with the Walker Recommendations. In addition, it is noted that Sir Michael:

...is encouraged by the enthusiastic response eight months after Sir David Walker, the City grandee, unveiled the voluntary guidelines he drew up for the British Private Equity and Venture Capital Association (BVCA). Since then, about a dozen private equity firms – including Apax Partners, Terra Firma, Permira and Cinven – have published annual reviews, giving details of their senior managers, investors, strategies and portfolio companies. “The reports are worth looking at,” says Sir Michael. “They see the business benefits of doing it. There is nothing to fear from transparency and the story they have to tell is generally a good one; therefore why not tell it?” 

In addition, large portfolio companies, such as Alliance Boots, the pharmacy chain, and Gala Coral, the betting and casinos group, have published public company-style annual reports. By the end of the year, Sir Michael plans to report back on how the rules have been adopted by relevant portfolio companies".

USA: improving financial reporting for investors

The SEC's Advisory Committee on Improvements to Financial Reporting has published its final report. The report makes recommendations within the following five areas:

• Increasing the usefulness of information in SEC filings
  
• Enhancing the accounting standards-setting process
  
• Improving the substantive design of new standards
  
• Delineating authoritative interpretive guidance
  
• Clarifying guidance on financial restatements and accounting judgments
  

For further information, including a video commentary provided by SEC Chairman Cox and Advisory Committee Chairman Pozen, click here.

UK: interim management statements - Deloitte survey

Deloitte has published a report titled "First IMpressionS – The first year’s interim management statements", which considers UK listed companies' publication of twice yearly interim management statements (as required by Disclosure and Transparency Rules). The report covers a sample of 130 companies and in the press release accompanying the report's publication it is stated:

In terms of strict compliance with the rules, first impressions are that companies could do better: 4% of the selected companies simply failed to issue an IMS; only 9% received a tick in all the compliance boxes; 6% of companies were late in producing their IMS. For most, the delay was only up to a week. For one, the delay was a month; and the poorest area was, perhaps surprisingly in these economic times, providing a general description of the financial position of the company.

At another level, it appears that companies, investors and the market have coped well with the new requirements. There have been no major signs that the IMS is seen as an excessive and unnecessary burden. Admittedly this may be because the IMS replaced the threat of UK companies being forced to issue detailed quarterly financial reports. While many companies voluntarily reported more often, the IMS has formalised more frequent communication by all".

UK: Limited Liability Partnership Accounts Regulations published

The following Regulations have been published on the OPSI website and come into force on 1 October 2008. Their purpose is to apply to limited liability partnerships the accounting provisions of the Companies Act (2006). For further information see these FAQs prepared by BERR. 

[1] The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 - see here for the explanatory memorandum.

[2] The Small Limited Liability Partnerships (Accounts) Regulations 2008 - see here for the explanatory memorandum.

[3] The Large and Medium-sized Limited Liability Partnerships (Accounts) Regulations 2008 - see here for the explanatory memorandum.

UK: England and Wales: the true and fair view

Judgment was given yesterday by the Court of Appeal in Macquarie Internationale Investments Ltd v Glencore UK Ltd [2010] EWCA Civ 697. The court upheld the trial judge's finding (at [2009] EWHC 2267 (Comm)) that there had been no breach of a warranty which provided that [a] audited accounts were prepared in accordance with accounting standards and a true and fair view of a company's assets and liability [b] a set of management accounts had been prepared in accordance with relevant accounting standards.

The decision is of interest because of what is said about the true and fair view; in this regard, Jackson LJ observed (paras. [51] and [52]):

... a joint opinion written by Mr Leonard Hoffmann QC and Ms Mary Arden in September 1983 has been highly influential and was relied upon by the judge in the present case. I recall that that joint opinion was in general circulation in the 1980s. It appears to have left an imprint on judicial thinking and on legal writing in subsequent decades. The essential thesis of Mr Hoffmann and Ms Arden was that the concept of "true and fair view" as used in the Companies Acts is an abstraction. It is for the courts to decide in any given case whether the accounts do give a true and fair view. However, in deciding this question the courts look for guidance to the ordinary practices of accountants and in particular to the standards published by the relevant professional body. These published standards not only guide accountants in the preparation of accounts but also mould the expectations of those who read or use the accounts. Therefore compliance with professional standards is prima facie evidence that the accounts present a true and fair view of the assets and liabilities of the company or the group. Deviation from accepted accounting principles is prima facie evidence that the accounts do not present a true and fair view of the assets and liabilities of the company or the group.

In subsequent decisions courts have treated compliance with published professional standards as strong evidence that the accounts in question did present a true and fair view: see Lloyd Cheyman & Co Ltd v Littlejohn & Co [1987] BCLC 303 at 313; Senate Electrical Wholesalers Ltd v STC Submarine Systems Ltd (20th December 1996, unreported) at page 20 of the transcript; Bairstow v Queen's Moat Houses plc (23rd July 1999) at pages 31-32 of the transcript and Revenue and Customs Commissioners v William Grant & Sons Distillers Ltd [2007] UKHL 15; [2007] 1 WLR 1448 at paragraphs 2 and 38".

UK: confidence in corporate reporting and governance - FRC warning continues

The UK's Financial Reporting Council held its Annual Open Meeting this week. The FRC's chief executive delivered a series of remarks concerning the on going work of the FRC and concluded with this warning:

In December of last year we issued a statement noting that the risks to confidence in corporate reporting and governance were higher than they had been for some years and that this needed to be matched by additional diligence on the part of preparers of accounts, audit committees and auditors. Eight months on our warning remains in place and the text of our statement and the key questions which we suggested that audit committees should consider is worth re-reading".

UK: Companies Act (2006) - Overseas Companies Regulations 2008

A revised draft of the Overseas Companies Regulations 2008 has been published and is available here (in Word format). The revised draft has been published following a consultation in December 2007. In its response to this consultation (available here in Word format), the Government notes:

In line with the wider Companies Act 2006 (the 2006 Act) implementation timetable, the overseas companies regulations (including the accounting provisions) will be commenced on 1 October 2009. These regulations are intended for use by both overseas companies with an existing UK branch or UK place of business, and overseas companies that register a UK establishment on or after 1 October 2009.

The regulations apply to overseas companies as defined in the 2006 Act. The Government’s approach to these companies remains the same as it was in December 2007 and the regulations have continued to be developed with the intention of minimising obligations on overseas companies while complying with European legislation, as well as ensuring that UK creditors will have access to transparent information about the business of such companies. This is particularly the case with regard to accounting provisions within the draft regulations, which we have developed further in response to comments received in light of the consultation".

UK: materiality in financial reporting - ICAEW technical release 03/08

The ICAEW has updated its guidance (published earlier in Tech 32/96) on the concept of materiality in financial reporting. According to the ICAEW the guidance has been updated "to take account of the latest UK literature and IFRS, and to make sure that its principles remain in line with the latest thinking on materiality. This will help to minimise divergent practices in the application of materiality judgements in the preparation of financial statements".  The revised guidance - Tech 03/08 - is available here and in the introduction it is stated:

This guidance refers primarily to the financial statements of commercial entities reporting in compliance with companies legislation and therefore intended to give a true and fair view. However, its principles can be applied more generally to financial statements prepared by other organisations (eg, charities, pension schemes, government departments, local authorities and public sector businesses), although the assessment of users’ needs may vary ... The principles set out in this guidance may also be relevant to other information, such as that provided in an operating and financial review, a business review, a half-yearly report, interim management statements, information about post balance sheet events or in corporate governance disclosures".

UK: the Data Sharing Review and corporate governance

The Data Sharing Review Report was published today. It contains many recommendations but the first two are of particular importance within the field of corporate governance:

Recommendation 1: As a matter of good practice, all organisations handling or sharing significant amounts of personal information should clarify in their corporate governance arrangements where ownership and accountability lie for the handling of personal information. This should normally be at senior executive level, giving a designated individual explicit responsibility for ensuring that the organisation handles personal information in a way that meets all legal and good-practice requirements. Audit committees should monitor the arrangements and their operation in practice.

Recommendation 2: As a matter of best practice, companies should review at least annually their systems of internal controls over using and sharing personal information; and they should report to shareholders that they have done so. The Combined Code on Corporate Governance requires all listed companies to review ‘all material controls, including financial, operational and compliance controls and risk management systems’ ... It would be surprising and worrying not to see information risks addressed explicitly in the Statements of Internal Control for such companies. We hope that bodies such as the Confederation of British Industry will develop guidance to help companies ensure their controls and disclosures are adequate. If approaches on these lines are not successful in improving high-level accountability for giving assurance on information risks, we would expect the Financial Reporting Council to intervene.

For background information click here.

The 2008 Charkham lecture

The second Charkham lecture, titled "Corporate governance in an era of multiple capital suppliers and exotic capital instruments", was delivered in London yesterday by Professor Ira M Millstein (Senior Associate Dean for Corporate Governance at the Yale School of Management). A transcript is available here. The lecture was hosted by the UK's Financial Reporting Council and is held annually in honour of the late Jonathan Charkham.

Prof. Millstein's lecture surveyed the development of corporate governance over the past 20 years and explained several governance issues arising from the structure of today's capital markets. In his view, we are on the threshold of unfamiliar territory.

Note:

The first Charkham lecture was delivered by Sir Christopher Hogg and is available here.

UK: the complexity and relevance of corporate reporting - FRC review

The Financial Reporting Council has embarked on a review considering the complexity and relevance of current UK corporate reporting requirements. According to the FRC:

The complexity project will consider whether corporate reporting requirements are disproportionate to their intended benefits and whether there are opportunities for improvement. It will address the risk that these requirements, and related influential guidance, are contributing to the increasing complexity of corporate reports without making them more useful or understandable. The project will focus primarily on the ongoing mandatory corporate reporting requirements for UK listed companies. This includes the financial and narrative aspects of all interim, half-yearly and annual reports, but not offer documents. There is also acknowledgement of the need to keep an eye on voluntary reporting such as preliminary announcements and annual reviews to ensure the project is comprehensive in its analysis and findings"

Further information about the review is available here.

UK: KPMG audit committee survey

KPMG has published the results of a survey of public company audit committee members. The views of just under 150 audit committee members were obtained and the following findings emerged:

• Risk management was seen as the top oversight priority for the year ahead.
• Nearly half of respondents said that the committee reported to the full board.
• One in four respondents said that their committee did not have a formal process in place to evaluate the external auditor.
• Over half of respondents expressed concern that the committee had been assigned (or had assumed) too much responsibility for risk oversight beyond financial reporting risk.

The results are available here (you may need to provide personal information in order to gain access).

USA: IFRS and US GAAP convergence

Following the publication of a joint statement (here, pdf) by the IASB and FASB in connection with their standards convergence work, the chairmain of the Securities and Exchange Commission, Mary Shiparo, has announced (see here):

I foresee no reason that the adjustment to the targeted timeline for certain joint projects should impact the staff's analyses under the Work Plan issued in February 2010, particularly when that adjustment is designed to enhance the quality of the standards. Indeed, focused efforts on those standards the boards consider highest priority for the improvement of U.S. GAAP and IFRS will facilitate the staff's analyses. Accordingly, I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for U.S. issuers".

USA: the predictive qualities of corporate governance ratings

Recent research published by academics at Stanford University's Rock Center for Corporate Governance has considered the predictive ability of corporate governance ratings. The authors report:

"The providers of the ratings make strong claims regarding the ratings’ value in predicting future bad outcomes (such as accounting restatements or shareholder suits) and firm performance. These ratings, often provided by proxy advisors, are also used in formulating recommendations that can be influential in shareholder voting. We provide the first independent assessment of four prominent commercial corporate governance ratings. Prior evidence on individual ratings has generally been backward-looking, raising the distinct possibility that the ratings reflect past firm performance but are unable to predict  accounting restatements, litigation, and future performance. We examine the ability of ratings produced by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services), GovernanceMetrics International, and The Corporate Library to predict future performance. With the possible exception of ratings by Audit Integrity, we find that most ratings have either limited or no success in predicting firm performance or other outcomes of interest to shareholders".

For further information see:
Research article | Abstract | Rock Center home page |