FRC publishes discussion paper on improving quality in smaller listed and AIM company reporting
Published on 25th Jun 2015
The Financial Reporting Council has published a discussion paper on improving the quality of financial reporting by smaller listed (being Main Market companies with a market cap of between £20m and £100m) and AIM quoted companies. In the paper, the FRC seeks to change the perception of many smaller public companies, which, in the FRC’s words “think that investors do not read their annual reports and therefore the reports are of limited value“. The FRC identifies some of the practical difficulties that smaller public companies can face in successfully exploiting the opportunities presented by annual reporting, and proposes ways in which the FRC can help overcome these.
Reporting requirements and practices
The FRC has looked at whether IFRS remains the right reporting framework for AIM quoted companies, given the perception that IFRS is overly complex, especially for smaller companies. Feedback received by the FRC suggests that investors value the consistency and comparability across listed and AIM quoted companies that IFRS reporting provides, but that they are concerned by the volume of information included in reports, much of which, in the case of smaller listed companies, is boilerplate included with “with little attention to the company’s specific circumstances“. In order to address these concerns, the FRC intends to, amongst other initiatives:
- consider whether the Capital Markets Union initiative (which we discuss here) provides an opportunity to develop differentiated disclosure frameworks for smaller listed companies;
- include specific consideration of smaller quoted companies in its “Clear & Concise” reporting initiative;
- provide annual reminders to boards of smaller listed companies setting out key areas of focus for investors and highlighting common errors with suggestions for how these areas could be improved; and
- encourage participation in the FRC’s Financial Reporting Lab.
Audit practices
The FRC is considering whether, as part of its 2015 review of ethical standards, to provide greater clarity on the scope of permitted assistance that auditors can provide to companies in preparing the annual report. The FRC feels that additional guidance might be useful to clearly delineate what is permitted under the FRC’s existing independence requirements for auditors, which are generally seen as being fit for purpose by investors. The FRC has also identified certain areas in which processes can be improved in firms responsible for smaller public company audits, which are often smaller and may have less rigorous audit review systems in place.
Company governance and resources
Perhaps unsurprisingly, smaller listed companies face challenges relating to a lack of internal resource, placing pressure on the company’s finance function in particular. The FRC intends to:
- discuss with relevant professional bodies the scope for providing specific training to finance teams; and
- discuss with the London Stock Exchange and the UKLA ways to educate smaller listed companies of the importance of their ongoing reporting obligations and the need to ensure that adequate resources are available to meet them.
The FRC invites comments on the findings and proposals set out in the report by 31 July 2015.
