Financial Reporting/Governance events in 2021 year-to-date (June 2021)

April & March 2021:

FRC delivers initial investigation report into KPMG’s 2013 audit of Carillion but it was not published.

The major event is the publication of the Department for Business, Energy & Industrial Strategy(BEIS) released its suggestions in a government white paper named ‘Restoring trust in audit and corporate governance: proposals on reforms in March 2021. As this is a consultation document, responses to the white paper close on 8 July 2021. How this fits in with the FRC views of corporate reporting is difficult to fathom. This will mean that the new ARGA (replacement to the FRC) with its new enhanced powers is virtually free to dictate any changes.

These proposals can be accessed by this link:

Our comments on this report can be found on this file:

Apart from their 232 page document, there is an Impact Assessment (207 pages) and a summary of 30 pages dealing with:

a)   Financial reporting – 82 reactions/suggestions
b)   Quality and effectiveness of audit – 66 reactions/suggestions
c)   Audit market – 5 reactions/suggestions

Available with this link:

These cover all the suggestions of the Kingman Review, The Competition and Market Authority, and the Brydon Review. These can also be downloaded from the above link. Not all the individual recommendations of the three reports are adopted in the BEIS recommendations. Since this is a consultation, many of these will be argued by both listed companies and auditors. We expect the full set of recommendations to be watered down. The government may be afraid, in a Brexit world, that tougher rules and regulations would deter companies coming tothe UK or investing in the UK. Existing companies may wish to leave the UK for listing purposes (despite Unilever’s move to Amsterdam being cancelled).

These proposals include new reporting obligations on both auditors and directors (even those without an accounting association) regarding detecting and preventing fraud, with boards required to set out what controls they have in place and auditors expected to look out for problems. In total the government estimate this would cost business £1.7 billion. We think this may be an underestimate but not by much. Well worth the additional cost spread over the current listed company criteria and about 2,000 additional firms.

In summary this government white paper can be summarised as:

Widening of the scope of the regulations and who is affected by the proposals
All listed companies in the two London stock market and the Alternative Investment Market. Additionally the largest private companies would be included. This would add around 2,000 new entities to the new regulations. Also an acknowledgement that stakeholders are much wider than investors, financiers, and shareholders.


  • Enhanced powers for ARGA (previously the FRC)
  • ARGA will have many powers over all reporting and audit matters.
  • Auditors
  • Operational split of audit and consulting divisions of an audit firm. A stand-alone audit profession, independent of the professional accountancy bodies. Increased scrutiny of their work. The old FRC (but still current at time of writing) will push through the separation of audit and non-audit divisions.
  • Auditors will take into account a wider set of information including the whole of the narrative part of the annual report. This may include other information including climate and other environmental, social or stakeholder concerns.
  • A junior/senior dual audit which will enable the Big Four augmented by a challenger/mid-tier firms as a junior partner in the so called ‘managed shared audit’.
  • Directors
  • All directors to be held accountable for adequate internal controls – even those with no accounting qualification (a change from the old FRC). The proposals aim to make directors more accountable if they have been negligent in their duties, with fines or suspensions in the most serious cases of failings, including the lack of internal control to prevent fraud. This once again applies to all directors as does the sections immediately below.
  • A set of rules on dividends pay-outs and capital maintenance. Directors may be asked to justify any dividends or buy-back share scheme.
  • More details on forward looking statements. To the going-concern and viability statements, are replaced by three new resilience statements dealing with the short-run, medium run and longer run – the later time horizon to be decided by the directors. All such statements to be signed off by all the directors.
  • New rules governing non-executive directors (NEDs) and duties to be performed by them. As Sir John Thompson of the FRC said non-executive directors can’t just turn up and cash in. We certainly wanted a more professional approach for these NEDs given that they also have demanding full-time jobs elsewhere.
  • The possibility of a claw-back on directors’ remuneration for the largest companies.Directors’ remuneration would contain two-year clawback or malus provisions for serious misconduct, a material misstatement of results or error in performance calculations, failures of internal controls and risk management, reputational damage and unreasonable failure to protect the interests of employees and customers.
  • Shareholders
  • These proposals give investors better tools to exercise stewardship through:
    a)   An advisory shareholder vote on a company’s audit and assurance policy.
    b)   A right of shareholders to propose to the audit committee areas of emphasis to be considered within the auditor’s annual audit plan.

There will much discussion and these proposals will be picked over by all the interested parties and no doubt (as we have said) watered down or made more acceptable to the interested parties.

We think that the proposals should have contained more about the publication of forecasts (numerical and financial modelling) with directors believing in their own forecast including non-executive directors building and running a simplified financial model of their entity with several different time dimensions.

Helen Thomas, writing in the FT, ‘Long road to audit reform is littered with questions’. 18 March 2021, made the following criticisms:

  1. Lack of choice in auditors. “First, it is indeed “not healthy” that 97 per cent of FTSE 350 audits are undertaken by just four audit firms, especially as internal conflicts of interest and auditor rotation mean not every Big Four firm will be bidding for every mandate”. She did not like this senior/junior partnership is a halfway house between s single auditor and the joint audit requirement in France. The Big Four firms will still complain about duplication, logistical complexity, and rising costs.
    We agree but the solution is not to have joint audits in our view. See
  2. Second, she believes that the ‘tougher rules holding directors responsible for the accuracy of the numbers may yet end up a tad flimsy. The government’s three options in this area span a broad range of outcomes, from a simple director statement in the annual report to a fully vetted opinion from the auditor as to the effectiveness of the company’s internal controls’. Not quite the equivalent of US’s Sarbanes-Oxley regulations. We hope that this regulation will be strengthened over time.

Professor Karthik Ramannawiring in the FT on 20 March 2021 in article titled ‘UK audit reforms fail to address the real problem behind scandals’ claims that these proposals are inherently weak.

Alas, it has not been worth the wait. The proposals focus almost entirely on fixing “rules”, not rebuilding “norms”. The key idea seems to be that new regulations and regulators will succeed where old ones failed. But the trouble is not badly designed rules; it is that, whatever the rules, we lack a systematic culture in audit firms and corporate boardrooms to challenge chicanery when it presents itself. True, the accounting standards that enabled Carillion to avoid goodwill write-offs and instead pay out dividends are flawed, in that they give managers unverifiable discretion over accounts. We should fix them. But the standards do not impede auditors and independent directors in questioning management’s reporting judgments.

Dual-class shares:

Company founders could maintain control over their firms after listing them on a London exchange under its proposals. The new rules aim to close “a gap”, which has opened up between the UK and other trading centres post-Brexit and attract more firms to list in London.

February 2021:

Ministers and business leaders have raised concerns over the soaring cost of insuring British directors after prices more than doubled in the past year on concerns about corporate governance and pandemic-related claims.

Operational separation of audit practices:
The Financial Reporting Council (FRC) published principles for operational separation of the audit practices of the ‘Big 4’ firms in July 2020.  The FRC asked the firms to submit their implementation plans by 23 October 2020.  The FRC has reviewed these plans and discussed them with the firms individually and is now content for the firms to move to the next stage of implementation. The firms’ progress will continue to be closely monitored against the milestones in their plans and the FRC will provide feedback and challenge to the firms on their arrangements.

Izzy Englander’s Millennium Management hedge fund had invested $4.4bn in blank-cheque SPAC companies at the end of 2020.

The FRC has made some changes to the principles following our analysis of the firms’ implementation plans:

  • To clarify that services provided to non-audited entities should be commissioned by those charged with governance at the entity or be assurance services for third party recipients.
  • To increase the minimum proportion of revenue within the ring-fence that must be derived from audit.
  • To confirm that the audit practice should not receive fees for introducing business to other parts of the firm and that partners in the audit practice should not be incentivized for sales passed to other parts of the firm.

Financial Reporting news in 2020

June/July 2020: Revisions to Going Concern, Risk and Viability statements (COVID-19)
During the 2007-2009 crisis, we were told by a number of interviewees that a cross-sector wave of warnings did not happen, This is confirmed by Tabby Kinder in the FT[1]. The FRC obviously heeded her warnings that auditors have a backlog of annual reports that are likely to question the ability of companies in the hardest hit sectors during the pandemic to continue trading as a going concern for the next 12 months. Tabby Kinder writes:
A flood of going concern warnings or qualified audit opinions — in which an auditor says there are misstatements or that they could not obtain enough evidence to sign off the accounts with a clean bill of health — could spook markets. There is also expected to be a rise in “emphasis of matter” audit reports, which highlight serious uncertainties around matters such as property or inventory valuations.

Tabby goes on to report:
The head of audit at one large firm said some major businesses had approached the government’s department for business in recent weeks to complain that their auditors were putting too much pressure on them.

“They have complained that we’re being overly prudent,” the auditor said, adding: “However, it’s clear that none of the stress tests we forced companies to do back in February and March look so crazy now.”
He said his firm was forcing all consumer-facing companies it audits to stress-test being closed until September and a phased recovery for a further 12 months. He said that travel and leisure companies had been told to “assume no European summer revenues and no winter sun revenues at all”.

So firms believe the auditors are putting too much pressure on them in what is often regarded as a pass or fail type test (going or not going concern). The FRC has clarified that there are ways in which the survival of a company can be graded with different possibilities.

The FRC responded with two reports: Covid 19 – going concern, risk and viability[2] and Covid 19 – resources, action, the future[3]

The reports consider that investors are fully aware that the levels of uncertainty are unprecedented and, to a large extent, outside companies’ control. The FRC encourage Boards of companies to consider plausible scenarios and report on how they intend to respond to these going forward. Examples of good practice reporting were included to assist companies.

Specific elements of uncertainty relevant to the next 12 months might include (but are not limited to):

a) Timing of resumption of operations.
b) Further restrictions that limit the return to normal operations.
c) Restrictions placed on government (or other) capital.
d) Timing and continuation of government schemes and support packages.
e) The outcome of capital raising actions, discussions with banks, and landlords.
f) Short-term impacts of pricing changes to revenue and expenses.
g) Impacts on human capital, the supply chain, and customers.

The FRC summaries of these issues are provided below:
Going concern
Locating and obtaining short-term cash resources is often about building resilience and flexibility but, for some, it is ultimately about survival. In such circumstances, reporting ongoing concern and uncertainties becomes more important. The disruption to business models in the short-term might mean that the going concern assessment is more complex task. However, going concern is not a simple binary or pass/fail concept. A company can be a going concern even when one or more material uncertainties exist. In such circumstances what becomes important is the disclosure about the uncertainties and management’s consideration of these.

Risk reporting
Reporting by companies on principal risks provides investors with key information about the resilience and adaptability of a company’s business model and strategy to internal and external shocks. COVID-19 has created risks for many companies and caused a reconsideration of risk profile and appetite. Investors therefore want to understand how those risks have changed and how they specifically affected companies, and how management have responded.

Viability statement
The viability statement was introduced following the 2008 financial crisis to provide investors with a better view on the longer term prospects and viability of a company’s future. The current crisis is a test of the value of viability statements. Availability statement with realistic scenarios and clear assumptions provides boards an opportunity to communicate their longer-term prospects, even when the short-term outcome is less certain.