EQ Monthly Bulletin - September 2024

In This Edition:

• Economic Crime and Corporate Transparency Act 2023 Companies House Business Plan
• Financial Reporting Council Discussion Paper on opportunities for future UK Digital Reporting
• Financial Reporting Council – Consultation on Revised Guidance on Going Concern Basis
• Financial Reporting Council – Sixth Annual Enforcement Review
• Financial Reporting Council – Review of Reporting against the Wates Principles

Economic Crime and Corporate Transparency Act 2023 Companies House Business Plan

Companies House have published their business plan for 2024 to 2025 which details their proposed programme of delivery in respect of the Economic Crime and Corporate Transparency Act 2023. The plan includes the following:

• Cleaning up existing information on registers is a priority to be accomplished by the identification and removal of incorrect information. This includes querying and rejecting information where it is clearly false, misleading or suspicious.
•  Stop the use of PO boxes or equivalent by the end of March 2025 so that all companies have an appropriate registered office address.
• Continue preparatory work for the introduction of identity verification for company directors so that Companies House has the technical capability to verify an individual's identity by the end of March 2025 ahead of the process for a phased roll out from Spring 2025.
• The development of processes to impose limits on the use of corporate directors as provided for in the Small Business Enterprise and Employment Act 2015.

The full plan can be viewed at Companies House business plan 2024 to 2025 - GOV.UK (www.gov.uk)

Financial Reporting Council Discussion Paper on opportunities for future UK Digital Reporting

The Financial Reporting Council (FRC) as part of a cross regulatory group comprising the Financial Conduct Authority, Companies House, HM Revenue and Customs and the Charity Commission, has published a discussion paper on opportunities for the future of UK digital reporting. The report also references changes in the post-Brexit regulatory landscape and considers the impact of the Economic Crime and Corporate Transparency Act 2023 in relation to digital reporting.

The discussion paper includes:

• Potential alternatives to the European Single Electronic Format Taxonomy for UK regulated markets.
• Proposed changes to structured digital reports to support regulatory disclosures initiatives.
• Considerations for mandatory assurance of digital tagging.
• Impact of “full tagging” requirements on companies and charities.
• Strategies to support stakeholders in adopting the new digital reporting requirements.

The discussion paper seeks input from a wide range of stakeholders, including preparers of financial reports, investors, software vendors, accountants, and regulators. It aims to help shape the future of digital reporting in the UK, ensuring it meets the needs of all users while promoting transparency, comparability, and efficiency in corporate reporting. There will be no specific decisions made following the receipt of responses to the discussion paper, but these will inform the FRC's thinking on the technical and practical implications of policy decisions. Responses to the discussion paper should be received by 1 November.

The paper can be viewed at: Opportunities for future UK digital reporting (frc.org.uk)

Financial Reporting Council – Consultation on Revised Guidance on Going Concern Basis

The Financial Reporting Council (FRC) has issued a consultation paper on revised guidance on the going concern basis of accounting and related reporting, including solvency and liquidity risks. The consultation closes on 28 October 2024 with the final guidance expected to be published in early 2025.

Once finalised, the guidance will replace the existing guidance which was issued in 2016. The Guidance will not be mandatory but is intended to provide a practical guide to companies which are in scope including companies which apply the UK Corporate Governance Code (the Code). Small and micro-entities are excluded. The draft guidance incorporates the provisions and/or the requirements of company law, the Code, listing rules, accounting standards, auditing standards and other relevant legislation.

The changes to the current guidance include:

• The provision of extra guidance on overarching disclosure requirements, especially when significant judgement was required in the assessment of the appropriateness of the going concern basis of accounting or the conclusion that there are no material uncertainties.
• Revising the range of factors directors could consider when assessing the appropriateness of the going concern basis of accounting.

The guidance is available from Guidance on the Going Concern Basis of Accounting and Related Reporting (including Solvency and Liquidity Risks) (frc.org.uk)

Financial Reporting Council – Sixth Annual Enforcement Review

The Financial Reporting Council (FRC) has published its sixth Annual Enforcement Review providing a summary of FRC enforcement activity for the year ending 31 March 2024.

The Review analyses high-profile cases during the year and draws out important themes and lessons from recently concluded cases. These include :

• Auditors failing to adequately understand the entity being audited where there is an increased risk that audit procedures are not capable of effectively responding to the actual risks of material misstatement.
• Insufficient professional scepticism. The Review notes that failures in this area arose in several enforcement cases where the context and circumstances of the audit evidence amounted to red flags indicating possible misstatement.
• Failures in relation to fundamental aspects of an audit, such as auditor objectivity and integrity.

The report can be viewed via this link: Annual Enforcement Review 2024 (frc.org.uk)

Financial Reporting Council – Review of Reporting against the Wates Principles

The Financial Reporting Council (FRC) has published a second report on the quality of corporate governance reporting by private companies which apply the Wates Corporate Governance Principles for Large Private Companies (the Principles). Large companies for this purpose are those which have more than 2,000 employees and / or a turnover of more than £200m and a balance sheet total of £26bn.

The Principles operate on an “apply or explain” basis.

Of the 1,815 in scope companies, 547 applied the Principles. Of those there were slight improvements in most disclosures.

The key areas for improved disclosures were noted as:

• Company purpose and connecting purpose to strategy, culture, and values where the disclosure scores remained low. The report suggests giving examples of actions and decisions made by the board and linking this to their company purpose will give a more meaningful picture of a company’s strategy.
• Board composition. The report notes that companies should be encouraged to follow the Wates guidance on independence and to disclose in their corporate governance statements whether they consider their non-executive directors to be independent and able to offer constructive challenge.
• Director roles and responsibilities. Subsidiaries were found to disclose little information about their own board and the demarcation of responsibilities and accountability between the parent’s and the subsidiaries’ boards. Subsidiaries should report on their own governance arrangements and be transparent about their relationship with the parent company.
• Risk mitigation and opportunity detection. The report notes that companies engage more in discussing risk than opportunities and there is a suggestion that where risks are discussed in other areas of the annual report there should be cross-references in the corporate governance section to make the document more user friendly.
• Remuneration and philosophy on pay. Some companies provided information about the remuneration given in tables but almost all companies failed to connect their remuneration with their purpose, strategy, and values. There is a suggestion in the report that disclosing more information when discussing directors’ remuneration in light of workforce pay would improve the quality of reporting on remuneration.
• Stakeholder engagement and its impact on board decision making. Companies should take a broader view of their stakeholders and for example, consider the impacts of their operations on the communities in which they operate.

The full report can be accessed via this link: The Wates Corporate Governance Principles for Large Private Companies (frc.org.uk)