The Financial Reporting Council (FRC) does more than standard-setting for UK corporate reporting. It also reviews accounts for compliance with the Companies Act 2006 and other relevant requirements to help drive continuous improvement across the UK’s corporate reporting ecosystem. The FRC looks at the annual report and accounts, as well as the interim reports, of companies included on the FCA’s official list (listed on the London Stock Exchange). It also reviews the reports of other UK-incorporated public companies and larger private entities.

This work is undertaken by the FRC’s Corporate Reporting Review (CRR) function, an executive-led team of accounting and reporting specialists. In performing their work, CRR may seek advice from members of the Advisory Panel as well as lawyers, audit and other specialists from across the FRC.

Why CRR?

CRR helps companies to improve their corporate reporting, directly and indirectly. While CRR operates under statutory powers derived from the Companies Act 2006 and other relevant law, it rarely uses its powers and primarily engages with companies on a voluntary basis. Those companies that have their reporting reviewed will get feedback from CRR and the insights gained then inform the FRC’s annual and thematic reviews.

The work of CRR involves a programme of reviews of reports and accounts using risk-based selection. This means an approach that considers the probability of non-compliant reporting, and how errors might impact the company, its industry and the wider market. There is a slight emphasis on FTSE 350 companies due to their significance to the investing community, with their reports being reviewed on a more frequent basis. “We aim to undertake at least one full-scope review of a FTSE 350 company’s annual report and accounts and at least one limited-scope review every five years.”

A small number of industries are identified as particularly under stress each year, whether it’s due to economic conditions, regulatory changes or new reporting requirements. Those industries become the focus for CRR and Audit Quality Review (AQR) activity. Certain issues, such as risk of misstatement, may also take precedent if identified as a specific issue.

Random selection also plays a part in the process to make sure that all companies that fall within the remit have a chance of having their reporting reviewed. Further, CRR will consider well-informed complaints about the reports and accounts of companies within its remit.

What happens if CRR uncovers any issues?

If CRR finds any areas of a report that raise significant compliance questions it will contact the company to ask for further information. This usually comes in the form of written correspondence but sometimes involves a meeting to discuss what the team has identified. These meetings are informal and, while usually only called to discuss more complicated accounting issues, are sometimes useful to clarify the process and related expectations. These informal meetings help when CRR would like a better understanding of the business and the environment in which it operates, and ensure both parties fully understand the issue raised.

CRR emphasises its focus on proportionality in its approach, part of which is to ask for responses only for the more significant matters. Other observations (‘appendix points’) are communicated for companies to consider when preparing the next year’s report and accounts if relevant and material.     

How to respond to a CRR letter

The FRC offers advice and good practice for companies that may receive a CRR letter, explaining the elements of a good response in the event of receiving a ‘substantive’ letter that asks for additional information from the company. A good response:

• provides clear answers to all questions included in the main body of the letter;
• addresses whether an issue identified by CRR is material and, if not, why not; and
• explains the judgment process.

CRR advises that, while it is always willing to engage, companies should admit deficiencies if identified and avoid ‘arguing a lost cause’. Essentially, the more information the company can provide in the event of a ‘substantive’ letter, the better.

CRR plays a vital role in upholding high-quality corporate reporting in the UK and ultimately ensures companies provide transparent, reliable and compliant financial information.

“High-quality corporate reporting, in which investors and other stakeholders have confidence, is a key enabler of efficient capital markets and sustainable economic growth,” says Andrew Watchman, CRR Director. “The FRC's Corporate Reporting Review function is an important part of the ecosystem that supports this outcome, alongside standard-setters, auditors, investors and companies themselves. We strive to regulate proportionately, focusing on material information and avoiding unnecessary challenge to reasonable judgements made by preparers. High-quality reporting does not necessarily mean longer reports; rather, it means providing clear, relevant and decision-useful information to stakeholders.”