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Several business associations in the U.K. blasted initial proposals from the U.K. Financial Reporting Council to require greater auditor oversight of company preliminary performance announcements.
Organizations representing large and mid-sized companies criticized FRC’s suggestions on changing the role that auditors play in preliminary announcements.
Preliminary announcements, which companies usually issue about a month before their statutory annual reports, play an important role in U.K. corporate financial reporting, FRC said. Many companies base their announcements on audited information.
However, statutory audits—those required by government agencies—don’t have to be completed when annual reports and accounts are released.
Current guidance applies only to auditors of entities listed on the London Stock Exchange’s main market that are based in the U.K.
FRC, which establishes accounting and auditing standards for the U.K. and the Republic of Ireland, issued a discussion paper (DP) containing the preliminary announcement proposals April 27, 2017, to explore how the council might update its 2008 guidance on preliminary announcements, known as Bulletin 2008/2.
“The options we identify in this paper are not formal proposals, but rather are intended to encourage a broad community of stakeholders to engage with the issues we have identified,” the paper said.
The DP outlined 10 potential revisions to its guidance, such as changing Bulletin 2008/2 into an engagement standard.
“Bulletins have the status of ‘guidance’ rather than standards, and are therefore ‘persuasive rather than prescriptive’ and are ‘indicative of good practice,’“ according to the DP.
Converting Bulletin 2008/2 into an engagement standard would enable FRC to establish procedures for preliminary announcements that auditors would have to follow.
Another proposal would require audits to be finished and the auditor’s report on statutory financial statements to be signed before preliminary results could be released.
In addition, the council suggested redefining a preliminary announcement in the auditor guidance, “potentially changing the scope of any procedures required for an auditor to agree to publication,” the DP said.
Some business associations insisted that FRC’s current framework for preliminary announcements operates just fine and said the council is attempting to tackle problems that don’t exist.
“We believe the current system works well and is fit for its purpose,” the 100 Group said in its comments.
The 100 Group is made up largely of finance directors from such FTSE 100 companies as BP PLC, Barclays PLC, Royal Dutch Shell PLC and U.K. retail giant Tesco PLC.
The organization recommended that FRC determine whether it would be practical to require auditors to sign their audit opinions on financial statements before preliminary announcements are published.
More broadly, FRC should re-evaluate its proposals in light of the government’s drive to cut regulations on business, as “the majority of the options outlined in the paper seek to increase regulation and therefore will increase the burden on our members as preparers,” the 100 Group said.
The GC100—which comprises general counsels and company secretaries from FTSE 100 companies—echoed these views, saying it is unaware of any evidence that FRC needs to reshape the roles that auditors play in preliminary announcements.
The Quoted Company Alliance (QCA) of small and medium-sized U.K. quoted businesses called on FRC to start from scratch in reconsidering its policies on preliminary announcements.
“We believe that the consultation lacks clarity with respect to the identification of a problem regarding preliminary announcements,” QCA said.
The alliance—whose members include international law firm Eversheds Sutherland LLP, the London Stock Exchange (LSE), LexisNexis, and polling company YouGov—urged the council to better determine if problems exist with its current oversight.
QCA said the feedback it has received from investors doesn’t indicate that FRC’s current guidance is flawed.
“We would not want to see the FRC make regulatory changes which delay the release of information into the market unless those changes are needed to stop market abuse,” the alliance said.
Any deficiencies in preliminary announcements, QCA said, should be addressed through regulation of LSE’s AIM—formerly known as the Alternative Investment Market—or by U.K. financial markets overseer, the Financial Conduct Authority (FCA).
If evidence shows that FRC’s guidance needs to be improved, the alliance said it would welcome a joint FRC consultation with the FCA and the LSE.
Two U.K. investment companies, invesco Asset Management Ltd., and Schroders plc. offered less scathing assessments. Both welcomed FRC’s evaluation of its guidance on preliminary announcements.
The guidance for preliminary announcements generally is meeting its goals and doesn’t require a major overhaul, Invesco said.
The company supported changing Bulletin 208/2 to an engagement standard to ensure that all auditors—including auditors of some AIM companies—apply required procedures consistently before preliminary announcements are published.
Schroders supported FRC’s proposal to require that audits be completed and to have the auditor’s report on the underpinning statutory financial statements be signed before preliminary results are issued.
The DP marks the first step in FRC’s broader outreach effort to garner views on revising Bulletin 2008/2.
Based on the feedback it receives, the council envisages conducting a formal consultation to amend the bulletin.
FRC hasn’t set a timetable for considering comments on the DP or revamping the auditor guidance.
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The discussion paper is available at https://www.frc.org.uk/Our-Work/Publications/Audit-and-Assurance-Team/Discussion-Paper-Invitation-to-comment-Auditors.aspx
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