The audit watchdog today called for firms to provide more information on strategic risks to help improve public trust in business.
High-profile failures like travel agent Thomas Cook and outsourcer Carillion have led to fingers pointed at companies and their auditors with questions raised over why risks were not set out in the company’s accounts.
Paul George, executive director of corporate governance & reporting at the Financial Reporting Council (FRC), said: “Users want to get a better understanding of what types of issues could emerge that might have an adverse effect on a company’s sustainability and long-term prospects.
“If a company fails everyone is quickly asking questions around ‘why wasn’t that apparent from the last set of accounts?’”
In an open letter to audit committee chairs and finance directors, FRC chief executive Sir Jonathan Thompson called for greater transparency from companies.
“In times of uncertainty, whether created by political events, general economic conditions or operational challenges, investors look for greater transparency in corporate reports to inform their decision-making,” Thompson wrote.
Brexit and the reform of interest rate benchmarks, such as LIBOR, were flagged as specific issues for companies to get to grips with.
The FRC, which reviewed over 200 annual and interim reports, found that companies could be reluctant to deal with risks they were facing over fears of scaring investors.
George said: “What they [investors] want directors to do is acknowledge those issues exist and set out the actions they are taking. Investors understand there will be bumps in the road, what they want to see is if the directors are on top of the issues and taking appropriate actions.”
The FRC also raised concerns about the reporting of cashflow, an area where it continued to see “basic errors”.
“That is quite a disappointing aspect,” George said. “We found quite a number of clear errors in cashflow statements and if we can spot a clear error from a desktop review of a set of accounts it does call into question the company’s own quality control processes and those of the auditors as well.”
George said the majority of errors inflated the company’s operating cashflow at the expense of areas such as investing.
“Investors like businesses to be able to convert profits into cash. If there is a miscalculation of cashflow to make it look as if the operations are throwing off more cash, that needs to be corrected,” George said.
Nigel Sleigh-Johnson, ICAEW head of financial reporting, audit and assurance, said: “While it’s reassuring that the FRC believes more companies seem to be getting more of the basics right, the assessment of continued weaknesses in some key areas is concerning as the quality of corporate communications underpins investor confidence.
“Recent corporate failures have highlighted the need to secure an improvement in both the reporting and assurance of going concern, viability, and internal controls over financial reporting. This should be a priority for business, regulators and the profession in the coming months.”