Back in December 2022, the Financial Reporting Council (FRC) (that is, the independent regulator in the UK responsible for regulating auditors, accountants and actuaries, and which sets the UK’s Corporate Governance Code and the UK’s Stewardship Code) announced areas of supervisory focus for its 2023/24 corporate reviews and audit quality inspections to identify any areas of poor compliance with company corporate reporting requirements and to inform future monitoring. 

At this time, the FRC highlighted that, when selecting reports and audits for review, it would be prioritising sectors which were under particular economic pressure and considered higher risk for corporate reporting and audit. 

The FRC has since turned its regulatory attention to, and conducted a thematic review of, 20 of the UK’s largest private companies’ corporate reporting. On 31 January 2024, it released its findings in a report that examines the quality of those companies' corporate reporting (the Report).

The FRC’s review looked at the annual report and accounts of 20 UK companies with revenues ranging from £1.5 billion up to a whopping £24 billion and that employ between 1,000 and 145,000 people (and covered year-ends falling between September 2022 and December 2022). There was a particular focus on areas of most importance to users (such as the strategic report, judgements and estimates, provisions of contingencies, presentation of primary statements including cash flow statement and supporting notes, revenue and financial instruments.

Companies were chosen from various industries, including retailers, construction, materials and engineering, technology, energy and chemicals, beverages and tobacco, and automobiles and parts. The companies could be split into three broad categories: (1) parent companies of privately owned groups (that prepared consolidated accounts); (2) subsidiary companies of overseas entities (that prepared individual accounts); and (3) subsidiaries of UK-listed companies (that also prepared individual accounts). 

As the FRC points out in the Report, transparent and relevant communication of key matters in the annual report and accounts of large private companies is needed to provide users with decision-useful information – these sorts of companies are economically significant entities, often providing jobs for large numbers of people, sustaining extensive supply chains and utilising substantial debt financing and are often important drivers for growth in the economy. 

During its review, the FRC found that the quality of reporting of the UK’s largest private companies was mixed, particularly in terms of how clearly companies explained material matters that were complex or judgemental and that many of the issues it had identified could have been avoided if a sufficiently critical review of the annual report and accounts had been conducted prior to their finalisation. 

The Report sets out the FRC’s main findings, which, among others, include: 

• The best strategic report disclosures focused on the elements of development, performance and position that are key for an understanding of the company, explaining them in a clear, concise and understandable way that was consistent with the disclosures in the financial statements. Good quality reporting does not necessarily require greater volume
• To enable users to fully understand a business, disclosures should explain the nature of the business’s operations and how it fits into a wider group structure
• Better examples of judgement and estimates disclosures included detail of the specific judgement involved and clearly explained the rationale for the conclusion. The significance of estimation uncertainty was much more apparent when sensitivities were quantified
• For some material provisions, the level of detail provided on the nature of the obligation and the associated uncertainty was below the level that the FRC expected. Users benefit from clear disclosure of this information to allow them to fully understand the risks affecting the company.

The FRC’s findings further identified the need for companies to conduct a sufficiently critical review of their annual report and accounts before finalising and submitting them. This would help them to ensure that they are complying with their corporate reporting obligations. Such a review will include taking a step back to consider whether the report as a whole is clear, concise, and understandable, whether it omits immaterial information and whether additional information was necessary to understand particular transactions, events or circumstances. 

The Report as a whole might serve as an additional tool for companies as they prepare their accounts and reports and assist them to ensure high-quality, compliant corporate reporting, particularly given the use of live examples and notes on whether certain reporting items were considered by the FRC to be good examples, or otherwise fell below the required disclosure standards.  

The full report can be found here.

In addition to the Report, companies can find further FRC guidance around what makes a good annual report and accounts at: 

• ‘What Makes a Good Annual Report and Accounts’. Section 4 of this publication identifies the characteristics that should be considered in determining whether information is material, including in the context of the strategic report
• ‘Materiality’, which looks at the application of materiality in practice by companies.