Member Article

A Report into effective approaches to audit committee reporting has been published by the Financial Reporting Lab, which is a forum set up by the Financial Reporting Council (FRC) to encourage better communication between listed companies and investors in the UK.

The aim of the Report is to provide insight from companies and investors on effective approaches to audit committee reporting. The project focused on the UK Corporate Governance Code and in particular the requirement that the work of the audit committee should include descriptions of:

•  the significant issues considered in relation to the financial statements and how they were addressed;

•  how the audit committee assessed the effectiveness of the external audit process; and 

•  the approach to appointing the auditor and how objectivity and independence are safeguarded relative to non-audit services.

The findings of the report were as follows:

•  in relation to significant financial statement reporting issues, investors recognise that companies need to use their judgement to determine whether an issue is significant, taking into consideration what may be useful to a reasonable investor. Companies commented that the issues on which the audit committee report to the board may be a good indication of issues for disclosure;

•  investors want audit committee reporting to move away from boilerplate disclosure and to be bespoke and company specific. The description of each significant issue should be tailored to the company and the year, and providing context to the issue helps to accomplish this;

•  investors would like to understand in greater depth how the audit committee fulfils its role and the robustness of the steps it undertakes to assess each significant issue and reach conclusions;

•  in relation to external audit effectiveness, investors expect audit committees to report concisely on the activities performed, together with the outcome and to avoid cluttering the annual report with extensive disclosure of policies;

•  in relation to appointing the auditor and safeguards on non-audit services, it was acknowledged that external audit tendering will become part of the normal business cycle and represents good governance;

•  any change to the company's policy on non-audit services should be disclosed together with the reason for the change; and

•  investors indicate that it would be useful to have disclosure of non-audit services fees as a percentage of audit fees as this is a clear and measurable outcome.

In addition, investors concluded that audit committee reporting is best presented by way of a separate audit committee report, rather than as a section of another report such as the board's governance report.