The UK's Financial Reporting Council (FRC) has published recommendations aimed at improving the dialogue between company boards and their shareholders.

The FRC's report, ‘Effective Company Stewardship: Enhancing Corporate Reporting and Audit', responds to lessons of the financial crisis and builds on changes already made, such as the new UK Corporate Governance Code and the introduction of the Stewardship Code for institutional investors.  It contains seven key recommendations:

1. Directors should take full responsibility for ensuring that an Annual Report, viewed as a whole, provides a fair and balanced report on their stewardship of the business.

2. Directors should describe in more detail the steps that they take to ensure:

• - the reliability of the information on which the management of a company, and therefore directors' stewardship of the company, is based; and
• - transparency about the activities of the business and any associated risks.

3. The growing strength of Audit Committees in holding management and auditors to account should be reinforced by greater transparency through:

• - fuller reports by Audit Committees explaining, in particular, how they discharged their responsibilities for the integrity of the Annual Report and other aspects of their remit (such as their oversight of the external audit process and appointment of external auditors); and
• - an expanded audit report that:
•        > includes a separate new section on the completeness and reasonableness of the Audit Committee report; and
•        > identifies any matters in the Annual Report that the auditors believe are incorrect or inconsistent with the information contained in the financial statements or obtained in the course of their audit.

4. Companies should take advantage of technological developments to increase the accessibility of the annual report and its components.

5. There should be greater investor involvement in the process by which auditors are appointed.

6. The FRC's responsibilities should be developed to enable it to support and oversee the effective implementation of its proposals.

7. The FRC should establish a market participants group to advise it on market developments and international initiatives in the area of corporate reporting and the role of assurance and on promoting best practice.

CIMA Perspectives

Although CIMA has not formally agreed its response to this consultation here are some personal thoughts on the issues raised:

I agree that it is the directors' responsibility to ensure their reports are fair and balanced and contain all relevant and material information for readers to determine the effectiveness of past stewardship and the future strategy / business model.

The ability to be able to write an effective annual report indicates a well-run organisation with good management information flows.  I welcome the FRC's recommendation that directors should describe the steps they have taken to ensure the reliability of these information flows.

CIMA called for an expansion in the role of audit in its recent evidence to the House of Lords Economic Affairs committee to cover the process of generating the non-financial information reported to and by the directors.  I believe that the FRC's proposals to expand the audit report should also include this requirement

I believe that large amounts of data that currently forms part of the printed annual report should only be available online eg the detailed disclosures on share-based payments, financial instruments, pensions and holding company data.  Shareholders should still be able to opt to receive a hard-copy ‘super summary annual report containing the financial statements and key supplementary disclosures supported by a comprehensive narrative report that provides the key contextual information needed to fully understand the financial statements. 

Online reporting should be accessible and not merely a pdf representation of the hard-copy reports - see Report Leadership Online Reporting guide.

I welcome greater involvement from all participants in the financial reporting supply chain in the development of corporate reporting but am aware, from first-hand experience, that this is often difficult to achieve due to pressure of work / a lack of willingness to participate.

The consultation is open until 31 March 2011.  The consultation paper can be accessed via the FRC website and we would be pleased for any comments that you might have that help us finalise our response.