Changes to the UK Corporate Governance Code proposed Wednesday by the Financial Reporting Council (FRC) are intended to improve risk management by boards of listed companies and ensure that better information is provided to investors.
The FRC’s consultation paper, Risk Management, Internal Control and the Going Concern Basis of Accounting, seeks comments by January 24th. Supplementary guidance for directors of banks also was released in an accompanying consultation paper.
In the proposals, the FRC brought together its previous guidance on risk management and internal control with the assessment of the going-concern basis of accounting.
The consolidated approach follows the integrated assessment and reporting mechanism recommended in a key inquiry led by Lord Colin Sharman, former chairman of KPMG International and life peer in the House of Lords. The proposals are designed to improve communication to providers of risk capital about the risks faced by companies in which they invest and how those risks are managed or mitigated.
“Risk management is one of the most important responsibilities of the board,” Melanie McLaren, the executive director for Codes and Standards of the FRC, said in a news release. “Understanding the principal risks facing the company is essential for the development of strategic objectives and the ability to seize new opportunities.”
In the proposals, the FRC has emphasised the need for robust assessment by boards and the important role of auditors in ensuring reliable communication to investors, according to McLaren.
Key elements of the draft guidance include:
- Board responsibilities: These would include setting the company’s risk appetite, ensuring an appropriate risk culture throughout the organisation and assessing and managing the principal risks facing the company, including risks to its solvency and liquidity.
- Auditor requirements: Auditors would be required to consider and report if they are aware of any material matter in connection with the disclosure of principal risks that should be disclosed.
- Assessment of risks to solvency and liquidity: Companies would be required to conduct a robust assessment of how they manage or mitigate their principal risks, including risks to solvency and liquidity. Companies would be required to explain which, if any, of these risks have also given rise to material uncertainties for the purposes of reporting on the company’s going-concern basis of accounting. The FRC is proposing removal of the current Code provision requiring companies to make a “going concern” statement, because the current provision is focused on a narrow meaning.
- Bank guidance: A conclusion that a bank is or would be reliant in stressed circumstances on access to liquidity support from central banks that is reasonably assured does not necessarily mean that the bank is not a going concern, or that material uncertainty disclosures or an auditor’s emphasis-of-matter paragraph are required.
Comments can be emailed to riskreview@frc.org.uk. The final Code, guidance and standards are expected to be issued in the middle of 2014, with application for financial years beginning on or after October 1st 2014.
—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.