AICPA & CIMA, together as the Association of International Certified Professional Accountants, responded to the UK Financial Reporting Council (FRC), which sought comments on proposed changes to the UK Corporate Governance Code (the Code).
AICPA & CIMA’s response had nine focus areas.
Comply or explain: The Code, according to the AICPA & CIMA response, offers flexibility as well as a “tried and tested mechanism” for the introduction of new requirements for in-scope companies. However, the response said, “there is a risk that it may not deliver the desired levels” of consistent corporate governance over the short term.
“Comply or explain is a strength of UK corporate governance but, given the importance of some of the new measures being introduced via the Code, it is important that companies embrace these new requirements (particularly those relating to enhanced internal controls),” the response said.
“If this is not the case, then we would hope that the FRC will engage and take steps to ensure that there is an acceptable level of consistency, in the public interest. Where there are departures from the Code, there should be an expectation that the requisite explanation will consider both impact and outcomes.”
A well-defined regulatory landscape: The response noted that the “framework of legal and regulatory requirements is growing increasingly complex” and called for a simple approach. “We would encourage the FRC to reflect on how best to simplify the navigation for companies that are in scope,” the response said.
Strong internal controls: “We have previously called for regulatory adoption of the framework of internal control provided by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control — Integrated Framework (the COSO framework),” the response said. “This framework is well-regarded and widely used. However, we understand the UK government view that this may not work effectively in the context of the UK market and/or the hesitation of companies who are keen to avoid a costly road to compliance.
“For now, we can support the more nuanced focus in the Code review on ensuring prudent and effective controls and in particular the new requirement for evidencing their effectiveness, but the FRC’s guidance for companies within scope will be critical to ensuring that the spirit and intent of these new provisions are embraced.”
Material weakness: The Code requires boards to identify and describe any material weakness or failure, the remedial action being taken, and the timeframe, the response said. “We commend the FRC for providing an extract from its draft guidance on the expected interpretation of ‘material weakness’. Consistent interpretation of this requirement is critical to the reporting regime.”
Board composition: Board composition, the response said, is paramount. It goes on to note that many board positions go to those trained in the global accountancy profession. “The knowledge, skills, and (most importantly) the values of the accountancy profession can influence board culture and behaviour in the future,” the response said. “We take this responsibility seriously and are committed to training individuals from diverse backgrounds who can demonstrate high technical and ethical standards. … We welcome this express change to the Code.”
Enhanced role of the audit committee: “We would hope that the FRC is engaged with the Audit Committee Chairs’ Independent Forum, as it will be a key stakeholder,” the response said. “We would also wish to recognise the role that internal audit will play in many companies as these new requirements are rolled out and embedded for the future.
“Investor engagement with audit committees is an obligation which sits with the committee, and we would hope that the FRC continues to encourage investors to pay sufficient heed to the audit committee process, and the new requirements which are designed for their benefit.”
Wider ESG & corporate reporting: The AICPA & CIMA response said that the new provisions “will increase the necessity for organisations to consider sustainable value creation through integrated thinking and its application to reporting”. The response also said that the FRC should ensure that the Code does not introduce provisions that “are not complementary” to the new international sustainability standards.
Resilience: With geopolitical uncertainty putting pressure on supply chains, a focus on resilience is welcome, according to the response, especially the Resilience Statement. “The new code provisions, which will supplement the impending legislative changes, will ensure that organisations consider in greater depth, and in a more integrated way, their approach to resilience,” the response said.
The response goes on to say it recommends “greater management accounting involvement in helping with, testing, and reporting on the resilience of an entity via the Resilience Statement to the benefit of all stakeholders”.
Corporate reporting and technology: “At some point the role of [artificial intelligence] and technology will need to be expressly recognised within the Code,” the response said.
Changes to the Code, if approved, will be applicable from 1 January 2025, the consultation report said.
— To comment on this article or to suggest an idea for another article, contact Steph Brown at Stephanie.Brown@aicpa-cima.com.