The Financial Reporting Council (FRC) recently announced its areas of supervisory focus for 2023/24, including priority sectors for corporate reporting reviews and audit quality inspections.
The FRC's Supervision Division will supplement its routine reviews of corporate reporting and audits with a number of thematic reviews. These reviews will identify scope for improvement, as well as examples of better practice
The FRC's Audit Quality Review team will pay particular attention in its audit quality inspections to areas including going concern, fraud risks, climate-related risks, and risk identification and assessment.
In selecting corporate reports and audits for review, the FRC will prioritise sectors that are under particular pressure.
Thematic reviews of corporate reporting
The Corporate Reporting Review team will conduct four thematic reviews during the next year:
Insurance contracts (IFRS 17): The new standard on insurance contracts will have a significant effect on corporate reporting in the insurance sector. The FRC will review a selection of insurers' 2023 interim accounts to identify compliance with IFRS 17 and examples of good disclosures.
Large private companies: The proposed change to the definition of a Public Interest Entity will bring an enhanced regulatory focus on the largest private companies. The Government's intended threshold is entities that exceed £750 million annual revenue and 750 employees. The FRC will review a selection of private companies' annual reports to identify whether and where there are areas of poor compliance with reporting requirements with a view to informing our monitoring activities going ahead.
Task Force on Climate-related financial Disclosures (TCFD)-metrics and targets: climate-related metrics and targets, including companies' "net zero" plans, are seen as increasingly important by investors, and the TCFD's recommendations in this area were updated in 2021. Following the FRC's thematic review of TCFD disclosures in 2022 (carried out in collaboration with the FCA) which highlighted room for improvement in many companies' metrics and targets disclosures, the FRC will undertake a targeted follow-up in 2023, with a focus on the metrics and targets disclosures of companies from four relevant sectors. The FRC will also consider how adequately these companies' net zero commitments have been addressed in their financial statements.
Fair value measurement (IFRS 13): The FRC's review will focus on companies in the non-financial sector, and will provide an overview of the disclosure requirements of the standard, highlighting examples of better disclosure and common pitfalls.
Areas of focus for audit quality inspections
The FRC's programme of audit quality inspections will pay particular attention to the auditor's work in the following areas:
- Going convern
- Fraud risks
- Climate-related risks, including the linkage between the audited financial statements and climate-related disclosures elsewhere in the Annual Reports
- The application of the revised Auditing Standard on risk identification and assessment (ISA (UK) 315).
In selecting both corporate reports and audits for review, the FRC will give priority to the following sectors:
- Travel, Hospitality and Leisure
- Retail and Personal Goods
- Construction and Materials
- Industrial Transportation
These sectors are considered by the FRC to be higher risk, for corporate reporting and audit, by virtue of economic or other pressures.
Given the difficult economic conditions that are currently being experienced, the FRC recognise that many companies, in many different sectors, are currently under particular commercial and financial pressure. The FRC will therefore be especially careful over the coming year in monitoring where these pressures are being felt most acutely, and tailor the selection of company reports for review and audits for inspection accordingly.
Please get in touch with a member of our team if you have any questions.