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ICAS this week reported its support of the FRC’s proposal to require boards of directors to explain why their annual reports are ‘fair, balanced and understandable’. However, ICAS believes that the FRC’s proposal to provide users of annual reports with assurance on this matter do not go far enough; failing to fill the assurance vacuum.
James Barbour, ICAS Director, Technical Policy said: “We appreciate that the FRC is seeking to ensure that users of annual reports are provided with assurance over the front half of annual reports (narrative section). Additionally, we support the proposal to extend the remit of the audit committee to expressly advise the board on this issue. However, the proposal that auditors would only report by exception - in circumstances where they believe that the content of such reports is not fair, balanced and reasonable - fails to properly fill the assurance vacuum in this area.
“Research undertaken on behalf of ICAS revealed a genuine demand amongst investors for assurance on the narrative information contained in annual reports.We believe that this demand would be best satisfied by auditors being asked to opine on whether such information is deemed fair and balanced. Reporting by exception, we believe, does not place sufficient emphasis on an increasingly important part of corporate reporting.”
Barbour added: “The ICAS ‘Future of Assurance’ report previously recommended that the auditor should be asked to opine on whether the company’s narrative reporting was ‘balanced and reasonable’. We do not believe there to be a substantive difference of opinion in the terminology used by the FRC ‘balanced and fair’. We do believe however that users would substantially benefit from the auditor being specifically asked to opine on such matters.”
ICAS also noted a number of the FRC’s other proposals including its recommendation for companies to be encouraged to retender their auditors every ten years.
ICAS said whilst it welcomes moves to encourage more frequent tendering of audit appointments, it believes that the onus on frequency of rotation should be placed on the audit committee to determine the most appropriate period of rotation.
The proposal for encouraging more informative reporting by audit committees, including on the process for appointing the external auditor was also welcomed by the Institute.
The full FRC consultations can be viewed here
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