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Financial reporting in smaller listed and AIM-quoted companies: nurturing a culture of improvement

Asking the right questions at the right time, combined with recommendations for small, practical changes, should enable audit committees to nurture a culture of improvement, says Dr Nigel Sleigh-Johnson FCA is Head of Financial Reporting, Audit and Assurance at ICAEW.

In this article, Dr Nigel Sleigh-Johnson explains the background to the ICAEW Financial Reporting Faculty’s latest publication on smaller listed and AIM quoted companies. Written in association with the Financial Reporting Council, the publication, Smaller Listed and AIM Quoted Companies: A Practical Guide for Audit Committees on Improving Financial Reporting, does exactly what it says on the tin.

The issue

For smaller listed companies and Alternative Investment Market (AIM) quoted companies, financial reporting is not always seen as a top-tier issue. The diversity of companies in this sector, in terms of size, structure and strategy, can influence how financial reporting is perceived within the company and the extent to which it is prioritised.

While some of these companies may be planning for a period of growth and therefore require high quality financial reporting and information for investment purposes, others (perhaps smaller companies) may have listed as a one-time financing exercise with no need for further investment. The effect of this diversity has contributed to varying standards of financial reporting quality in this segment of the market.

With the aim of addressing the quality of financial reporting by these companies, the Financial Reporting Council (FRC) published a discussion paper in June 2015, Improving the Quality of reporting by Smaller Listed and AIM quoted Companies. Focussing on listed companies with a market capitalisation between £20m and £100m, and UK companies quoted on AIM with a market capitalisation greater than £5m, the FRC found that: ‘whilst the system of financial reporting is not fundamentally flawed, there is a higher incidence of poorer quality annual reports by smaller quoted companies than by their larger counterparts.’

According to Paul George, The FRC’s executive director of corporate governance and reporting: ‘Smaller quoted companies are critical to generating future jobs and growth in the economy and need access to capital to invest and grow. The availability of capital though can be affected by the quality of reporting, so audit committees have a vital role to play in ensuring that the quality of reporting meets the needs of stakeholders and those companies’ growth aspirations.’

Since the 2015 paper, the need to focus on financial reporting quality has become more critical. During this time, three major new international accounting standards have come into effect: IFRS 9: Financial instruments, IFRS 15: Revenue from contracts with customers, and IFRS 16: Leases. Significant time and effort has been required by the CFO, finance function and audit committee of companies in correctly implementing these standards, and will continue to be required. Alongside these new standards, 1 January 2019 saw the implementation of new requirements for the Strategic Report, placing greater emphasis on the duties of directors.

Given financial reporting processes are already likely to be under review (as a result of the new reporting requirements), companies could use the opportunity wisely to improve other aspects of their financial reporting at the same time.

The response

In November 2018, the FRC published the results of its thematic review. The aim was ‘to assess the extent of any improvement in the general quality of compliance’ since the publication of its 2015 paper. The thematic review identified that although there was some degree of progress made against the 2015 proposals, there remained much scope for improvement in reporting by smaller listed and AIM quoted companies.

To aid these improvements, ICAEW’s Financial Reporting Faculty and the FRC produced a short publication that offers practical guidance for these companies. The guide is aimed at audit committees, which, with responsibility for oversight of the annual reporting process, are well positioned to drive up the quality of the annual report and accounts.

Drawing on discussions at a series of meetings and conversations with relevant stakeholder groups, the guidance offers:

  • Practical, cost-effective suggestions on how smaller listed companies and AIM quoted companies can improve the quality of financial reporting; and
  • Questions for audit committees to ask themselves and those associated with the financial reporting process, including the board, chief financial officer, finance team and external auditors. These questions are designed to encourage the company to reflect on current financial reporting practices and consider areas for improvement.

The guide includes some steps which all audit committees can take in order to increase the likelihood of achieving higher quality financial reporting. For example, it suggests that audit committees should:

  • Consider the areas highlighted by the FRC’s Annual Review of Corporate Reporting each October;
  • Concentrate on areas of focus for investors in smaller quoted companies;
  • Review progress on areas of concern highlighted in the financial reporting cycle or audit process in the prior year; and
  • Set the right ‘tone from the top’ by engaging early in the financial reporting and audit processes, including ensuring an early audit planning meeting takes place.

‘By asking the right questions at the right time, audit committees can help bring about a step change in the quality of financial reporting.’

Timing is all-important in ensuring an efficient process that offers robust challenge. In terms of timing, audit committees should:

  • Schedule the meetings for the next financial period as soon as the current period is signed off;
  • Encourage colleagues to write the narrative parts of the annual report prior to the year end. This gives more time to develop comments on the business model, principal risks and uncertainties, accounting judgments and accounting policies; and
  • Request that the first and subsequent drafts are provided to the audit committee for early review comments.

‘Early engagement by the audit committee chair in the financial reporting and auditing process will set the right tone from the top and demonstrate the company’s commitment to high quality financial reporting.‘

The audit committee should ensure that the experience and skillset of its members and of the finance function are comprehensive and up to date by:

  • Ensuring that the audit committee’s skills are varied, including non-financial skillsets, whilst providing ongoing technical training;
  • Ensuring that the finance team has both adequate resourcing and skills; and
  • Making good use of resources available from the FRC, ICAEW and auditors.

Audit committees should make effective use of the auditors throughout the process by:

  • Ensuring regular contact throughout the process, including regular touch points between the chair and the audit partner;
  • Holding early discussions around one-off transactions and significant judgments, to avoid disagreements and late changes; and
  • Holding a private session with the auditors to gain insights into the efficiency and challenge of the process, and into the relationships between the auditors, CFO, finance function and audit committee.

The impact of asking the right questions at the right time, combined with recommendations for small, practical changes, should enable audit committees to nurture a culture of improvement within the company. In turn, this should help bring about a step change in the quality of financial reporting.

The guide is available to download now at


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