ARGA – FRC position paper

On 12 July 2022, the FRC published a Position Paper setting out how the FRC will support the UK government’s audit, corporate reporting and corporate governance reforms, following publication of the government’s response to its consultation. See our insight for more information on the government’s response.

This insight summarises the FRC’s proposals for the UK Corporate Governance Code (Code) and corporate reporting. The FRC paper also covers audit, actuaries, local audit, and funding of the new regulator, the Audit, Reporting and Governance Authority (ARGA). The FRC paper does not, however, deal with ARGA’s proposed new powers to enforce directors' statutory duties relating to corporate reporting and audit, which will require legislation.

Revisions to the Code

The FRC is proposing to amend the Code to:

• provide additional support to existing Code Provisions, where reporting is currently weaker (as identified in the FRC’s annual report on the use of the Code and its Culture report);
• strengthen the basis for reporting on and evidencing the effectiveness of internal controls around the year end reporting process;
• reflect the wider responsibilities of the board and audit committee for sustainability and ESG reporting;
• require boards to consider how audit tendering takes account of the need to expand market diversity; and
• update it to reflect proposed changes set out in the government’s response, including strengthening reporting on malus and clawback arrangements.

The FRC will revise its guidance on Audit Committees, Board Effectiveness and Risk Management, Internal Control and Related Financial and Business Reporting, which support the Code.

The FRC will also develop a voluntary set of minimum standards for audit committees. The FRC intend holding round tables with stakeholders in the second half of 2022 to develop these standards, with the standards being available for 2023 financial year ends. Supervision against the standards will start in 2024, subject to legislation.

The FRC is expected to consult on the revised Code and supporting guidance from Q1 2023, and the revised Code is expected to apply to periods starting on or after 1 January 2024.

Corporate reporting

The corporate reporting changes proposed in the government’s response will require either primary or secondary legislation, but the FRC will develop implementation guidance for:

• the Resilience Statement;
• fraud reporting by directors;
• the Audit and Assurance Policy and related disclosure requirements; and
• capital maintenance and dividends (which will replace the current ICAEW/ICAS guidance).

The FRC will also revise its Guidance on the Strategic Report but will delay completion of this work so that it can also take account of the government’s policy on the use of the International Sustainability Disclosure Standards in the UK.

Subject to the extension of Corporate Reporting Review (CRR) powers, the FRC also intends to include new reporting disclosures in its review processes from the date at which any new reporting requirements commence. The FRC will continue to publish CRR case outcomes on a quarterly basis, including reference to any findings related to non-financial disclosures where appropriate.

The FRC Lab will carry out a series of projects to assist with the development of the new reporting requirements set out in the government’s response, covering areas such as resilience statements, capital maintenance disclosures and audit and assurance policy.