The Kingman review and corporate reporting

The audit sector has been plagued with controversies, the collapse of Carillion and the Patisserie Valerie scandal to name a few. Due to the number of these incidents, questions were raised around the FRC’s monitoring and regulation of the audit sector. It led to the UK government asking Sir John Kingman to carry out a review of the FRC, which has now been published. A key recommendation of the Kingman Review is that the FRC should be replaced with a new statutory regulator, while other recommendations focus on the governance structure of the FRC and its regulatory powers. Here our focus is on the recommendations related to corporate reporting.

The new regulator should be required to promote brevity and comprehensibility in accounts and annual reports.

Annual reports are continually increasing in length, due in part to the growing number of disclosures. The Kingman review states that the FRC has not been very effective at ensuring that annual reports are comprehensible and offer value to readers. It seems that this would be a difficult issue for the regulator to control, due to the increasing information requirements of both regulation and the stakeholders of companies. It may be that the amount of information required to be disclosed within the annual report decreases, with additional information outside of those requirements communicated through other reports and/or the corporate website.

The new regulator should focus on the needs of the users of corporate reports, not the preparers of corporate reports.

The Kingman review recommended that the new regulator should engage meaningfully with investors and asset owners about their information needs. Additionally, at least once in every Parliament, the regulator should report on its assessment of the extent to which the statutory reporting framework is serving the interests of users of company reports. This suggests that there could be changes to the statutory reporting framework to better serve the users of corporate reports. It is difficult to tell at this stage how dramatic these changes could be.

The Government, working with the FCA and the new regulator, should consider whether there is a case for strengthening qualitative regulation around a wider range of investor information than is covered by the FRC’s existing corporate reporting work.

Communications materials produced by companies for the investment community extend beyond the annual report and regulatory announcements. Investor presentations are a key communication channel between companies and investors and analysts. They contain information that is used by investors, but is not subject to the same quality control measures and audit and assurance processes that the annual report undergoes. It may be appropriate to create some regulation on disclosures in investor communications materials outside of the annual report. This suggests that the remit of the new regulator could extend further beyond the annual report, potentially having oversight of all investor relations communications materials.

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