Recent UK corporate governance reforms, including the establishment of the Audit, Reporting, and Governance Authority (ARGA), significantly impact outsourcing accounting firms. Controllers and Heads of Reporting play a crucial role in understanding and adapting to these changes.
Transparency and accountability are key focuses, requiring proactive preparation for the evolving regulatory landscape. In this context, the absence of a specified effective date emphasizes the urgency for Controllers and Heads of Reporting to lead their teams in anticipating and aligning with the forthcoming reforms.
In this blog, we are going to discuss this in details because this is not merely compliance; it’s an opportunity to enhance the reputation and effectiveness of outsourcing accounting services through strategic adaptation.
Key Essential Updates in Corporate Governance Reforms for Outsourcing Accounting
The FRC plans to establish voluntary minimum standards for audit committees by holding discussions with stakeholders in the latter half of 2022. These standards are expected to be available for the 2023 financial year ends, with compliance monitoring starting in 2024, pending legislation. The revised Code, open for consultation from Q1 2023, is set to apply to periods starting on or after January 1, 2024.
Strengthening the regulatory framework
1. Introduction of the Audit, Reporting, and Governance Authority (ARGA):
- Concern for the Controller or Head of Reporting: The creation of ARGA signifies a significant shift in regulatory oversight. As a Controller or Head of Reporting, you should be aware that ARGA will play a pivotal role in shaping and enforcing reporting standards.
- Implications: Expect heightened scrutiny and a more robust regulatory environment. ARGA’s establishment suggests a need for a proactive approach in aligning reporting practices with the evolving regulatory landscape.
2. ARGA’s expanded review powers:
- Concern for the Controller or Head of Reporting: The expanded review powers of ARGA, covering the entire annual report, including corporate governance statements, directors’ remuneration, and CEO’s and chairman’s reports, pose a challenge. As a result, the reporting process needs to be more comprehensive and transparent.
- Implications: The reporting team should be prepared for detailed reviews from ARGA, necessitating thorough documentation and adherence to higher standards. The ability of ARGA to publish summary findings without consent adds urgency to maintaining high reporting standards.
Enhancing reporting quality and transparency
1. Changes in the disclosure requirements:
- Concern for the Controller or Head of Reporting: The move beyond minimum disclosure requirements means that companies must aim for more transparent, comprehensive, and robust disclosures. This puts pressure on the reporting team to ensure that disclosures meet these elevated standards.
- Implications: Reporting teams need to reassess their current disclosure practices. There is a need for a shift towards a more detailed and transparent reporting approach, ensuring compliance with the new regulatory expectations.
2. The role of ARGA in enforcing higher reporting standards:
- Concern for the Controller or Head of Reporting: ARGA’s authority to direct changes to companies’ accounts and sanction directors for breaches raises the stakes for reporting teams. Non-compliance may lead to significant consequences.
- Implications: Reporting teams need to collaborate closely to ensure that reporting practices are aligned with ARGA’s expectations. Proactive measures to meet and exceed reporting standards are essential to avoid potential sanctions.
As a Controller or Head of Reporting, the key concerns revolve around adapting to the enhanced regulatory framework and the expanded powers of ARGA. The focus should be on improving reporting quality, transparency, and collaboration within the organization to meet the evolving reporting standards and expectations. The proactive assessment of current processes and collaboration with relevant functions are crucial steps in preparing for these regulatory changes.
Resilience Statement: A Comprehensive Assessment
Overview of the Resilience Statement:
- Concern for the Controller or Head of Reporting: The introduction of the Resilience Statement means that reporting teams will now have to provide a detailed analysis of the risks that could impact the business over the short and medium term. This introduces a new layer of complexity in reporting.
- Implications: The Resilience Statement requires a strategic and thorough assessment of risks, going beyond traditional reporting structures. Reporting teams must be ready to integrate this new requirement seamlessly into their reporting processes.
Reporting on key business risks:
1. Short and medium-term risks:
- Concern for the Controller or Head of Reporting: Assessing risks over different time horizons demands a shift in reporting focus. Reporting teams need to be equipped to evaluate and communicate both short and medium-term risks effectively.
- Implications: The reporting team needs to develop methodologies for identifying, analyzing, and reporting on risks with varying timeframes. This involves a nuanced understanding of the business environment and potential threats.
2. Specific risk factors to be considered:
- Concern for the Controller or Head of Reporting: The requirement to consider specific issues like liquidity and solvency threats, supply chain dependencies, cybersecurity risks, and accounting judgments introduces a need for a more expansive risk management and reporting approach.
- Implications: Reporting teams should collaborate with risk management and other relevant departments to ensure a comprehensive evaluation of specific risk factors. This may require enhanced communication and coordination across different functions.
3. Disclosure requirements and transparency:
- Concern for the Controller or Head of Reporting: The Resilience Statement demands detailed disclosures for each key risk, including likelihood, impact, time-period, and mitigating actions. Achieving this level of transparency may pose a reporting challenge.
- Implications: Reporting teams need to develop clear and concise disclosure frameworks that address each key risk comprehensively. Transparent reporting is crucial to meeting the expectations outlined in the Resilience Statement.
4. The finance and reporting teams’ pivotal role:
- Concern for the Controller or Head of Reporting: The responsibility of preparing a robust Resilience Statement places a significant burden on finance and reporting teams. Coordinated efforts are essential to ensure accuracy and consistency.
- Implications: Finance and reporting teams must collaborate closely to perform thorough risk assessments, scenario testing, and develop effective controls and processes. Consistency in facts and assumptions is critical for a cohesive Resilience Statement.
The Resilience Statement introduces a comprehensive assessment of business risks over different time horizons, requiring a more detailed and transparent reporting approach. Reporting teams must focus on effective collaboration, integration of risk management practices, and the development of clear disclosure frameworks to meet the new transparency requirements outlined in the Resilience Statement.
Distributable Reserves and Dividend Policies | Corporate Governance Reform
1. New requirements for disclosing distributable reserves:
- Concern for the Controller or Head of Reporting: The introduction of requirements to disclose distributable reserves or a ‘not less than figure’ adds a new layer of complexity to financial reporting. Accuracy and transparency in these disclosures become critical.
- Implications: Reporting teams must develop processes to accurately calculate and disclose distributable reserves. This may involve collaboration with other departments to ensure that the disclosed figures are comprehensive and compliant with the new regulations.
2. Encouragement for disclosing dividend-paying capacity:
- Concern for the Controller or Head of Reporting: While not mandatory, the encouragement to disclose the dividend-paying capacity adds an additional dimension to reporting. Determining this capacity requires a comprehensive understanding of the company’s financial position.
- Implications: Reporting teams should work closely with financial planning and analysis teams to assess the dividend-paying capacity. Clear communication of the company’s long-term approach to returns to shareholders, whether through dividends or other means, is crucial.
3. The responsibility of directors in confirming dividend legality:
- Concern for the Controller or Head of Reporting: The explicit requirement for directors to confirm the legality of proposed and paid dividends places a direct responsibility on the reporting teams to ensure accurate reporting of financial positions.
- Implications: Reporting teams must establish robust internal controls and processes to facilitate the confirmation of dividend legality by directors. This involves thorough documentation and communication between reporting and finance teams.
4. Preparing for audits and ensuring accuracy:
- Concern for the Controller or Head of Reporting: With distributable reserves being subject to audit, reporting teams must ensure that these figures are accurate and withstand scrutiny. This requires a focus on audit readiness.
- Implications: Reporting teams should collaborate with auditors to understand the audit process for distributable reserves. Accurate and transparent reporting, backed by well-documented processes, is essential to pass audits successfully.
The new requirements for disclosing distributable reserves and the encouragement for disclosing dividend-paying capacity introduce challenges in financial reporting. Reporting teams must focus on accuracy, transparency, and collaboration with other departments to ensure compliance with these new regulations. Additionally, preparing for audits becomes crucial, and reporting teams should work closely with auditors to facilitate a smooth audit process for distributable reserves.
Additional Reporting Obligations as per Corporate Governance Reform
Audit and Assurance Policy:
1. Explanation of the approach to assurance:
Concern for the Controller or Head of Reporting: The need to explain the approach to assurance over information reported in the front half of annual reports requires a clear understanding and articulation of the company’s assurance policies.
Implications: Reporting teams even Outsourcing one, should collaborate with internal audit functions to clearly articulate the approach to assurance. Transparent communication about the assurance process is vital for stakeholders and compliance with the new reporting obligation.
2. Disclosure of internal auditing and assurance processes:
Concern for the Controller or Head of Reporting: Disclosing internal auditing and assurance processes puts an additional reporting burden on the team. It necessitates comprehensive documentation and communication of these processes.
Implications: Reporting teams need to work closely with internal audit teams to provide detailed disclosures on internal auditing and assurance processes. Collaboration is essential to ensure accurate representation and compliance.
Directors’ Fraud Statement:
1. Actions taken to prevent and detect fraud:
Concern for the Controller or Head of Reporting: Preparing a directors’ fraud statement requires a detailed account of actions taken to prevent and detect fraud. Reporting teams must ensure that these actions are accurately documented.
Implications: Reporting teams need to collaborate with risk management and legal departments to compile a comprehensive directors’ fraud statement. Clear communication of anti-fraud measures is crucial for stakeholder trust.
Statement on Internal Controls:
1. Requirement for an explicit statement on control effectiveness:
Concern for the Controller or Head of Reporting: The explicit requirement for a directors’ statement on the effectiveness of internal controls adds a layer of responsibility to reporting teams. Ensuring accuracy and transparency in this statement is crucial.
Implications: Reporting teams should collaborate closely with internal control functions to provide an explicit statement on control effectiveness. This requires a thorough understanding of internal control processes and effective communication.
Collaborative efforts within the organization:
Concern for the Controller or Head of Reporting: Meeting these additional reporting obligations requires collaboration with various functions within the organization, including internal audit, risk management, and legal teams.
Implications: Reporting teams must establish effective collaboration mechanisms with other functions. Clear communication and coordination are essential to ensure that all reporting obligations are met in a cohesive and accurate manner.
The additional reporting obligations related to audit and assurance policy, directors’ fraud statement, and statement on internal controls place added responsibilities on reporting teams whether in-house or outsourced. Collaboration with internal audit, risk management, and legal departments is crucial for accurate and transparent reporting. Establishing effective communication channels within the organization is essential to meet these obligations in a cohesive manner.
Applicability and Scope of Corporate Governance Reform
Definition of Public Interest Entities (PIEs):
Inclusion of large companies:
- Concern for the Controller or Head of Reporting: The expansion of the definition of PIEs to include large companies with 750 or more employees and a turnover of at least £750m broadens the scope of entities subject to the reforms.
- Implications: Reporting teams need to be aware of the expanded definition to ensure that large companies falling within these thresholds are identified and comply with the specific reporting requirements applicable to PIEs.
Target companies subject to specific reporting requirements:
Employee and turnover thresholds:
- Concern for the Controller or Head of Reporting: The thresholds for employees (750 or more) and annual turnover (£750m or more) determine which companies are subject to specific reporting requirements. This introduces a need for accurate data tracking and monitoring.
- Implications: Reporting teams must work closely with HR and finance departments to monitor and track employee numbers and annual turnover accurately. Compliance with the specific reporting requirements hinges on correctly identifying companies that meet these thresholds.
The importance of understanding the Corporate Governance Reforms’ scope:
- Concern for the Controller or Head of Reporting: Understanding the scope of the Corporate Governance Reforms is crucial to ensuring that the reporting teams focus their efforts on the areas relevant to their company’s classification as a PIE.
- Implications: Reporting teams should invest time in comprehensively understanding the scope of the reforms, including the criteria for PIE classification. This understanding is essential for directing resources efficiently and ensuring compliance with the specific reporting requirements applicable to PIEs.
The reforms’ applicability and scope, particularly the expansion of the definition of PIEs to include large companies, introduce new challenges for reporting teams especially outsourced teams. Accurate identification of companies falling within the employee and turnover thresholds is crucial for compliance. Understanding the scope of the Corporate Governance Reforms is paramount to focusing reporting efforts on areas directly relevant to the company’s classification as a PIE. This necessitates collaboration with HR, finance, and other relevant departments to ensure accurate tracking and monitoring of the necessary criteria.
Preparing for the Corporate Governance Reforms
1. The evolving corporate reporting landscape:
Concern for the Controller or Head of Reporting: The evolving landscape signifies a shift in reporting expectations. Staying abreast of these changes is crucial to ensure proactive compliance and alignment with evolving standards.
Implications: Reporting teams should engage in continuous learning and monitoring of regulatory updates. Staying informed about the changing corporate reporting landscape positions the team to adapt swiftly to new requirements.
2. The absence of an effective date for reforms:
Concern for the Controller or Head of Reporting: The lack of a specified effective date for the Corporate Governance Reforms introduces uncertainty regarding the timeline for implementation. This may impact planning and resource allocation.
Implications: Reporting teams need to adopt a flexible approach to readiness, understanding that preparation is an ongoing process. Establishing a framework that can be adapted based on the eventual effective date is essential.
3. The opportunity for strategic reassessment:
- Concern for the Controller or Head of Reporting: While compliance is a priority, the reforms offer an opportunity for a broader strategic reassessment of business models, risks, governance, and reporting practices.
- Implications: Reporting teams should work collaboratively with leadership to leverage the Corporate Governance Reforms as a chance to reassess and enhance strategic elements of reporting. This involves aligning reporting practices with broader business goals.
4. Assessing current processes and reporting:
- Concern for the Controller or Head of Reporting: A thorough evaluation of existing processes is crucial to identify gaps and areas that need enhancement for compliance with the new reporting requirements.
- Implications: Reporting teams must conduct a comprehensive assessment of current reporting processes, identifying strengths and weaknesses. This evaluation serves as a foundation for developing an effective plan for compliance.
5. Developing a plan for transparent, integrated, and holistic reporting:
- Concern for the Controller or Head of Reporting: Achieving the new standards requires a well-structured plan that addresses the need for transparent, integrated, and holistic reporting.
- Implications: Reporting teams should collaboratively develop a strategic plan that outlines specific actions and timelines. The plan should address the need for transparency, integration of new requirements, and a holistic approach to reporting.
6. Collaboration with other business functions:
- Concern for the Controller or Head of Reporting: The success of implementing reforms hinges on effective collaboration with other business functions, including finance, risk management, and internal audit.
- Implications: Reporting teams must establish communication channels and collaboration frameworks with other functions. Clear coordination ensures that reporting aligns seamlessly with other business processes.
Preparing for the Corporate Governance Reforms requires a proactive and strategic approach. Staying informed about the evolving corporate reporting landscape, reassessing strategies, and collaborating with other functions are essential steps. Despite the absence of a specified effective date, Outsourced as well as In-house reporting teams should continually assess and enhance current processes, developing a well-structured plan that aligns with the principles of transparent, integrated, and holistic reporting.
Conclusion
The recent corporate governance reforms in the UK usher in a transformative era for reporting standards, marked by heightened transparency requirements and the establishment of the Audit, Reporting, and Governance Authority (ARGA). The impact of these reforms is extensive, introducing new reporting obligations such as the Resilience Statement and disclosures on distributable reserves.
Key Takeaways:
- Controller and Reporting Heads’ Crucial Role: Controllers and Heads of Reporting are pivotal in guiding their in-house as well as outsourced teams through the reforms, ensuring compliance, and leading the development of transparent reporting practices. Collaboration with other functions is integral for cohesive reporting.
- Proactive Preparation and Strategic Alignment: With no specified effective date for the reforms, proactive preparation is imperative. This period offers a unique opportunity for strategic reassessment, aligning reporting practices with broader business goals.
- Continuous Monitoring and Seeking Guidance: Staying informed about the evolving corporate reporting landscape is essential. Seeking guidance from experts can provide valuable insights for effective interpretation and implementation of the reforms.
As Controllers and Reporting Heads, initiate proactive measures within your teams. Assess current reporting processes, collaborate with other functions, and develop a strategic plan for transparent and holistic reporting.
Stay informed about regulatory updates and seek expert guidance to navigate the complexities of the evolving landscape successfully. This is not just compliance; it’s an opportunity to enhance your reporting practices and contribute strategically to your organization’s success!
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