Company directors should “think twice,” before issuing dividends once proposed new reporting requirements come into force, according to an expert observer.
Speaking in a Board Agenda podcast, Steve Brice, partner and head of accounting technical services at Mazars, was reflecting on the implications of proposals that would see boards make disclosures about dividends and their effect on company solvency.
He said companies would have to calculate their distributable reserves with a lot more accuracy and warned that disclosures would be audited.
“Think twice before making a dividend, making sure it is the responsible thing for your business when you make that decision. And make sure you’ve done the analysis to support that decision,” he told the Board Agenda podcast.
The proposals come as part of a host of measures set out in a government white paper, Restoring Trust in Audit and Corporate Governance, which aims to improve risk management.
The paper proposes companies reveal “the total amount of reserves that are distributable”, with parent companies offering an estimate of reserves available across group structures. The other major change is a proposal asking directors to declare that any proposed dividend will not in their “reasonable expectation” threaten the solvency of their companies.
There are other major risk management measures proposed in the white paper, including asking directors to review and make a statement on the “effectiveness” of their internal controls. Directors will need to report the benchmarks they use and how they have “assured themselves that it is appropriate to make the statement”.
Matt Dalton, a partner in risk assurance services and leader of the FTSE 350 team at Mazars, says for many companies the new internal controls regime will mean a substantial piece of work examining the numbers produced for annual reports and understanding the controls that produced them.
“It’s really going to be up to board members to put together process documentation, start testing controls and provide assurance. And that assurance has to be put in your annual report.
“There’s a lot of work in the background to really understand what gaps you’ve currently got in your control framework, how you start remediating those controls and …making sure you’ve got a really strong integrated assurance framework.”
You can listen to the full podcast here.