Research by the Investment Association, a UK professional body for fund managers, finds that only 8% of FTSE 100 companies could “adequately” demonstrate how they assessed the quality of their audits, a drop from 20% in 2021.
The news comes as rumblings of discontent continue among practitioners and observers that the government has still to follow through on recommendations to reform the audit market, firms and the content of audits despite a review project being under way since the collapse of Carillion, the construction company, in 2018.
The IA also says the coming AGM season will see fund managers focused on climate reporting and diversity issues. Executive pay will also remain a hot topic.
According to Andrew Ninian, stewardship director at the IA: “Investment managers want to work together with companies to see them succeed and deliver long-term value to their shareholders, which ultimately benefits pensions and householders across the UK. This is particularly important in the current economic environment given the challenges that companies face.”
January may have marked five years since the collapse of Carillion but important decisions and legislation are still to be introduced to continue with an audit reform project that has included parliamentary reports, government-ordered reviews and a white paper.
A firm line
This week, Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, complained publicly that continuing delays to audit reform could cause would-be investors in the UK to go elsewhere. He told City AM: “It just feels that someone needs to grab this by the scruff of the neck and move forward,” he said.
There is good news elsewhere. The IA says companies have improved reporting against Task Force on Climate-related Financial Disclosures (TCFD) guidelines, as companies are coming to terms with new rules to use the disclosure scheme on a “comply or explain” basis.
In 2022, 98.8% of companies made disclosures “consistent” with all four segments of TCFD reporting, compared with 88% in 2021. However, it’s not all good news. While 51.8% of the FTSE 100 do include an impact statement, the IA says the number is “still quite low”. And where financial impacts are included in accounts, “the audit committee rarely made a statement to confirm this”.
When it comes to diversity, more than a fifth of the FTSE 100 companies received a “red” flag for having executive committees with a lack of gender diversity—33%, or less, of the board. That is an increase on the 17% in 2021.
Seven companies, the IA found, failed to have at least one board member from an ethnic minority, as recommended by the Parker Review.