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27 September, 2023

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Government reveals resilience disclosure rules

by Gavin Hinks on July 21, 2023

The detail of the new regulations has been fleshed out—and could catch many more companies than expected.

resilience statement

Image: BotondHorvath/Shutterstock.com

The government has released final details of the new corporate disclosure rules that will replace the “going concern” and viability statements, with experts observing that many more companies may now be caught by the new regulations.

All public companies, listed or not, and private companies with turnovers of £750m or more and more than 750 employees will be caught by the new rules, which demand that directors report on the ability of their companies to continue as a going concern over the “short”, “medium” and “long term”.

Companies must also produce an audit and assurance policy document every three years. This must detail information on how accounts receive assurance and whether there are plans to strengthen internal audit and assurance capabilities.

The new rules come as part of efforts to bolster UK audit and risk management following a number of corporate scandals, including the collapse of construction giant Carillion in 2018.

The reform agenda, after much debate and anticipation, has recently picked up steam. The Financial Reporting Council (FRC) released new standards for audit committee members in May, while the watchdog is also consulting on a review of corporate governance that makes changes to expectations for internal controls.

According to Carolyn Clarke, founder of the risk consultancy Brave, the new resilience statement will mean “additional companies” will be drawn into considering risks beyond the old “going concern” report requirement of 12 months.

Companies will have to assess “known and unknown” risks, as they consider how they will “remain resilient”.

The new regime, she says, “acknowledges that directors cannot force or describe the specific nature of every risk so they must be comfortable they have the agility and mechanisms to respond appropriately”.

She adds that resilience reporting will require companies to “invest more time in understanding the linkage between risk and responses”.

The rules, she says, put the emphasis on companies working out which risks demand close monitoring.

Reports on risk and resilience

Companies will, under the new rules, need to: summarise their “strategic approach” to managing and remaining resilient; describe their principal risks; describe their reasons for making a going concern statement; provide an assessment of the company’s “prospects” over the medium term; undertake and report on reverse testing exercises; and offer a report on the “long term” trends that could “threaten the company’s business model or operations”.

The government is leaving companies to “determine” what medium and long term mean in their business sector and markets.

The three-yearly audit and assurance policy must be published, along with any plans for beefing up internal audit over the following three years. The audit and assurance policy must go through an annual update.

Boards must also make annual policy statements on dividends and share buybacks.

The Chartered Institute of Internal Auditors said the new requirement “in effect enshrines internal audit into UK legislation and would encourage more companies to have an internal audit capability”.

New guidelines setting minimum standards for audit committees were released by the FRC in May, telling FTSE 350 companies that they could not “preclude” challenger firms (non-Big Four firms) from consideration for their audit contracts. Audit committees must also report on how they have assessed the “independence” of their auditors.

The FRC has also launched a review of the UK Corporate Governance Code, with proposals intended to boost the role of internal controls. The new proposals say boards “should establish and maintain an effective risk management and internal control framework…”. The provision will be subject to the “comply or explain” principle, an obligation that carries much less force than writing responsibilities into law.

After a long time waiting, reforms are now coming through to UK financial reporting. The resilience report will be a major piece of work for boards and is set to provide stakeholders with important new information.

Mike Suffield, director of policy and insights at ACCA, a professional accountancy body, says none of the new measures are complex, though additional guidance expected from the FRC will be useful. However, he adds that the measures will “involve important areas for judgement for companies and their boards”.

He adds that the rule should produce welcome new insights “but that will require investors and other stakeholders to engage with the additional information that will be made available, and use it to hold companies and their boards to account for their performance.”

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For thoughtful journalism, expert insights on corporate governance and an extensive library of reports, guides and tools to help boards and directors navigate the complexities of their roles, subscribe to Board Agenda

accounts, audit, audit reform, Brave, Carolyn Clarke, Chartered Institute of Internal Auditors, corporate disclosure, corporate disclosure regulations, corporate disclosure rules, corporate governance, corporate reporting, Financial Reporting Council, going concern, governance, internal audit, resilience statement, risk management, UK Corporate Governance Code

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