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Watchdog finds accounts lacking

Friday, 21 September 2007

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Four company-specific press notices were issued in the year under review, all of which related to annual accounts prepared under UK GAAP. Four Panel Groups were set up in the period, one to consider matters arising under IFRS which is now concluded and three under UK GAAP, one of which is continuing.

Management judgement

Of the 135 companies who were approached by the Panel to clarify aspects of their financial reporting, 94 gave an undertaking to improve their financial reporting in at least one area in future.

Improvements and corrections agreed with companies ranged across applicable reporting standards under both reporting frameworks. Standards that gave rise to most questions about potential non-compliance fell into two categories.

First, those that deal with more complex matters where management judgement is important. These areas tend to be the same under IFRS and UK GAAP; for example, impairment testing, pensions and provisioning.

Second, those international requirements that do not have a parallel under UK GAAP and which therefore presented new challenges to preparers in terms of application and disclosure; for example, IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.

The Panel’s review of 16 banks reporting under IFRS focused particularly on implementation of IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, IAS 32, Financial Instruments: Disclosure and Presentation and IAS 39, Financial Instruments: Recognition and Measurement. These reviews identified a good level of compliance with these standards and with IFRS in general. Issues raised with companies indicated a need for refinement of disclosures rather than significant changes to accounting treatments.

Improvement in key areas

The Panel’s targeted review of pension disclosures in 30 companies’ accounts showed a good degree of compliance with the detailed disclosure requirements of IAS 19 and FRS 17. The areas of disclosure that could be improved were published in a report in August 2006 which also drew attention to common disclosure omissions. A follow-up review of the same companies’ 2006 IFRS pension disclosures has shown improvement in key areas – notably disclosure of mortality assumptions and of key estimates and
sensitivity analysis.

The Financial Reporting Review Panel (FRRP) is part of the Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy & Actuarial Discipline Board) and by the Council. The Committee on Corporate Governance, whose members are drawn from the Council, assists it in its work on corporate governance.

The role of the Panel is to examine the annual accounts of public and large private companies to see whether they comply with the requirements of the Companies Act 1985, including applicable accounting standards. Following implementation of the Accounting Regulation (EC) No. 1606/2002, this may mean compliance with UK or International Financial Reporting Standards.

Where breaches of the Act are discovered the Panel seeks to take corrective action that is proportionate to the nature and effect of the defects, taking account of market and user needs. Where a company’s accounts are defective in a material respect the Panel will, wherever possible, try to secure their revision by voluntary means, but if this approach fails the Panel is empowered to make an application to the court under section 245B of the Companies Act 1985 for an order for revision. To date no court applications have been made.

During the year, four companies were named and shamed by the Panel for their accounting methods: Inveresk for the treatment of a land sale, Eurovestech for wrongly invoking the "true and fair" override, Highams over "fair" share valuations in connection with an acquisition, and Sanctuary Group for revised accounting policies that were found to be corrections of fundamental errors in earlier accounts.

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