Governance and Regulatory Spotlight October 2024

Welcome to the October edition of our Regulatory and Governance Spotlight. With summer well and truly behind us, we hope you’ve dug out your woolly jumpers ready for autumn.

Governance and reporting updates

Audit committees and internal audit

We have published a jurisdiction-agnostic audit committee guide intended to practically support audit committees of public companies in understanding expectations and fulfilling their responsibilities effectively. We have also localised it for use in the UK.

The UK government’s plans to tackle late payments may mean that UK audit committees have additional responsibilities soon. In order to reduce late payments to small businesses and the self-employed, the UK government plans to introduce a Fair Payments Code (to replace the Prompt Payments Code); introduce new legislation to require large businesses (defined as those meeting at least two of the following criteria: a turnover of £36 million or above, a balance sheet total of £18 million or above, or more than 250 employees) to include payment reporting in their annual reports; consult on the role of external audit and audit committees; and step up its enforcement in respect of existing late payment performance reporting regulations which currently require large business to report on a government web service.

Another development audit committees should be aware of is that the Chartered Institute of Internal Auditors (CIIA) recently revised its Code of Practice (the Code), with changes set to take effect in January 2025. The Code has been aligned with international standards and the 2024 UK Corporate Governance Code and now applies to all internal audit functions in companies outside of the public sector.

The changes encourage: 

► Internal audit functions to address a spectrum of risks. As companies revisit their principal and emerging risks, the Risk in Focus report, authored by the Institute of Internal Auditors with contributions from the CIIA, may prove useful. This report provides internal auditors with data-driven insights into risk trends, based on global surveys and regional discussions.

► Internal audit functions to support board disclosures on material controls, in line with the 2024 UK Corporate Governance Code, through assessments of risk management and internal controls.

► Audit committee reports within the annual report to disclose, amongst other matters, the impact and effectiveness of internal audit function. This aligns with the recommendations in our recent publication to provide details on the work of internal audit including the level of assurance provided by the different types of activities undertaken, and how this contributes to the overall confidence the board has in the organisation's risk management and internal control framework.

Annual Review of Corporate Reporting by the Financial Reporting Council (FRC) 

Amongst other findings pertaining to financial reporting, the FRC’s Annual Review of Corporate Reporting emphasises the importance of narrative reporting that is fair, balanced, and comprehensive. Companies are reminded to provide a strategic report that covers both the positive and negative aspects of their performance, articulates the impact of economic uncertainty, and explains significant financial movements, in line with Companies Act 2006.

Green Spotlight

The FRC’s Corporate Reporting Review positively observes that compliance issues amongst commercial-listed companies with the Task Force on Climate-related Financial Disclosures (TCFD) framework are relatively few but notes that improvements can be made with respect to the clarity of statements regarding consistency with the TCFD framework.

Climate reporting has made it into the FRC’s ‘top ten’ list and this year it will review the extent of compliance with the new Companies Act 2006 Climate-related Financial Disclosure (CFD) requirements; monitor the extent to which material information about the effects of climate change is incorporated into the financial statements; and review the balance between the emphasis on climate related matters in narrative reporting versus financial reporting.

As the scrutiny over sustainability claims continues to evolve, the Financial Conduct Authority (FCA) has acknowledged challenges faced by some firms preparing the necessary disclosures for the “naming and marketing” rules within its Sustainability Disclosure Requirements. As a result, temporary measures have been announced, extending the compliance deadline from 2 December 2024 to 2 April 2025. Firms with a sustainability product which is a UK-authorised investment fund and meeting specific criteria will have until 1 October 2024, to submit applications for approval of amended disclosures. 

Diversity, equity and inclusion

Chapter 2 of our recent publication Reframing the governance narrative covers the changes to the 2024 UK Corporate Governance Code with respect to reporting on diversity and inclusion (D&I) initiatives. This includes our views on what makes for a good, outcome-oriented narrative, drawing on reporting examples from 2023 annual reports.

Companies may also find the report Flying Flags and Ticking Boxes, published by Diversity by Design, useful. It contains useful takeaways for businesses to ensure that D&I initiatives go beyond symbolism, promote true diversity of thought, foster true inclusion rather than inadvertent division, are evidence and data-led, and remain connected to overall business objectives. Similarly, the new Equality and Human Rights Commission guidance for employers on facilitating hybrid working for disabled employees can be a reference point for inclusion initiatives beyond the more commonly addressed areas of sex and ethnicity.

Calling company secretaries of PLCs – attend our forum on Thursday 21 November If you are a company secretary of a UK PLC, please register to attend our in-person event on Thursday, 21 November, 9:00 a.m. to 1:00 p.m. in our EY London office. As well as having an opportunity to network, you will hear from a range of subject matter experts on latest developments in corporate governance and narrative reporting, AGMs and the reform of Companies House.

Please get in touch for help with governance or narrative reporting matters. If your colleagues would like to subscribe to this e-bulletin, please share this form. Best wishes,

Mala and Maria

EY Regulatory and Public Policy team

Contacts

Mala Shah-Coulon Associate Partner Ernst and Young LLP +44 (0)20 7951 0355 mshahcoulon@uk.ey.com

Maria Kepa Director Ernst and Young LLP

+44 (0)20 7951 8164

mkepa@uk.ey.com