The role of NEDs in financial reporting and auditing
Timely and accurate disclosure enables stakeholders, for example investors, to make informed economic decisions. Furthermore, it enables companies to demonstrate their disciplined and rigorous approach towards corporate information, which may help gain confidence among those who invest.
Directors should be aware of their responsibility for corporate reporting and ensure that the board collectively possesses the right mix of background and competencies. This is particularly relevant for the audit committee - one of board committees that many governance codes around the world specifically require.
Why the board oversight matters
In reality, company law, including that in the UK, often requires that the board take responsibility for overseeing the reporting process and for ensuring appropriate internal controls over the reporting process are in place. It also needs to ensure that what is reported reflect the performance, position and future prospects of the company.
‘What makes company reporting credible is the recognition that the board is responsible for the oversight’, says Yen-Pei Chen, subject manager in corporate reporting and tax at ACCA. ‘Because they are more independent from the day-to-day operations of the financial reporting process, they are in a position to have a high-level view. With years of experience in management and in some cases equipped with financial skills, the oversight from board members can signal the quality of corporate reporting.’
‘The audit committee normally requires a member with recent financial and auditing knowledge, therefore if there is a professional accountant on the committee, shareholders are likely to turn to that person as the source of that knowledge’, adds Andrew Gambier, head of audit and assurance, ACCA. ‘Even if you are not on the audit committee, or are on the board of an entity that does not have an audit committee, external stakeholders, for example shareholders, would still expect to you to be the one to challenge what executives do and ensure that they are not going off the rails. They would also expect you to have challenged the auditors to ensure that they have provided a high quality of audit.’
Narrative about the business position, performance and its future
‘While they are not expected to be involved in accounting as such, it is important to stay up to date about legal development and emerging practice in corporate reporting. An example of this is narrative reporting’, says Yen-Pei.
Today, there is growing recognition that financial information tells only a part (albeit a very important part) of the story about the company. Companies have a whole range of impact on stakeholders, starting from shareholders but also including others in their supply chain: employees, customers, suppliers, and the communities where they operate. How companies capture the impact of their activities within the organisation, up and down the supply chain and beyond, is becoming important.
The calls for more information have come from the public, pressure groups and the media, and the regulators are responding to the team by introducing new requirements for more disclosure. For example, the EU has adopted the Non-Financial Reporting Directive, which will be transposed into member states’ national law from January 2017. This directly affects large listed companies, but other companies that think ahead are preparing for the future scenario when their larger customers may start to demand relevant information.
‘There is also a business case. Taking a comprehensive, holistic view of the company’s activities can help the board to assess how effectively the company is employing finite resources’, says Yen-Pei. Similar development is happening not just in Europe but also in South Africa, Singapore and Japan, where more and more companies are turning their attention to non-financial information, either in response to mandatory reporting regulation or voluntarily.
While non-financial information supplied alongside the financial statement is not directly part of the audit, there are other ways to get comfort over its quality. ‘When information is going into the annual report, you as an NED would want to challenge the integrity of the information because, later on, shareholders will be looking at you for having made that challenge’, says Andrew. This may involve the integrity of the information contained in the annual report as a whole.
Why does it matter to NEDs or the audit committee? ‘It matters because it is part of the audit. Auditors are required to communicate with the audit committee, or its equivalent, as the audit progresses. They will be coming to the audit committee to ask questions about what process the company had gone through to assure themselves. But this gives an opportunity for the audit committee to obtain whatever assurance they need from the work of auditors.’
‘It is also worth mentioning ISA 720, the international auditing standard on the auditor’s responsibilities relating to other information, which requires that information supplied alongside financial statements be reviewed by the auditor. This implies two things: firstly, when they are looking through that information, they need to consider whether there is anything in the information that sheds a new light on audit, and if there is, what work the auditor has to do. For example, if there is a disclosure on legal compliance regarding the working conditions of employees, there should be corresponding numbers somewhere in the annual report. Then the auditor has to think whether there is more work to do and what evidence to gather.
‘The second thing that the auditor needs to do is to look for a related disclosure if they have identified certain numbers in the financial statements. If they don’t see it, they will be asking why.’
Getting an assurance report is just one way of enhancing the quality of non-financial information. Yen-Pei adds that: ‘disclosing how the board has made the decision as to what information to report on and how they have prioritised the information reflects their strategic thinking. Providing some narrative about the thought process over such decisions can add credibility to the information itself.’
Financial and non-financial information are very different. But the rigour in the approach to capturing relevant information and reporting on it, doing their utmost to ensure that information is as free from error as possible – this is no different from the discipline applied in the preparation of financial information.
Keeping abreast of developments
Are there any tips to help aspiring NEDs to stay abreast of developments in reporting, auditing and other regulatory requirements? ‘Reading the accounting and finance press is useful, and ACCA’s AB magazine is an example. The Accountancy Futures journal is good for emerging topics. Some accountancy and law firms also publish webinars and fact sheets for public use, and these can be useful. It is important to find reliable sources of information, then you can use social media to ensure that you receive notifications as and when important developments are in the pipeline’, says Yen-Pei. Andrew agrees. ‘A key source for any professional accountant should be their professional body. They should find a source of information, as well as technical resources’
About the authors
Andrew is head of audit and assurance within the Professional Insights team of ACCA. He leads ACCA's policy on audit and assurance matters, including professional insights publications and responses to consultations. He provides technical support to the representatives on the International Auditing and Assurance Standards Board and the Audit and Assurance Working Group of the European Federation of Accountants' (FEE). He also represents ACCA on IAASB and environmental and sustainability assurance working parties.
Andrew trained as an auditor with KPMG and has 10 years' worth of experience of auditing listed companies in both the UK and US.
Professional Insights ensures that ACCA leads thinking, influences public policy and shapes business practice on key issues affecting the accountancy and finance profession.
Yen-pei is a qualified accountant and works in the Professional Insights team of ACCA. Her role focuses on influencing policy on tax, corporate reporting and integrated reporting. This is done through carrying out research on technical issues and work with policymakers, including HMRC, FRC and the UK government, as well as the EU Commission and the OECD. To support ACCA’s policy positions, she convenes ACCA’s Global Forum for Taxation, UK Tax Committee and the Global Forum for Corporate Reporting.
This article is part of ACCA's NED and trustee advice series
ACCA accountants have a key role to play as NEDs and trustees across all sectors - public, private and voluntary - as they can contribute hugely to ensuring viability and good stewardship of assets. The ACCA Professional Insights team has developed this series of articles to help ACCA members become NEDs or trustees in what can be a challenging process. So whether you are a senior manager looking to further your career or are considering giving something back, our series of articles will give you the advice you need to help you find your feet.
If you found this article interesting please read some of the others in our series:
- Cyber security for non-executives
- The six conversations every board should be having
- Ethical requirements for non-executive directors and trustees
- Who can be a NED or trustee?
- How to become a NED
- What are board committees and their functions?
Or watch the videos in our series:
- How to become an NED by Japheth Katto
- How to become an NED by Paul Tsang
- Board diversity in Norway by Turid Solvang
If you are interested in finding an NED or trustee role why not start by searching ACCA Careers Job Board for relevant positions.