The Financial Reporting Council’s (FRC) proposed changes to the UK Corporate Governance Code (the Code), represent a fundamental shift in how UK listed companies will be expected to manage and conduct assurance. The proposed changes to the Code (set to be in effect from 1 January 2025), which have gained crossbench support, bring to focus two key changes in relation to verification:

1. Narrative Reporting, notably the new language relating to Audit, Risk and Internal Control, which, if implemented, clarifies the importance of fully corroborating all aspects of market statements (both narrative and financial); and
2. The Role of the Audit Committee, which, if implemented, will add the obligation to fully and effectively explain how the company verifies statements contained in market statements.    

While many companies in the UK already adopt a rigorous approach, these proposed changes are designed to bring more uniformity to the way in which assurance and verification is conducted across the market. As the FRC’s Head of Corporate Governance Maureen Beresford explains, “We really want companies to give us transparency, and these explanations are so important to investors and wider stakeholders.” 

Narrative reporting takes centre stage

Narratives are an important commodity, particularly when it comes to sustainability measures, social issues, and internal controls. As the Code consultation states, “We know from stakeholder engagement that narrative reporting increasingly includes materially important information… which is used by investors for capital allocation decisions.” In line with this, the draft legislation proposes “replacing the word ‘financial [reporting] with ‘reporting’”.

This is a material change. It means that companies will need to develop comprehensive strategies for verifying narrative reporting alongside financial reporting, to guarantee the integrity of the narrative elements of all market statements. The challenge for governance professionals is that this will not be easily achieved using old fashioned assurance methods involving dozens of emails, unnavigable spreadsheets, drafting (rather than verification) focused platforms and a number of responsible parties (both internal and external). A more collaborative and streamlined approach is required, which allows professionals from across the business to add their supporting evidence to statements, which can then be signed off by management and ultimately the Audit Committee.

The growing role of audit committees

Narrative verification is poised to become even more central to the work of audit committees. Under proposed changes to company law, they will not only have to monitor narrative integrity, but report on how the committee itself is reviewing and developing its internal reporting controls on an ongoing basis.

Pursuant to the amendments, companies will be required to develop a triennial audit and assurance policy that explains how the company proposes to assure its narrative reporting over the next three years. According to the draft legislation, a company in scope will need to report on: 

1. How it is “proposing to strengthen its internal audit and assurance capabilities.”
2. Its “plans for obtaining internal assurance over annual accounts and reports.” 
3. “How the company has implemented its audit and assurance policy.” 

To adapt to these changes, companies in scope will need to think about what changes are needed to their approach to assurance and reporting. With an expected implementation date of 1 January 2025, companies are likely to want to start work now on identifying what changes they might need to make, so they have time to implement them. Gold standard compliance will depend on ensuring that there is a detailed explanation and robust references in relation to material narrative statements in market disclosures. A comprehensive record of these notes should also be reviewed and approved by a company’s audit committee.

Streamline verification processes to stay ahead of the game

The proposed changes indicate an increased workload for teams, and narrative verification can come with unique demands. The pressures of the modern regulatory environment have made antiquated verification and assurance methods defunct.

According to FRC’s Executive Director of Regulatory Standards Mark Babington, there is a direct relationship between internal processes and the quality of reported data: “We have found in our work [that] companies that are well-governed… produce higher-quality reporting; they produce better information.”

Companies who act now to improve their internal assurance policies will be best placed to communicate these policies effectively when this becomes mandated. Improving internal verification processes will also have a direct impact on the quality of companies’ narrative reporting. “The challenge for companies now is not more information, it’s better information,” says Babington, “One of the consequences of better information is it lends itself better to assurance, which underpins public confidence.”

Getting processes in place now, rather than waiting for the changes to come into effect, allows time for new processes to bed in, ensures reporting processes are best practice by the time of implementation and so helps to minimise risk. As the world’s leading verification platform, Atticus is well placed to enable governance professionals to navigate through these complex requirements by enabling better collaboration, deeper reviews and more accurate reports while saving valuable time.

As Paddy Skinner, General Manager of Atticus (UK & Europe) says:

“We have seen first-hand how UK listed companies are verifying more and more of their disclosures due to an increase in regulatory queries and investigations, shareholder activism and press scrutiny. It has been apparent for a while that the old-fashioned approach of “personal responsibility” when it comes to the ownership and verification of disclosures is a thing of the past and the proposed changes to the Code go some way to developing best practices.”

For more information please contact [email protected].

This post has been edited and updated on October 17, 2023, following the UK Government’s announcement withdrawing draft regulations. This followed consultation with companies that raised concerns about imposing additional reporting requirements. The proposed changes to the Code, in relation to smarter regulation for narrative regulation, are still relevant to our corporate customers.