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The FRC’s Corporate Governance Review: What You Need to Know

In May 2023, the Financial Reporting Council (FRC) published its consultation on the UK’s Corporate Governance Code. The consultation set out proposals for legislative and governance reforms which will be implemented to the Code as the FRC transitions to the Audit, Reporting, and Governance Authority (ARGA) by 2024. 

The UK government initiated the Code review to strengthen the country’s governance and audit frameworks – and consequently encourage investment and growth across the country.  The reform effort is often described as ‘UK SOX’ thanks to its similarity to the US’ Sarbanes-Oxley Act – SOX Act – which was implemented in 2002 to address a series of high profile financial scandals and control failures. 

The government’s push for reform is likely to have a significant impact on the accounting industry. FloQast research in 2023 revealed that up to 60% of accounting professionals are unsure whether their company has sufficient resources to support control and compliance, while 70% reported that their control framework was not fully automated to meet the demands of the changing compliance landscape.   

As the consultation proposals are implemented over the coming years, it’s important that company directors and employees understand how the Code will change, and how that will affect their compliance responsibilities. 

What is the UK’s Corporate Governance Code?

Published in its current form in 2018, the UK Corporate Governance Code is a set of principles that company directors must apply to their businesses in order to promote good governance, serve the interests of their employees and shareholders, ensure transparency and accountability, and ultimately reduce the risk of corporate scandal. Overseen by the FRC, the Code sets out expected standards of conduct for company leadership, including establishing and aligning the company’s purpose and values, and leading with integrity. 

The Code allows for companies to either “comply or explain” their adherence. In practice, this means that companies may take alternative approaches to the relevant standards, if they can demonstrate that doing so is more beneficial to good governance. 

2023 Consultation Proposals 

The FRC consultation on the UK Corporate Governance Code included the following key proposals: 

• A greater focus on environmental, social, and governance (ESG) factors, including new requirements for sustainability disclosures and clarification of the role of the new audit committee.  
• Requirements for an Audit & Assurance Policy (AAP) and company Resilience Statement. 
• New disclosure requirements to address investor concerns about director over-boarding.  
• Increased transparency about the company’s succession process and the appointment of senior employees, including diversity and inclusion considerations. 
• Increased board accountability for the company’s risk and internal control framework, including an explicit board declaration on the effectiveness of those systems.
• New malus and clawback arrangement disclosures. 

New ESG Obligations: 

The proposals reflect the increased importance of ESG factors to good governance, and the role that corporate leadership will play in sustainability efforts. The details of the ESG-related proposals include:

• A requirement to consider ESG matters when assessing how the company generates value. 
• An audit committee responsibility to monitor “the integrity of narrative reporting, including sustainability matters”. 
• A requirement for the audit committee to comment, in the annual report, on how the company addressed ESG concerns.
• An assessment of whether company remuneration levels are aligned to long-term delivery of ESG objectives. 

Audit Assurance Policy: 

The FRC included the AAP in its list of proposals as a way for companies to demonstrate that they are obtaining effective assurance on their statutory and voluntary disclosures – beyond those required by the annual audit.  

The AAP will be the responsibility of the audit committee and should include:

• Details of the independent assurance that the company will apply to their reports in the next three years – as that relates to the Resilience Statement, and to the internal controls framework. 
• A description of the company’s internal audit and assurance processes, including how the processes can be challenged and verified, and how they will be improved over the next three years.   
• A description of company policies for tendering external audit services. 
• An explanation of how shareholders and employees have been able to play a part in the development of the AAP. 

Key Control Changes

Beyond a new focus on ESG factors, the FRC’s proposals emphasise the strengthening of corporate risk management and internal controls, including audit controls. Key highlights of the control changes include:

Focus on controls: The scope of the new Corporate Governance Code will extend beyond financial controls, and refocus the term “material controls” to include “operational, reporting, and compliance” controls. The shift will allow for an emphasis on new control areas, such as sustainability reporting. 

Board accountability: Central to the new Corporate Governance Code is the idea of board accountability for internal control frameworks. In practice, the Code will require boards to make the following statements and declarations: 

• A statement about the effectiveness of risk management and internal controls. 
• An evidence-based explanation for that statement. 
• A statement describing control weaknesses or failures, and details of actions being taken to address those issues (within a given timeframe). 

Audit committees: The new Code will require companies to introduce audit committees that will monitor the integrity of new reporting obligations, including the focus on sustainability. The committees will also review any significant reporting judgements. 

How to Prepare for the New UK Corporate Governance Code

The FRC has indicated that the new Corporate Governance Code will come into effect on 1 January 2025 – and apply to accounting periods that commence on or after that date. Companies with year ends in December therefore have less than 18 months to review their existing Code compliance and make necessary adjustments or remediations in order to transform their control framework.  

The preparation process should include the following steps and measures: 

• Prepare a brief on the FRC consultation for the board and audit committee, including the company’s current compliance posture and any changes that need to be implemented. 
• Survey the board to determine whether the company will need to respond to questions and issues raised in the FRC consultation. The deadline for comments is 13 September 2023.
• Perform an assessment of the company’s current controls to gauge compatibility with the new Code. 
• Depending on the results of the control assessment, draw up any requirements for control updates, including necessary resources. 

Companies that have not already begun their control transformation should move quickly to ensure they meet the 2025 deadline. Depending on current control infrastructure, the transformation process may represent a significant administrative burden, and require the attention and focus of leadership executives. 

FloQast Compliance Solutions

Get ahead of your new obligations under the UK Corporate Governance Code with industry-leading accounting compliance software. Delivering automated speed and efficiency, FloQast regtech solutions integrate accounting controls with workflows, building cutting-edge compliance into day-to-day tasks, and ensuring that your organisation is ready to meet its challenges in a changing regulatory environment.  

To learn more about our UK Corporate Governance Code solutions, get in touch with us today. 

Hugh O'Neill

Hugh O'Neill is a Chartered Accountant and Senior Sales Engineer based in the UK. Prior to joining FloQast, Hugh served in several senior accounting and financial operations positions.