On Wednesday, my Survey of International Business Issues and the City of London class visited the Financial Reporting Council (FRC). I am very excited to be one of the two site leads for this visit.
Initially, I did not know much about who the FRC is or what they do. After doing some research, I learned quite a bit. By definition, the FRC “regulates auditors, accountants and actuaries in the public interest by setting high standards of corporate governance, reporting and audit and by holding to account those responsible for delivering them.”
In our presentation to our class, my partner first covered what the FRC does, what they are committed to, and how they are structured. Here are some of the key things he highlighted: The FRC “monitors and takes enforcement action where things do go wrong to ensure the proper operation of the market and confidence in the UK economy and the UK’s international reputation as a great place to do business.” In simpler terms, the FRC serves the public by regulating financial reporting, creating guidelines for businesses to follow with their financial reporting, and acting as a disciplinary force when these guidelines are not taken into account. They are committed to five main goals: the creation of the Audit, Reporting and Governance Authority (ARGA), protecting and improving audit and reporting quality, making company reporting fit for the future, supporting the creation of the audit of the future, and ensuring that the UK Corporate Governance and Stewardship Codes make the UK a great place to do business. These commitments emphasize the dedication the FRC has to best serve UK citizens and companies.
The FRC is structured into 4 divisions: regulatory standards, supervision, enforcement, and corporate services. Each of these serves a different yet vital purpose within the FRC. Overall, the FRC’s work in financial reporting matters as it regulates and governs one of the most important sectors of our daily lives, although many may not realize it.
After the introduction to the FRC, I provided our class with some details of current events/ other information I found interesting within the FRC. Upon my first google search into the true purpose of the FRC, I came across a very interesting and inspiring article. Published in October 2020, the FRC advertises a thought leadership paper titled “A Matter of Principles: The Future of Corporate Reporting” that primarily proposes a new financial reporting model developed on a principles-based framework for corporate reporting as a whole. The article dives into how technology has transformed people’s relationship with information, and that we must “recognize the importance of regulation in a more flexible and responsive system.” This paper was written amidst the COVID-19 pandemic and makes me wonder if this thought paper would have received any support without the struggles of remote working in this time. Some external research leads me to believe the thought paper was widely supported by the public, specifically in the proposed areas of accommodating interests of investors and other stakeholders, new reporting network, a digital first initiative, and the standardization of non-financial reporting.
Speaking of non-financial reporting, the thing that interested me the most was the FRC’s work on Environmental, Social, and Governance (ESG) and Climate related reporting. While this is a pressing issue brought to light primarily by people in my generation, I was shocked to see the FRC had an entire page and several articles and statements regarding these things. I informed my class of this topic by splitting it into two sections. First, I discussed the Climate Thematic Review on the FRC website. Briefly summarized, this review addresses the issue of companies being held accountable for the way in which they report their impact on climate. Companies are encouraged to consider both direct and indirect effects of their operations on climate change. An example provided of this would be through valuation of assets or depreciation rates. This is not something I have heard any companies in the US discuss, so I find it very inspiring that the UK is requiring that companies discuss this. Second, I discussed the Environmental, Social, and Governance Statement of Intent on the FRC Website. In brief, this statement of intent encourages the public and companies to understand how the actions of companies affect the societies in which they operate. Examples of this listed were understanding how companies operate, how they report on ESG, and how they are addressing this impact. Overall, this was my favorite part of my research done on the FRC. These topics are crucial to consider today and I am very pleased by the work the FRC has already done to hold companies accountable in non-financial reporting, and how they will do so moving forward.
An edit after our visit:
I am very grateful to have met with Phil Fitz-Gerald, Andrew Hyland, and Kefei Wu, three members of the FRC’s ‘Lab’ on our visit. We began the visit with an overview of the FRC and compared it to the counterparts in the US. I was surprised by the differences in regulation and enforcement in the FRC; in areas I thought would be enforced by them, it was not enforced, but in other areas where It thought an outside group would enforce it, the FRC did.
One of our main points of discussion was the ESG reporting. I was fascinated by everything they shared on this since this was where my primary research was completed. However, the most intriguing thing was about a new project the Lab is working on with Cyber, Digital, and Data risk. They fielded our questions about what we think companies do with our data, how they report it, and how digitalization changes the role of the FRC. Overall, the FRC were great hosts to us and gave an intriguing and inspiring presentation. I am very grateful I had the opportunity to represent Pitt here.