AIM Audit Committees: The growing scope of responsibility
AIM Audit Committees: The growing scope of responsibility
My roles at BDO require me to interact regularly with Audit Committees and Audit Committee Chairs. During the second half of 2023 the majority of conversations with Audit Committees, and notably their Chairs, were dominated by discussion about the growing scope of responsibilities falling on Audit Committees. My belief is that corporate governance reform, and/or the uncertainty in relation to it, was the catalyst for these discussions.
In November 2023, following the King’s Speech, some certainty was delivered when aspects of these reforms were shelved. However, the FRC confirmed it will continue to push through proposed changes around internal controls in the UK Corporate Governance Code.
In recent years corporate governance reform is just one of the changes that has driven Audit Committee ‘scope creep’. Audit Committees now oversee Annual Reports covering areas of disclosure and reporting that extend far beyond their historical core responsibility of financial reporting and audit oversight. It could be argued that this started with the requirement to make a s172 statement in a company’s Strategic Report, but this has been surpassed by climate disclosures from Streamlined Energy and Carbon Reporting (SECR) to the Task Force on Climate-related Financial Disclosures (TCFD). Then followed the need to address the broader topic of Environmental, Social, and Corporate Governance (ESG). The backdrop to this scope creep has also been coloured by the heightened risk landscape facing UK PLCs: from the pandemic to cyber risk, to geopolitical uncertainty, and through to economic challenges of rising inflation and interest rates.
The QCA report notes that across the UK market, the average page length of Annual Reports rose from 134 in 2017 to 173 in 2022, an increase of 33%. For FTSE 100 companies, the average report page length stood at 237, while the figure for AIM companies was 101.
Such reporting requires Audit Committee review, oversight and most importantly, a recommendation to the Board for approval. This adds to the workload and diligence required by the Audit Committee.
Our research also showed that 14% of the AIM 100 companies used the UK Corporate Governance Code putting them in scope for future changes on internal controls.
Whilst I am supportive of the junior market being less burdensome than a main market listing, and Audit Committee scope being commensurate with the risk, the following comment may seem at odds with this. If you attach the need for strong governance with the level of public interest, and if you use market capitalisation as a proxy measure of public interest, an argument could be made for more AIM companies to be using the UK Corporate Governance Code.
Our research showed that, based on market capitalisation, there were 31 AIM companies with a market capitalisation exceeding the FTSE 250 entry market capitalisation. Of this 31 only eight were using UK Corporate Governance Code. I believe the remaining 23 Audit Committees could be subject to challenge on the code they adopt.
Legislators and regulators must balance red tape, driving trust and market competitiveness. Audit Committees and UK PLCs must have a voice and, importantly, use it as this debate moves forward.
In the meantime, our research suggests more AIM company Audit Committees could seek support from separate ESG/Sustainability Committees and even more of these companies could consider through which governance structure they manage risk.
For more information contact Leighton Thomas.
1. https://www.theqca.com/press-releases/press-release-annual-reports-never-ending-story/
2. As of 28 November 2023, and utilising the most recently publicly available Annual Report
In November 2023, following the King’s Speech, some certainty was delivered when aspects of these reforms were shelved. However, the FRC confirmed it will continue to push through proposed changes around internal controls in the UK Corporate Governance Code.
In recent years corporate governance reform is just one of the changes that has driven Audit Committee ‘scope creep’. Audit Committees now oversee Annual Reports covering areas of disclosure and reporting that extend far beyond their historical core responsibility of financial reporting and audit oversight. It could be argued that this started with the requirement to make a s172 statement in a company’s Strategic Report, but this has been surpassed by climate disclosures from Streamlined Energy and Carbon Reporting (SECR) to the Task Force on Climate-related Financial Disclosures (TCFD). Then followed the need to address the broader topic of Environmental, Social, and Corporate Governance (ESG). The backdrop to this scope creep has also been coloured by the heightened risk landscape facing UK PLCs: from the pandemic to cyber risk, to geopolitical uncertainty, and through to economic challenges of rising inflation and interest rates.
Length of Annual Reports
The expanded scope for Audit Committees can be best illustrated by the length of Annual Reports. In 2023, the Quoted Companies Alliance (QCA) issued research¹ showing the average word count grew by 46% over five years, hitting 95,000 words and 173 pages (longer than George Orwell’s 1984 or Jane Austen’s Persuasion).The QCA report notes that across the UK market, the average page length of Annual Reports rose from 134 in 2017 to 173 in 2022, an increase of 33%. For FTSE 100 companies, the average report page length stood at 237, while the figure for AIM companies was 101.
Such reporting requires Audit Committee review, oversight and most importantly, a recommendation to the Board for approval. This adds to the workload and diligence required by the Audit Committee.
Corporate Governance
Since 2018, AIM companies have been required to apply a recognised corporate governance code. The most widely adopted and used code for AIM companies is the QCA Corporate Governance Code. In our research², 81% of the AIM 100 companies used the QCA code.Our research also showed that 14% of the AIM 100 companies used the UK Corporate Governance Code putting them in scope for future changes on internal controls.
Whilst I am supportive of the junior market being less burdensome than a main market listing, and Audit Committee scope being commensurate with the risk, the following comment may seem at odds with this. If you attach the need for strong governance with the level of public interest, and if you use market capitalisation as a proxy measure of public interest, an argument could be made for more AIM companies to be using the UK Corporate Governance Code.
Our research showed that, based on market capitalisation, there were 31 AIM companies with a market capitalisation exceeding the FTSE 250 entry market capitalisation. Of this 31 only eight were using UK Corporate Governance Code. I believe the remaining 23 Audit Committees could be subject to challenge on the code they adopt.
Managing ESG
In researching this topic, I was intrigued as to how Audit Committees manage the ESG agenda, and the specialist skills required to support and review the necessary disclosures. Our research showed 49% of AIM 100 companies had a separate ESG or Sustainability Committee. In doing so, these companies, and more importantly, the Audit Committees of these companies, are spreading the workload in terms of responsibility, specialist skills and external reporting.Managing Risk
Our research also showed 22% of AIM 100 companies had a separate Risk Committee: another way Audit Committees are spreading their workload. Having spoken to several Non-Executive Directors (including Chairs), I have garnered that they see benefits from segregating risk from the Audit Committee. This includes driving greater ‘Executive ownership’ for risk, and ensuring risk is focused as much on commercial risk, as on financial reporting risk. This is shown by several Risk Committees being chaired by a member of the Executive and supported by Non-Executive members.So, what does this all mean?
The growth in Annual Reports, and therefore more qualitative and non-financial quantitative reporting, is undeniable and unavoidable. This has a direct correlation with Audit Committee responsibility. In my opinion, corporate governance reform, in a post Carillion and Patisserie Valerie world, must be delivered: but in a measured and proportionate manner.Legislators and regulators must balance red tape, driving trust and market competitiveness. Audit Committees and UK PLCs must have a voice and, importantly, use it as this debate moves forward.
In the meantime, our research suggests more AIM company Audit Committees could seek support from separate ESG/Sustainability Committees and even more of these companies could consider through which governance structure they manage risk.
For more information contact Leighton Thomas.
1. https://www.theqca.com/press-releases/press-release-annual-reports-never-ending-story/
2. As of 28 November 2023, and utilising the most recently publicly available Annual Report