Press Release

The FRC’s approach to internal reporting is pragmatic, says ABI

The pragmatic approach to reporting by companies of their internal controls announced today by the Financial Reporting Council is sensible says the ABI (Association of British Insurers).  But the ABI warned that its effectiveness may be diminished by harsh EU legislative requirements contained in the Statutory Audit Directive reminiscent of the US Sarbanes Oxley Act.

The FRC has today published the conclusions of its review of the Turnbull Guidance on what companies should disclose about their internal controls and risk management processes. The guidance relies on a non-prescriptive best practice approach, with companies expected to disclose on their approach to all risks, not just financial ones as in the US. The ABI supports the decision to continue with this approach.

"The Turnbull approach to disclosure on risk management has led boards to focus on this issue and to a discernible improvement in the way companies manage their risks," said Peter Montagnon, Director of Investment Affairs at the ABI. "We think the UK is right to continue with a principles-based approach covering a wide range of risks rather than a rules-based approach to disclosure covering only financial disclosure as in the US.

"But we are acutely worried that this pragmatic approach will be overridden by prescriptive requirements coming in from Brussels. These would impose on audit committees a statutory requirement to monitor the effectiveness of internal controls. Moving this requirement from best practice into statute brings us closer to Sarbanes Oxley. It would create a large burden of compliance and potential liability, which will shift the focus away from the substantive issue or risk management. We are worried that it would ultimately deter qualified people from wishing to sit on audit committees."

The European Parliament's Legal Affairs Committee is due to vote on this proposal next week.