189053 ACI QUARTERLY 28 2 web - KPMG in India

Audit Committee Institute Sponsored by KPMG

Quarterly 28

Never surprise the audit committee The Carbon Reduction Commitment Energy Efficiency Scheme Ownership of governance, risk and compliance role is unclear, according to a KPMG survey How sustainable is a cost reduced business model? FSA gets tough in its adoption of the Walker Review Proposed changes to enhance governance in UK businesses FRC consults on Stewardship Code for Institutional Investors The Professional Oversight Board publishes reports on the AIU’s inspections for 2008/09

2 Audit Committee Institute

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About the Audit Committee Institute Recognising the importance of audit committees, the Audit Committee Institute (ACI) has been created to serve audit committee members and help them to adapt to their changing role. Sponsored by KPMG, the ACI provides knowledge to audit committee members and is a resource to which they can turn for information or to share knowledge.

For more information on the work of the ACI please click on our web site www.kpmg.co.uk/kpmg/aci/index.cfm or contact:

Timothy Copnell Associate Partner Audit Committee Institute KPMG LLP (UK) 1-2 Dorset Rise London EC4Y 8EN

Tel: 020 7694 8855 e-Mail: [email protected]

© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

mailto:[email protected]

http://www.kpmg.co.uk/kpmg/aci/index.cfm


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Contents

Introduction 4

Never surprise the audit committee 6

The CRC (Carbon Reduction Commitment) Energy Efficiency Scheme – KPMG’s Carbon Advisory Group 10

Ownership of governance, risk and compliance role is unclear, according to a KPMG survey 14

How sustainable is a cost reduced business model? 16

FSA gets tough in its adoption of the Walker Review 18

Proposed changes to enhance governance in UK businesses – The UK Corporate Governance Code 20

FRC consults on Stewardship Code for Institutional Investors 22

The Professional Oversight Board publishes reports on the Audit Inspections Unit’s (AIU) inspections for 2008/09 23

Financial reporting update 24


Audit Committee Institute

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Introduction



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Welcome to the twenty eighth edition of the UK Audit Committee Institute Quarterly, the publication designed to help keep audit committee members abreast of regulatory matters, company law, accounting and audit issues and changes in the corporate governance arena.

In this issue of the ACI Quarterly Marcel Niggebrugge, CFO, De Nederlandse Spoorwegen and Arnout van der Veer, Chief Risk Officer, Reed Elsevier, discuss their working relationship with their respective audit committees. In our next article KPMG’s Carbon Advisory Group give an overview of the Carbon Reduction Commitment Energy Efficiency Scheme.

Next we present the key findings from The Convergence Challenge, a survey conducted by the Economist Intelligence Unit on behalf of KPMG International. Further articles include: a discussion on how sustainable cost reduced business models are; the FSA’s implementation of the Walker Review and the FRC’s proposed changes to the Combined Code.

We have also included a brief overview of: the FRC’s consultation on the Stewardship Code for Institutional Investors; and the Audit Inspection Unit’s report on its review of audits conducted by major firms. This edition of the Quarterly finishes with our regular financial reporting update.

I encourage all readers to support the ACI. We each fulfil our own role, but by working together to raise awareness and share knowledge we can all help ensure we adopt leading practice in our roles as audit committee members.

I hope this publication serves its intended purpose of briefing you on the important developments affecting your role as an audit committee member. If you require further information, the ACI web site (www.kpmg.co.uk/aci/index.cfm) provides additional information, including the previous editions of the UK ACI Quarterly, and other useful publications, surveys and information. Q28

Oliver Tant Head of Audit KPMG in the UK


http://www.kpmg.co.uk/aci/index.cfm


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Never surprise the audit committee



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“ We want to make sure never to surprise the supervisory [main] board or the audit committee.”

A good and clear working relationship between the CFO, the internal auditor and the audit committee is an important factor in the quality of corporate governance. Marcel Niggebrugge, CFO of De Nederlandse Spoorwegen, and Arnout van der Veer, Chief Risk Officer of Reed Elsevier, explain to Ben van der Veer how they work together with their respective audit committees. They agree that management should do its best to provide information as complete and timely as possible.

An important aspect of the governance structure in a large company is the way the audit committee and management work together. Audit committees work best when they are kept well informed by their CFOs and, in return, constructively challenge and support him. The relationship between the CFO and the audit committee, particularly the chair, should be one of trust and mutual respect.

Similar relationships between the audit committee and the internal and external auditor also enhance effectiveness. “As CFO I see it as my task to inform the audit committee about the state of affairs in our company in a transparent and thorough way,” says Marcel Niggebrugge. Being a member of the executive board Niggebrugge is also responsible for a business unit, legal affairs, participations and IT. In his capacity as CFO he is in close contact with the audit committee chairman and the company secretary. Together they prepare the agenda of the audit committee meetings, which contains regularly returning items like the annual budget, the management letter, fiscal affairs and treasury.



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In the present economic situation, risk appetite proves to be a particularly

important and sensitive subject.

Quality of internal audit

Another important role in the connection between management and oversight is played by the head of risk management. Arnout van der Veer, the Chief Risk Officer of Reed Elsevier, is an auditor by profession and has been working at the international publishing company for eight years now. He is responsible for risk management and has a formal reporting line with the chairman of the audit committee. “In the one tier board structure of Reed Elsevier, responsibility for risk management lies with the board, with an important advisory function for the chairman of the audit committee. Increasingly, the executives propose certain risk management topics for separate discussion with the board. In the present economic situation, risk appetite proves to be a particularly important and sensitive subject.”

Niggebrugge and Van der Veer are always present at the audit committee meetings of their respective companies. At Reed Elsevier, the CFO and the company secretary prepare the agenda of the audit committee meetings together with the audit committee chairman, but Van der Veer is also involved in the selection of the topics. There are five meetings per year; in January and February the annual figures are on the agenda and in June there is an interim meeting. The half year results are discussed in the July meeting and in November there is another interim update.

De Nederlandse Spoorwegen has officially three meetings per year, but occasionally ad hoc meetings are added. “I used to be the only executive board member present at the meetings, but since a couple of years ago the CEO also attends. The reason is that increasingly topics that are discussed in the meetings involve the whole company. The head of internal audit is also present at all audit committee meetings, so he can speak directly with the audit committee chairman. There is no formal reporting line between internal audit and the audit committee.”

No PowerPoint presentations

At the audit committee meetings PowerPoint presentations are never used, say Niggebrugge and Van der Veer. “We prefer to have open discussions based on well prepared documents,” says Niggebrugge. “Presentations are often rather schematic and rigid. I think the point of having separate meetings about financial and risk topics is to provide the opportunity to go deeper. Discussions also provide more flexibility than presentations; some topics can be concluded within minutes, others take much longer. Sometimes the audit committee decides to devote a separate meeting to a particularly complex subject and sometimes I bring an expert to give a presentation.”

According to Van der Veer, discussions based on documents instead of detailed presentations also allow management to discuss certain topics rather than put them to the audit committee in writing. “Because Reed Elsevier is listed in the US, we have to observe certain disclosure requirements that force us to be prudent in the ways we present information.” Niggebrugge and Van der Veer agree that management should do its best to provide information as complete and timely as possible. “We want to make sure never to surprise the supervisory board or the audit committee,” says Niggebrugge. “That is not always easy, because topics for discussion can come up unexpectedly.”

In recent years the work of the audit committee has become more complex, Niggebrugge and Van der Veer agree. This applies not only to typical audit committee topics such as financial accounting, financial instruments and risk management, Van der Veer notes. “Our company has evolved from a traditional publisher of journals, magazines and newspapers into an online information company. Board members, especially the non executives, must be thoroughly aware of their expertise and find out whether they need extra education. At Reed Elsevier, the number of people who are ‘internet literate’ has increased. Sometimes we meet on a business location to get more feeling when we discuss certain complex subjects.”



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Workload heavier

Niggebrugge admits that the audit committee agenda has the tendency to become heavier, but he believes this also depends on how the audit committee handles the subjects on the agenda. “In my opinion the audit committee should stay with its advisory role to the supervisory board as much as possible. So it’s the supervisory board that decides which subjects are assigned to the audit committee. Take information technology, for example, which has become very important for De Nederlandse Spoorwegen, as for all modern companies. The audit committee should limit the discussion to the financial aspects, because the main discussion on IT has to take place in the supervisory [main] board meeting.”

Van der Veer points to another aspect of the increasing role for board committees. “When a subject is completely delegated to a board committee, it can become unclear who is responsible for the outcome of the discussion and for the content of the final decision. Then you run the risk that an audit committee becomes part of management. Reed Elsevier is currently going through a large investment programme in new technology. The audit committee looks at the financial side of the project, but the strategic discussion takes place in the board.” He adds that risk management occupies an increasing share of the audit committee’s agenda time. “We are now looking whether

risk management can remain part of the audit committee’s responsibility or we should give risk management more dedicated focus.”

Beside the audit committee meetings where the CFO and the internal auditor are present, the audit committee also meets once a year on its own. There are also separate meetings with the external auditor without the presence of management. In spite of the formal ways in which the relationships between executives, audit committee and internal audit are organised, informal contact remains important. “There is no standard arrangement for one-one-ones between the audit committee chair and myself, but we can talk on the phone anytime,” says Niggebrugge. “And right before or after the audit committee meeting itself we talk for half an hour or so.”

Demands on oversight

During their long experience with audit committees Niggebrugge and Van der veer have seen rising demands on the role of oversight, coming from shareholders and regulators. On the one hand this trend has caused audit committees to strengthen their financial expertise, Niggebrugge notes. “I think we will need more financial experts on audit committees in the future. On the other hand, I wonder where this trend will end. There is a limit to what supervisory boards and audit committees can do and I doubt whether they can meet

the ever rising expectations of the outside world.”

Van der Veer believes there has not been an increase in responsibilities for audit committees but there has bee an increase in workload. “I think supervisory boards and non executives will ask their organisations to manage things better and give them the room they need to perform their oversight duties.” He also sees pressure from external regulation increasing, which in part accounts for the growing importance of the audit committee in the corporate governance practice. “I think external supervisors should take their responsibility and organise effective, efficient and simple regulations, instead of expecting everything from internal oversight. The value of the audit committee lies in discussing the content, not the formalities.” Q28

Article from the ACI in the Netherlands



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The CRC (Carbon Reduction Commitment)Energy Efficiency Scheme KPMG’s Carbon Advisory Group

11

What is it?

The CRC is a mandatory cap-and-trade scheme for emissions, targeted at large organisations in the non-energy intensive sector in the UK.

The Government estimates that the CRC sector represents 10 percent of the UK’s emissions at 51 million tonnes of CO annually. The scheme ²aims to give incentives to improve energy efficiency by directly rewarding energy savings. Mandatory energy record keeping will also highlight saving opportunities. The Government expects to achieve an annual saving of 4.4 million tonnes of CO by 2020 ²through the scheme.

It is anticipated that 5,000 organisations as diverse as banks, supermarkets, cinemas, hotels and local authorities will be required to participate but another 20,000 may have to register.

If your organisation spends £1m or more on electricity in the UK annually the CRC probably requires you to:

• Measure your energy usage.

• Report to Government on that usage.

• Pay for the carbon emissions your energy creates.

• Be publicly ranked on your performance.

Recent changes to the scheme have greatly reduced the initial cash flow impact of the scheme. The impact on the bottom line for most organisations is relatively small.

However, KPMG’s Carbon Advisory Groups’ work with clients has shown that the risks to reputation and the compliance burden posed by the need to provide accurate data to Government auditors are concerning many organisations.

The Government has estimated that the net present value to the scheme’s participants will be £755m. They forecast that this positive value will be realised through energy savings.

To realise these savings you will need to ensure you have the skills to implement the required energy saving measures, and an effective approach to carbon management. From October 2011, a Government published league table will recognise best performers while naming and shaming the worst.

What are some of the risks of

the CRC?

Leading organisations began to prepare for the CRC in 2009. They have already recognised they have a number of key risks to manage:

• Organisations with many sites and multiple utility suppliers will have much greater risk of error in their data systems.

• Landlords/tenants will have to determine responsibility for paying for carbon by reviewing contracts. The cost of carbon paid for by tenants or subtenants can be affected by organisations outside of their control.

• Private equity houses and those organisations that regularly buy or sell entities risk significant fluctuations in the cost of carbon,


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The risks to reputation and the compliance burden posed by the need to provide accurate data to Government auditors are concerning many organisations.



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with the actions of the fund/parent affecting the costs of carbon for all portfolio companies.

• Organisations that grow organically could see the cost of carbon rise as they expand.

• Non-UK owned organisations, particularly those with multiple sister companies in the UK, will have to participate as one entity and will need to develop systems for allocating costs.

• Organisations whose year end is between April and October will have challenges determining the cost of carbon to recognise in the accounts as the refund of spend on allowances in April (based on league table performance) is not determined until the October league table is published.

As a participant what do I really

need to do?

The legislation will drive change in organisations. Some are mandatory, whilst others are encouraged for those organisations who wish to perform well in the scheme:

• Participation is at a top-co level. Non-UK organisations must nominate a responsible UK subsidiary. For Private Equity, uniquely, the top-co is likely to be the fund.

• Include all companies and investments that are greater than 50 percent owned by the TopCo or fund and those over which you have control. This can include entities such as University spin off companies and ‘golden share’ investments.

The responsibility for complying with the requirements of the CRC is not just constrained to the energy or

environmental team.



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• Determine total electricity usage through HHMs (half-hourly meters) in 2008, register for the scheme, if you have at least one meter, and begin to participate if you cross the usage threshold of 6000MWH through half hourly meters.

• Pay for every tonne of carbon emitted from energy use in buildings, and build this into accounts, budgets and investment decisions from April 2011.

• Forecast carbon allowance for at least 12 months ahead of every April from 2011.

• Develop systems to track actual usage vs budgeted allowances.

• Have a director sign off on reported carbon numbers.

• Publicly disclose information on carbon management within your organisation.

• Keep records for five years to allow Government auditors to challenge your compliance when required.

• Consider carbon pricing in future business investment and strategies.

When should I start to prepare?

The CRC starts in April 2010 but KPMG’s Carbon Advisory Groups’ practical experience indicates that it takes several months to develop the systems, skills and coordination required to respond effectively.

The Government is relying on participants to self register for the scheme and fines for non compliance are deliberately heavy. Participants are expected to understand the scheme

and register correctly. Late registration incurs an automatic fine.

The responsibility for complying with the requirements of the CRC is not just constrained to the energy or environmental team. Experience indicates that finance, estates, legal, procurement, audit and many other functions all need to be involved early in preparation.

How do I calculate my

consumption?

Energy consumption will be calculated from all fixed point direct and indirect energy use emissions. This means any fossil fuels burnt on site, for example oil or gas fired heating, back-up generators and even calor gas, as well as grid electricity. It does not include transport emissions for licensed vehicles but does include some on-site transport such as conveyors and fork lift trucks.

Only grid electricity through HHMs and other half hourly measuring AMR will be used to determine whether you are included in the scheme. But it is important to note that once you are taking part your emissions will be calculated from your total energy use, taking many more sources into account.

For each energy source the Government will give you a multiplier to indicate the tonnage of CO² per unit of power consumed for that source. You can then calculate your total emissions. Example multipliers are already available from DEFRA.

Exemptions

In general, emissions which already fall under the scope of the EU Emissions Trading Scheme (EU ETS) or Climate

Change Agreements (CCAs) will be exempt from inclusion in the CRC. It must be emphasised that it is emissions and not organisations which are exempted.

EU ETS emissions are specific to installations and industries. This means that an organisation which falls under the EU ETC may still qualify or the CRC if its non-EU ETS activities use sufficient electricity through half hourly meters.

Emissions covered by CCAs will be exempt from consideration in the same way except where 25 percent or more of an organisation’s emissions are covered by CCAs. In this case the organisation will be completely exempted from participation in the CRC.

What next?

KPMG’s Carbon Advisory Group is currently working with public and private sector organisations to help them understand the impact of this new legislation. They can help you:

• Determine if you qualify.

• Review systems to provide confidence and recommendations for improvement.

• Model the financial impact of variable carbon pricing.

• Understand timing of investments to realise maximum value.

For further information you can visit KPMG’s Carbon Advisory Group web site http://www. kpmgcarbonadvisory.com/ or contact Lynton Richmond at lynton.richmond@ kpmg.co.uk Q28



http://www.kpmgcarbonadvisory.com/

http://www.kpmgcarbonadvisory.com/



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Ownership of governance, risk and compliance role is unclear, according to a KPMG survey


Nearly half of companies do not have full clarity about who in their organisation is in charge of governance, risk and compliance (GRC), according to a survey “The Convergence Challenge” by KPMG International and the Economist Intelligence Unit. The survey examines how organisations are converging their GRC activities to reduce overall business complexity and their exposure to risk.


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The key driving forces behind the convergence push are executive management (56 percent) and regulators (45 percent). Only 17 percent cited non executive directors as a key driving force – a surprising finding considering how crucial it is for them to have a complete overview of risk in their organisation.

Half of the respondents estimate that governance, risk and compliance convergence activities cost as much as five percent of their total annual revenues, while 77 percent expect it to increase over the next two years. This figure rises in the financial services sector to 88 percent.

The key benefit of GRC convergence for respondents was the ability to identify and manage risks more quickly (59 percent); while only 39 percent of respondents said improved performance.

Tim Copnell, Associate Partner, The ACI in the UK, comments: “Convergence governance, risk and compliance activities and structures should be a real priority for corporates. But in our experience, business leaders have often taken a ‘bolt-on’ and siloed approach to dealing with new regulatory requirements and other initiatives as they emerge. Increased complexity and inefficiencies are the inevitable consequences.”

“Direction needs to come right from the top – at CEO or CFO level. In today’s environment, convergence

of GRC is too important a subject for any ambiguity to be tolerated. Without clear direction and accountability, businesses can be left exposed to a variety of risks.”

Against this backdrop, the survey found that companies do appear keen to rationalise the various strands of GRC activity, but only 11 percent of respondents have so far managed to do so.

Clearly many respondents agree that GRC convergence is a priority, but the task itself is seen as a challenging one with 45 percent of respondents finding it difficult to build a business case for greater convergence. Whilst only 26 percent of respondents believe that convergence will help to bring down associated costs; and only a third, see GRC expenditure as an investment rather than a cost.

Tim Copnell concludes: “GRC convergence can be a way of reducing complexity, clarifying accountability and improving efficiency within a business but it can also be a tool for providing management with information which, in turn, can improve performance and decision making across the organisation. Convincing businesses to see the performance benefits of such a convergence programme remains a key challenge.”

For the full report please visit: http:// rd.kpmg.co.uk/mediareleases/20230. htm Q28

In today’s environment, convergence of GRC is too important a subject for any ambiguity to be tolerated. Without clear direction and accountability, businesses can be left exposed to a variety of risks.


http://rd.kpmg.co.uk/mediareleases/20230.htm



How sustainable is a cost reduced business model?

As expected, cost cutting has been a key response of many companies to the economic crisis: with revenue growth flat or negative, there hasn’t been much choice. In fact, while more than 70 percent of S&P 500 companies beat earnings expectations in the third quarter, analysts said it was mainly the result of heavy cost-cutting and not revenue growth.

From reductions in marketing, sales force and IT, to steep curbs on travel and face-to-face meetings, cost-cutting has been deep and wide – and not necessarily strategic. Unlike previous recessions – in which companies implemented temporary cost reductions for six to twelve months, followed by a return to business as usual – current cost reductions appear to be long-term, perhaps permanent, as companies anticipate lower economic growth rates for the foreseeable future.

A key consideration for every audit committee and board is whether these cost reductions, often coupled with corporate restructurings and reorganisations, can be sustained. Can this new ‘cost-reduced’ business model be sustained both to survive the economic trough experienced by some lines of business, as well as to make



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the most of opportunities for growth in other parts of the business?

Here are some pivotal questions for directors to think about – and discuss with management:

• Are the company’s revenues down (or flat), while earnings are up? How much further can revenues decline without impacting earnings?

• Did we cut too much? Have parts of the infrastructure been impacted too severely?

• What systematic changes – e.g., span of control, business processes, technology – have been made to the organisation to make the cost reductions sustainable? Have we modified policies and operating procedures to accommodate these changes?

• Do we have sufficient flexibility in the delivery model to respond to changing markets and customer demands? Do we have essential infrastructure in place? How quickly can we ramp up and restore critical infrastructure?

• How far have we extended the organisation through outsourcing and off-shoring? How well have we managed the extended organisation? How well have we managed key supplier and vendor relationships – and monitored quality and compliance risks? How global were the cost reductions and how do the reductions impact our controls in local markets?

• How has the company treated its employees? How do they think they’ve been treated?

• How has cost cutting affected succession and our pipeline of future leaders?

For audit committees, the economic downturn, coupled with cost reductions and the pressures on management to achieve operating results, may require heightened awareness of critical compliance and control issues.

According to KPMG Forensic’s 2009 Fraud Survey, nearly two-thirds of executives say that fraud and misconduct – including financial reporting fraud, illegal acts and misappropriation of assets – poses a significant risk today, and a similar number say that their companies’ internal controls or compliance programs may be inadequate. Similarly, audit committees need to probe whether cost reductions and layoffs adversely affect the company’s internal controls more generally, and whether the company’s compliance resources are adequate. Given the global expansion of so many companies in recent years, Foreign Corrupt Practices Act risk – and the risks associated with foreign corruption more generally – is a key area of focus.

As companies cut costs and implement workforce reductions, the control environment becomes even more important – and the role of internal audit becomes more critical. Now is not the time to reduce internal audit’s budget. In fact, more internal audit resources may need to be devoted to fraud mitigation and the company’s international activities.

Monitoring the impact of cost reductions should be high on the board’s agenda and boards need to consider whether the company’s delivery model has changed permanently. How have finance and operations been impacted? How has the company’s risk profile changed? Do we have the right leaders to move the business forward? Business as usual has a new meaning today – with important implications for audit committee and board oversight. Q28

Article by Mary Pat McCarthy, US vice chair, KPMG LLP and executive director of the ACI in the US and Lawrence S. Raff, KPMG in the US



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FSA gets tough in its adoption of the Walker Review


The Financial Services Authority (FSA) issued a Consultation Paper (CP 10/03) on 28 January titled Effective corporate governance (significant influence controlled functions and the Walker Review). The paper asks for comments on the FSA’s proposals on the implementation of some of Walker’s recommendations.

Commenting on the FSA’s announcement on how it will translate the Walker Review into tangible rule changes, Marcus Sephton, head of regulatory services at KPMG said:

“This sends a clear message to the industry that the FSA means business. Their proposals are consistent with those of Sir David Walker in his review – but are even wider-reaching in that they put heavy emphasis on personal accountability at senior levels and extend to institutions and individuals that were not encompassed by the review. Some aspects will even extend to foreign holding companies that own UK-based regulated companies.

“The FSA is putting personal accountability firmly at the heart of its approach. The proposals will ensure that non executives who act as chairmen of key committees will be subjected to the rigours of the approval regime and will be challenged during the supervisory review process.

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“The proposals also show the FSA increasing their requirements and expectations of Chief Risk Officers and risk control functions. The FSA has indicated here that its approach towards testing the effectiveness of governance within firms will be accorded a high level of priority.

“The new proposals reintroduce specific Controlled Functions for Finance, Risk and Internal Audit which were removed as part of the FSA’s earlier tidying up of the categories of Controlled Function – the FSA now recognise the importance of these roles and wish to ensure that they are able to control who takes on those responsibilities within firms.

“The FSA clearly expect that as part of the application for an individual to exercise a Controlled Function, they will hold the relevant firm responsible for explaining the governance structure surrounding that individual and why the firm believes the


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individual is appropriate to take on that role - individuals will find their interviews and the review of their case more challenging without clear and persuasive explanations of these issues from the firm.”

To view the consultation paper visit http://www.fsa.gov.uk/pubs/cp/cp10_ 03.pdf Q28


http://www.fsa.gov.uk/pubs/cp/cp10_03.pdf



Proposed changes to enhance governancein UK businesses – The UK Corporate Governance Code



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The financial crisis has necessitated a close look at the way in which UK companies are governed. At the end of November 2009, the Walker Review issued its final recommendations for the governance of banks. Several weeks later on 1 December 2009, the Financial Reporting Council issued its proposed changes to what is now called “The UK Corporate Governance Code.”

Main proposals

• To enhance accountability to shareholders, the FRC proposes either the annual re-election of the chairman or the whole board.

• To ensure the board is well balanced and challenging, new principles are put forward on the leadership of the chairman, the roles, skills and independence of non executive directors and their level of time commitment.

• To enhance the board’s performance and awareness of its strengths and weaknesses, board evaluation reviews should be facilitated at least every three years and the chairman should hold regular development reviews with each director.

• To improve risk management, new principles are proposed on the board’s responsibility for handling risk.

• Proposals are also made to emphasise that performance related pay should be aligned to the long term interests of the company and its policy on risk.

Proposed changes to provisions

The FRC proposes a small number of new provisions, which will be subject to the ‘comply or explain’ requirements in the Listing Rules. These are:

• The chairman should agree and regularly review a personalised approach to training and development with each new director.

• Evaluation of the board should be externally facilitated at least every three years, and any other connections between external consultants and the company disclosed.

• The board should satisfy itself that appropriate systems are in place to identify, evaluate and manage the significant risks faced by the company.

• The annual report should include an explanation of the company’s business model and overall financial strategy.

Next steps

The consultation process closed on 5 March. The new Code will apply to accounting periods on or after 29 June 2010.

Further information

For a commentary on the proposed changes you can download the ACI document by visiting www.kpmg. co.uk/aci. The full report issued by the FRC can be found at www.frc.org.uk/ press/pub2175 Q28


http://www.kpmg.co.uk/aci

http://www.kpmg.co.uk/aci

http://www.frc.org.uk/press/pub2175

http://www.frc.org.uk/press/pub2175


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Q28

FRC consults on Stewardship Code for Institutional Investors


The FRC has been asked by Government to take on the responsibility of oversight of the proposed Stewardship Code for Institutional Investors and in January began a consultation on the content, operation and oversight of the Code. The Code seeks to set out good practice for institutional shareholders when engaging with UK listed companies that they are investing in.

The FRC is seeking views on:

• Whether the Code published by the Institutional Shareholders’ Committee in November 2009 provides a suitable basis for the Stewardship Code, in either its existing or an amended form;

• What the responsibilities for engagement of institutional shareholders and their agents are to the beneficial owners whose money they manage;

• How adoption of the standards in the Code by UK and foreign investors can be encouraged;

• What information investors should disclose on their engagement policy and practice; and

• What arrangements should be put in place to monitor how the Code is applied.

The consultation closes on 16 April 2010 and the outcome will be announced in May or June. For further information on the Stewardship Code and the consultation please visit: http:// www.frc.org.uk/press/pub2216.html

The effectiveness of the ‘comply or explain’ approach to corporate governance in the UK depends on active and constructive engagement by investors. The FRC and Sir David Walker have both expressed concerns about the quantity and effectiveness of engagement between institutional investors and boards of listed companies.

http://www.frc.org.uk/press/pub2216.html


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The Professional Oversight Board publishes reports on the Audit Inspections Unit’s (AIU) inspections for 2008/09

The report provides an overview of the activities and findings of the Audit Inspection Unit when reviewing the quality of audits of listed and other major public interest entities conducted by major audit firms, (this amounts to nine audit firms – the Big 4, Baker Tilly UK LLP, BDO LLP, Grant Thornton UK LLP, Horwath Clark Whitehall LLLP and PFK (UK) LLP) and other firms that fall within the AIU’s scope. The inspections took place between April 2008 and March 2009 and audits reviewed had financial years ending between March 2007 and December 2008.

The AIU considered the overall quality of major public company audit work to be fundamentally sound. It was generally satisfied with the basis on which significant judgements were made on individual audits reviewed at the major firms. It considered that audit procedures had generally been performed to a good or acceptable standard. However, the AIU identified certain areas at each major firm where improvements were in its view needed in order to enhance audit quality. To view the full report please visit: http:// www.frc.org.uk/images/uploaded/ documents/Public%20Report%20an %20overview.pdf

The KPMG report commented positively on a number of areas and in particular highlighted the quality and regularity of technical briefings and updates, particularly those in relation to the economic downturn, and the monitoring of quarterly mandatory training. The AIU noted that these procedures are intended to ensure that all significant matters are communicated promptly and are likely

to make a positive contribution to audit quality. Certain areas for improvement were identified including some matters relating to performance evaluation procedures.

KPMG’s reply to the AIU included

the following:

We are please that the AIU has again applauded our commitment to audit quality and note specifically the various references highlighting our continuous improvement. We do not believe we are ever far apart from the AIU’s considered opinion on the various topics. However the degree of emphasis is necessarily occasionally different as we have to achieve a careful balance of effectiveness and efficiency. Q28


http://www.frc.org.uk/images/uploaded/documents/Public%20Report%20an%20overview.pdf




Financial reporting update


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Below are the key developments during the last quarter for IFRS and UK GAAP:

Title of article Subject Effective date

IFRS Accounting for provisions Exposure Draft Comments by 12 April

IFRS 8 Operating segments FRRP Guidance Periods beginning on or after 1 January 2009

UK GAAP and Classification of rights issues Amended Standard Periods beginning on or after other matters 1 February 2010

Related party disclosures – Amended Standard Periods beginning on or after a reminder 6 April 2008

Business combinations

The future of UK GAAP

FRC Study

Policy proposal

Not applicable

Not applicable

The Financial Reporting Review Panel says it is concerned about how companies are applying the requirements of IFRS 8 Operating Segments.



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IASB proposes amendment to

accounting for provisions

The IASB is requesting comments on a section of the proposed new standard to replace IAS 37, dealing with the measurement of provisions.

This exposure draft is a limited re-exposure focused on the following aspects of proposed measurement guidance:

• a high-level measurement objective for liabilities within the scope of IAS 37 and application of that measurement objective. As part of this project the IASB has decided to mandate the use of expected value to measure all liabilities, including single obligations (e.g., lawsuits), but the IASB is not inviting comments on this as part of the exposure draft;

• whether obligations involving services (e.g., decommissioning) should be measured with reference to the price that a contractor would charge to undertake the service on behalf of the entity i.e., including a profit margin; this would be irrespective of the entity’s intentions with regard to settling the obligation, i.e., in-house or external; and

• whether to continue current IAS 37 accounting for onerous sales and insurance contracts via a limited exception to the proposed measurement requirements.

The IASB has invited comments by 12 April 2010.

While not inviting comments on it, the IASB has also made available on its web site the working draft of the remainder of the proposed new standard, to enable the measurement proposals to be read in context.

The IASB press release is available at: http://www.iasb.org/News/ Press+Releases/IASB+re-exposes+p roposals+on+measuring+liabilities. htm

The working draft is available at: http://www.iasb.org/NR/ rdonlyres/300FC6B-F8E34826-82B4-3580989B31EA/0/ IFRSLiabilitiesWorkingDraftFeb10.pdf

FRRP warns of significant non

compliance with IFRS 8

The Financial Reporting Review Panel (“FRRP”) says it is concerned about how companies are applying the requirements of IFRS 8 Operating Segments.

Its press release includes what the FRRP consider to be common themes of non-compliance from its enquiries to date:

• only one operating segment is reported, but the group appears to be diverse with different businesses or with significant operations in different countries;

• the analysis of operations set out in the narrative report differs from the operating segments in the financial statements;

• the titles and responsibilities of the directors or executive management team imply an organisational structure which is not reflected in the operating segments; or

• the commentary in the narrative report focuses on non-IFRS measures whereas the segmental disclosures are based on IFRS amounts.

The press release also includes a list of questions for Boards to consider when applying IFRS 8.

The FRRP press release is available at: http://www.frc.org.uk/frrp/press/ pub2203.html

Amendment to FRS 25

– classification of rights issues

(identical to amendment to IAS 32)

The ASB has issued an amendment to FRS 25 Financial instruments: presentation for classification of rights issues. The amendment is effective for annual periods beginning on or after 1 February 2010 and is identical to the amendment to IAS 32 Financial instruments: presentation issued by the IASB in October 2009.

The amendment requires a rights issue involving the exchange of a fixed number of an entity’s own equity instruments for a fixed amount of cash denominated in a foreign currency to be classified as an equity instrument.

The FRRP press release is available at: http://www.frc.org.uk/frrp/press/ pub2203.html

Related party disclosures

– a reminder

FRS 8 Related party disclosures has been amended for periods commencing on or after 6 April 2008. Parent companies are no longer exempt from giving disclosure in their individual accounts of related party transactions, except for transactions with subsidiaries that are wholly-owned by the group. Previously, a complete disclosure exemption was available when the parent’s individual accounts were presented together with the consolidated accounts. Transactions with non-wholly owned subsidiaries will now require disclosure in the parent company accounts for the first time.

Similarly, non-wholly owned subsidiaries that trade with other non-wholly owned subsidiaries will no longer be able to claim exemption from disclosing related party transactions. Previously, subsidiaries that were 90% owned were eligible for an exemption from disclosure of transactions with the rest of the group.


http://www.iasb.org/News/Press+Releases/IASB+re-exposes+proposals+on+measuring+liabilities.htm

http://www.iasb.org/NR/rdonlyres/300FC6B-F8E34826-82B4-3580989B31EA/0/IFRSLiabilitiesWorkingDraftFeb10.pdf

http://www.frc.org.uk/frrp/press/pub2203.html

http://www.frc.org.uk/frrp/press/pub2203.html


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FRC says step change is needed in

business combination accounting

Companies have told the FRC that Merger and Acquisition accounting is costly and difficult, and investors say that the resulting information on acquisitions is not useful. An FRC study suggests that a possible reason for this is that IFRS 3 Business Combinations has been poorly applied by companies due to unfamiliarity with its requirements and the complexity of valuing intangible assets such as brands and customer relationships.

The FRC notes that additional guidance from the IASB (from its May 2009 exposure draft Fair Value Measurement) and the International Valuation Standards Council (from its January 2009 exposure draft Valuation of Intangible Assets for IFRS Reporting Purposes) should facilitate more reliable valuations of intangible assets in respect of future acquisitions.

The FRC intends to conduct further interviews with investors and other stakeholders in 18 months’ time to assess whether the information about acquisitions in annual reports and accounts has improved in quality and proved to be useful.

(Note that information will be disclosed in accordance with the requirements of IFRS 3 (Revised 2008), which applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.)

The FRC press release is available at: http://www.frc.org.uk/press/pub2205. html

The future of UK GAAP

The ASB is considering responses to its policy proposal ‘The future of UK GAAP’, which proposed different reporting regimes based on three tiers:

• Tier 1 – publicly accountable entities would apply IFRS as adopted by the EU.

• Tier 2 – all other UK entities other than those who can apply the Financial Reporting Standard for Smaller Entities (‘FRSSE’) could apply the IFRS for Small and Medium-sized Entities (‘IFRS for SMEs’).

• Tier 3 – small entities could choose to continue to apply the FRSSE.

Entities within Tier 2 and Tier 3 would have the option of using IFRS as adopted by the EU if they wished, and those in Tier 3 would have the option of using the IFRS for SMEs.

Under these proposals, entities within tiers 1 and 2 would not benefit from the disclosure exemptions currently afforded to subsidiaries under UK GAAP (such as the exemption from preparation of a cash flow statement or financial instrument disclosures).

The ASB press release is available at: http://www.frc.org.uk/asb/press/ pub2228.html Q28


http://www.frc.org.uk/press/pub2205.html

http://www.frc.org.uk/asb/press/pub2228.html

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ACI events in 2010 We will be running a number of industry and sector specific events in addition to our technical update series and FTSE 350 breakfast programme. If you require further information about the ACI’s events programme please contact:

Jennifer Davis


The ACI launches the ‘BOFI Programme’ In response to The Walker Review’s recommendation that each director should have a personalised training and development programme to ensure that they have sufficient understanding of the business to contribute effectively, the ACI has devised the ‘BOFI Programme’. Launched in January with a breakfast with Sir David Walker, the programme will consist of ten core events for non executive directors of banks and other financial institutions. If you are a non executive director of a bank or other financial institution and would like further please contact Jennifer Davis.

Contact us If you have feedback on this issue or would like to suggest a topic for a future edition, please contact:

Nicola Collins


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity. Designed and produced by KPMG LLP (UK)’s Design Services Publication name: ACI Quarterly 28 Publication number: RRD-189053 Publication date: March 2010



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