Britain’s three main financial regulators have told companies and auditors to adopt new approaches to providing information to investors during the coronavirus outbreak as concerns mount over the quality of corporate reporting — and market reactions to it.
The Financial Conduct Authority, the Financial Reporting Council and the Prudential Regulation Authority jointly announced on Thursday a series of measures to overcome the “unprecedented challenges” of preparing and auditing their accounts as the Covid-19 pandemic causes huge disruptions to businesses.
The initiatives include giving listed and private companies additional time to publish their accounts, warning banks not to overstate credit losses and advising auditors on necessary disclosures and new ways of collecting evidence.
The regulators’ co-ordinated response follows a temporary move by the FCA at the weekend to ask listed companies to observe a two-week moratorium on issuing preliminary results after auditors became concerned about the level of uncertainty in the numbers.
Rapidly changing revenue reports from FTSE 100 companies — most notably Next, the clothes retailer — triggered volatile share price movements on the London Stock Exchange. However, despite the FCA request, some companies continued to release preliminary results, leading audit firm Mazars to describe the practice as “incredibly unhelpful”.
The FCA has now said all London-listed companies would be permitted an extra two months to publish their audited annual reports, giving them six months from their financial year end, rather than the usual four.
The government this week granted private businesses an extra three months to file their accounts with Companies House.
But the FCA warned investors not to assume that any listed company delaying a report was in difficulty.
“We urge market participants not to draw undue adverse inferences when companies make use of the extra time,” the regulator said. “For a great many companies it will be a sensible decision to make in unprecedented times.”
Typically, market analysts treat the rescheduling of a company’s results as a signal to sell its shares.
Auditors supported the regulators’ moves.
Hemione Hudson, head of audit at PwC UK, said: “We will help the companies we audit make sensible decisions following a review of planned reporting timetables.”
Banks, meanwhile, have been instructed to take particular care over how they treat credit losses and borrower defaults in their own reporting.
In new guidance, the Bank of England’s Prudential Regulation Authority warned lenders against recording “inappropriate levels of expected credit losses”. It cautioned that doing so could lead to a drying up of much-needed loans.
Analysts at Goodbody, a stockbroker, said: “This is extremely strong language in our view.” It noted that the central bank’s guidance went further than an earlier demand not to treat loan or mortgage payment holidays as an automatic loss.
Banks have been told that their accounts must draw a clear distinction between “normal” breaches of lending covenants by corporate clients and “breaches that might occur because of the Covid-19 pandemic”.
All companies will also be required to consider their financial position before distributing any dividends. In their joint statement, the regulators said directors must “pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is made, not just proposed”.
Audit firms must also change the way they work, the Financial Reporting Council said. It instructed auditors to give modified audit opinions where they were not able to gather all the evidence needed to complete their checks. Their audited financial statements will also have to include more disclosures of “material uncertainties” that cast doubt on a company’s ability to continue as a going concern.
Audit firms responded positively to the new guidance.
“Covid-19 creates unprecedented practical challenges for corporate reporting and these will take time for companies to work through, so the announcements from the FCA, FRC and PRA are welcome,” said Stephen Griggs, managing partner for audit at Deloitte.
But Jon Holt, head of audit at KPMG UK, said some problems remained.
“Remote working is effective and technology is a huge enabler, but there will be limitations and new challenges,” he said.