Corporate Law Update

This week:

• The Financial Reporting Council’s Financial Reporting Lab publishes a report on how AI technology could be used to produce a company’s annual report
• The International Organization of Securities Commissions (IOSCO) publishes new guidance on how audit committees can be effective and on ESG disclosures
• The Government provides some insight into its approach to any potential changes to the gender pay gap reporting regime

FRC publishes report on AI in corporate reporting

The Financial Reporting Council’s Financial Reporting Lab has published a report examining the potential role of artificial intelligence (AI) in the corporate reporting process.

The report is the latest in the Lab’s series of technology deep-dive reports. It explains the basics of different AI technologies and their implications and potential use cases for corporate reporting. The key points from the report are as follows:

• The Lab believes AI systems could be used to auto-classify expenses and accounts payable with a view to systemising data so that they can be assimilated into an annual report.
• Robotic process automation (RPA) technology could be used to create elements of a company’s annual report by rolling figures from previous accounting periods into the next report and automatically applying XBRL tags to allow onward financial analysis. Reports could be prepared initially using standardised “building blocks” populated using AI technology.
• In time, the ability to create an entire annual report quickly and accurately may mean that the annual reporting cycle becomes meaningless. Companies could instead generate a report at any time covering any time period.
• AI could allow boards to check that annual reports comply with and address all legal, regulatory, technical and industry guidance content requirements. This in turn could provide additional comfort to the company’s auditor when preparing its report.

You can read more about the legal implications of artificial intelligence and other disruptive technologies on our Digital and Innovation hub here.

IOSCO publishes new advice on audit committees and ESG matters

The International Organization of Securities Commissions (IOSCO) has published a Report on Good Practices for Audit Committees in Supporting Audit Quality. The purpose is to assist audit committees of listed companies with supporting external audit quality.

The Report sets out the role of a listed company’s audit committee and others person involved in a company’s financial reporting cycle, as well as highlighting the importance of audit quality and attributes of audit firms that may influence audit quality. It also provides useful suggestions for good practice by audit committees when supporting audit quality.

The Report has been prepared at a general level for listed companies across different jurisdictions. It will be useful for companies listed or admitted to a regulated market in the United Kingdom, as well as companies admitted to non-regulated markets (such as AIM) that have audit committees.

Separately, IOSCO has published a statement for issuers on the importance of addressing environmental, social and governance (ESG) matters when disclosing information to their investors. The statement lists sustainability, climate change, labour practices, diversity and “general governance-related factors” as specific examples.

IOSCO emphasises that ESG matters can have a material short-term or long-term impact on an issuer’s business, as well as on risks and returns for investors. It is therefore encouraging issuers to consider the materiality of ESG matters to their business and to assess risks and opportunities in light of their business strategy and risk assessment methodology.

Government hints at next steps in gender pay gap reporting

The Government has responded to the report published by the House of Commons Business, Energy and Industrial Strategy Committee on the gender pay gap in August 2018. The response provides some light on the Government’s thinking for the future of gender pay gap reporting. In short:

• The Government is not currently proposing to reduce the threshold at which a company has to report gender pay gap information. The Committee had recommended reducing the threshold from 250 to 50 employees, but the Government believes this would be burdensome for small and medium-sized businesses.
• Neither has it taken up suggestions to require reporting based on deciles (currently reporting is on a quartile basis) or to include part-time statistics. It has, however, said that any amendments to these elements would be subject to a period of public consultation.
• The Government has no plans to extend the regime to profit-share received by partners from partnerships and LLPs. However, it is proposing to alter its guidance for future reporting periods to clarify how partnerships and LLPs can voluntarily disclose pay gap data to assist stakeholders.
• Finally, the Government appreciates the Committee’s recommendation of aligning gender pay gap reporting with other business reporting requirements. However, it says there is currently no other common reporting requirement that would “logically align” with gender pay gap reporting.