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How Do Companies Act? Annual reports, Strategic reports, Director's reports and Sustainability reports

by Ashley Breckell; Helen Campbell; Jeremy Nicholls

Jan 1, 2014
Existing legislation on inclusion of information on social and environmental issues in Company reporting does not
provide an adequate guarantee that the information reported is material or complete. This legislation is present
in the Companies Act 2006, and was recently updated in the Companies Act (Strategic Report and Directors Report
Regulations) 2013.

This means that investors will find it difficult to use existing data to inform decisions, even as the demand for this type
of information is increasing. The solution is to amend the Companies Act to incorporate a necessary requirement for
assurance of non financial impact information. Directors are currently required to provide a statement
asserting that shareholders have the information necessary to assess company performance, business and strategy. The
scope of the financial audit is to report on whether these statements are inconsistent with the information that the
auditors have acquired in the course of performing the audit. This scope should be extended to requiring assurance
on the materiality and completeness of the information regarding the wider impact of the company's operations.
Shareholders and other stakeholders would then be able to use this information in their investment decisions. In the
meantime, examples of discrepancies in Company reporting can be raised with the Financial Reporting Council (FRC).

The first section explores issues arising from current approaches to reporting on social and environmental
issues. The second focuses on related current legislation in the Companies Act and how limitations create challenges
for reporting useful information. The third section sets out the increasing demand for information on social and
environmental issues as evidence of how important this social and environmental information really is. The fourth
section highlights the importance of audit in standardising information and ensuring it is useful, and examines the
current provision for auditing the social and environmental information. It concludes that there is a critical gap in
current legislation which will restrict the use of information despite its growing importance.
The options for addressing this gap are limited but we believe that the statutory audit requirements should be
extended to cover materiality decisions relating to social and environmental information.