The Annual Report Insights, a new report released by Deloitte based on reports from 100 UK companies, reveals that companies are increasingly going beyond financial drivers and focusing on ‘success factors’ such as societal and environmental impacts.
In its report, Deloitte uncovered that almost half (46%) of companies incorporate values beyond making profit for shareholders, compared to 32% in 2018- meaning almost half now value success factors beyond profit.
Climate change as an emerging risk factor
The study found that over half of the companies surveyed referred to climate change as a prime success factor, with seven naming it within their main risks.
Other key findings include:
- 93% of audit committee chairmen showed clear ownership of their committee’s report, in most cases through a personal introduction or by signing the full report
84% of audit committees revealed how they had assessed the effectiveness of the extremal audit process
Only 57% of companies with an internal audit function explained how they had examined the effectiveness of the internal audit function
Commenting on the report, Veronica Poole, Global IFRS leader and UK Head of Corporate Reporting at Deloitte UK, said: “Businesses are facing increased scrutiny of their impact on people and the planet. The expectation of business is changing, and the licence to operate can no longer be taken for granted.
“Climate change is likely to have a profound impact on business and on us as individuals; it will lead to significant market corrections and changes in the coming years. Failure by business to respond to the risks has significant implications, such as disruption to supply chains, loss of asset values and market dislocation.”
For financial years starting on or after 1st January 2019, large UK companies are required to reveal how directors have promoted long-term success whilst including the impact on group of stakeholders such as employees, customers, supplies, the environment and community in their strategic report, when performing under s172 of the Companies Act 2006.
Deloitte’s Annual Report Insights also found that 31% of companies were already referring to ‘section 172’, while 97% identified stakeholders other than investors.
The concern of Brexit
It comes as no surprise that Brexit featured as a top focus, with 86% of companies discussing it in their risk reporting due to concerns over the broader macroeconomic impact.
The report highlights that the FRC is continuously encouraging companies to review their Brexit disclosures regularly by identifying the potential risks and ensuring disclosures reflect on their analysis of the impact of Brexit on the business.
FRC’s Annual Review of Corporate Reporting requires directors to assess the specific risk generated by Brexit which challenge company business models.
Cybercrime on top of the list
However, 29% of respondents said that Brexit was not their main risk. In fact, cybercrime was identified as the principal risk by companies, with 71% admitting it to figure on top of the list.
These findings enhance recent trends on cyberattacks, which highlight how companies put themselves at risk by not investing in cybersecurity.
For instance, Risk in Focus 2020, released by the Chartered Institute of Internal Auditors, identified cybersecurity as the main risk businesses face today whilst advising companies on the necessary measures to follow.
The report also stated that “39% of companies disclosed the gender diversity in the executive committee and their direct reports, in line with the Hampton-Alexander review’s expectations. This has more than doubled from last year (15%), and half of FTSE 350 companies surveyed now meet the requirement.”
As this will become a disclosure requirement in the 2018 UK Corporate Governance Code next year, figures of diversity and inclusion at companies are expected to rise.
Poole commented: “Looking ahead, next year should see a substantially higher number of companies disclosing these gender diversity figures as this becomes a requirement of the UK Corporate Governance Code.
“In addition, IFRS 16 will become effective for most of the companies surveyed in the next reporting season. Last year, only three companies had adopted the standard early.”
Disclosing UK Tax strategy
Either as a separate document or as part of another, large UK companies are required to disclose their UK tax strategy.
In the annual reports Deloitte surveyed, 49 companies released information on tax strategy or governance, with 18 of these providing detailed insight. In the strategic report, 81% of companies discussed the current year effective tax rate.
The firm’s report also adds that “providing information in addition to generic disclosure of statutory tax rate change is encouraged.”
Ahead of IFRIC 23 Uncertainty over Income Tax becoming mandatory on or after 1st January 2019, 31% of companies released an accounting policy on uncertain tax positions, enhancing the concern raised by the FRC around uncertain tax positions.