Deloitte has published the results of a study on current corporate governance disclosures in FTSE 250 accounts in advance of the Financial Reporting Council’s (FRC) review of the Combined Code.

In its latest Corporate Governance Update Deloitte reports on its review of 50 sets of governance disclosures.  It reveals that many companies are now willingly providing better and more valuable information for users of their annual reports.  Numerous examples of good disclosure practices emerged both in terms of disclosures being made voluntarily and the actual content and manner of the disclosures made.

A surprisingly high proportion (60%) of companies provided descriptions of their internal control systems and it is expected that this will become a requirement through the EU 4th and 7th Company Law Directives.  Two companies disclosed actions taken to address internal control weaknesses.  Under the proposed revised Turnbull Guidance boards would be required to confirm that necessary action has been or is being taken to remedy any significant failings or weaknesses identified from their review of the internal control system.

Deloitte audit partner, Martyn Jones, said: “It is encouraging to see that, in an increasingly complex regulatory environment, companies are following the flexible spirit of the Code to provide disclosures that genuinely add value to shareholders and other readers.”

However, the report also revealed that while companies understand and comply with the letter of the Code, there were also areas where they were reluctant to go beyond their ‘comfort zone’.  Examples of such areas include:

• Simple detail on structure and responsibilities of the board and its committees was generally provided but greater disclosures could be provided on the real work of and processes followed by these bodies, which would provide better insight into the actual governance of the company.
• Over 90% of companies complied with the requirement to state how performance evaluation of the board had been conducted but very few identified the outcomes of this evaluation and the actions taken or proposed as a result.

One area of risk highlighted in the report was insufficient disclosures on the independence of non-executive directors.  Almost half the companies surveyed deemed non-executive directors to be independent where they would not be classed as such under the Code (mainly due to tenure over nine years). Explanations for the determination were often unsatisfactory with the risk of prompting stricter independence criteria.

In audit committee reports the qualifications of committee members are consistently absent and few companies describe the work undertaken and the practices behind the policies.  The Deloitte guidance includes a specimen Audit Committee Report addressing these weaknesses.

The report considers the imminent review of the Code and urges the FRC to view the totality of the corporate governance framework before imposing extensive changes. 

Martyn Jones commented: “The areas of non-compliance should be reviewed in the context of the general improvements in governance reporting and the existing burden of regulatory change for UK plc. 

“Where changes are proposed, these must be supported by appropriate Regulatory Impact Assessments to ensure that the benefits of imposing further requirements outweigh the added time and costs.  The report from the Review of Turnbull clearly indicates the need for this approach.”

The full report can be found in the Deloitte Corporate Governance Update (June 2005) at www.deloitte.co.uk (Services, Assurance & Advisory, Corporate Governance).

Ends

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP.

Deloitte & Touche LLP is the UK's fastest growing major business advisory firm based in 21 UK locations, with over 10,000 staff nationwide and fee income of £1,246 million in 2003/2004. It is a member firm of Deloitte Touche Tohmatsu, a leading professional services organisation, delivering world class audit, tax, consulting and corporate finance services, with around 120,000 people in over 140 countries. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity.

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

The information contained in this press release is correct at the time of going to press.