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FRRP: Why SME accounts are pulled for scrutiny

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Inconsistency is the biggest mistake made by small to mid-sized companies who have their accounts pulled for scrutiny by the Financial Reporting Review Panel (FRRP).

It’s important to remember that all company accounts should ‘tell a single story’, recommends the CEO of the Financial Reporting Council (FRC), Stephen Haddrill. The FRC and business advisory network Baker Tilly hosted a seminar with 40 financial directors on how to keep accounts safe from scrutiny.

Small to mid-cap businesses tend to have trouble with complying to international standards, making the quality of their accounts suffer, explained Danielle Stewart, partner at Baker Tilly.

“The FRC, through the FRRP, reviews around 300 sets accounts each year, targeting sectors which either have complicated standards to meet or might be suffering from the current difficult economic conditions and are tempted into more ‘creative’ accounting.”

Commercial property companies were especially high on the list this year, because accounting rules on property are more complex and diverse than most others.

The FRC’s and Baker Tilly’s reasons for hosting this seminar are simple, Stewart says: “Nobody wants their company accounts caught by the FRRP. Better financial reporting means better investment decisions made – which is good for the UK economy.”

Five tips for best practice company accounts emerged from the seminar:

1. Tell a single story 

Ensure that the narrative is consistent with the back end accounting. “Essentially, this means that the front and back ends should be consistent,” emphasized Stephen Haddrill. “Too many companies use the front end of their accounts as a marketing exercise and it is only when the notes are scrutinised that any significant issues emerge.”

2. Be clear about what worries the Board

The principle risks and uncertainties need to be what the Board is actually concerned about. They should be described in a sufficiently specific way, for any reader to understand why they are important to the company.

3. Be consistent 

Any highlighted or adjusted figures, KPIs or non-GAAP measures need to be clearly reconciled to the main heading figures in the accounts and any adjustments need to be clearly explained.

4. Explain change 

Ensure that any year on year changes are explained clearly and concisely.

5. Summarise 

Be concise and brief in the narrative and in the notes so the information is easy to understand and is not lost in superfluous detail.

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