On 19 July 2023, the UK government published proposed significant amendments to the Companies Act 2006, which would impose greater reporting requirements on large companies, including a requirement to report on material fraud. Coupled with the new failure to prevent fraud offence which we expect to come into force next year (see more here) and the renewed focus of authorities on the detection and prevention of fraud, this new reporting requirement will act as further incentive for companies to take steps to implement robust fraud prevention measures.
The new rules, if implemented, would require companies with 750 employees or over and an annual turnover of £750m or more to include an annual material fraud statement in their directors’ report. The material fraud statement would need to provide an assessment by the directors of the risks of material fraud to the business (including how the directors have assessed the company’s susceptibility to material fraud and the types of material fraud the company is susceptible to) and the measures in place to prevent and detect fraud of this nature, as well as any measures which the directors intend to put in place during the following financial year. There is an exception whereby the directors are not required to disclose information if they consider that the disclosure of that information would be seriously prejudicial to the interests of the company.
The proposed amendments define fraud as any behaviour that falls within sections 2 to 4 of the Fraud Act 2006 (i.e. fraud by false representation, fraud by failing to disclose information and fraud by abuse of position), which is notably narrower than the offences covered by the proposed failure to prevent offence. “Material” fraud is defined as any which by virtue of “its nature or magnitude could reasonably be expected to influence the decisions which a reasonable shareholder would take in connection with their shareholding in the company”.
The proposed regulations also include requirements for companies to make an annual resilience statement, a triennial audit and assurance policy statement and an annual statement about distributable profits. The FRC has announced that it is developing non-statutory guidance for companies to assist them with compliance with the new reporting requirements. If approved by Parliament, the regulations are expected to come into force on 1 January 2025.