Companies too often fail to acknowledge in their financial reporting when business has not gone well, according to the UK’s governance watchdog.
The Financial Reporting Council (FRC) has issued its annual review of corporate reporting and while it recognises that most companies comply with the accounting framework, and improvements are underway, many also skew their reports to the extent that “they erode trust and undermine the quality of corporate reporting”.
The FRC highlighted the “excessive” use of underlying profit margins and the “inappropriate” use of alternative performance measures. The FRC called for companies to be more “balanced” in reporting their performance.
Paul George, executive director for corporate governance and reporting at the FRC, said: “Our work on corporate culture this year highlighted that stakeholders and society in general have a vested interest in healthy corporate values, attitudes and behaviours that lead to sustainable growth and long-term economic success.
“High-quality corporate reporting can contribute to improved trust in business, so important to a successful economy.”
So concerned is the FRC by the appearance of alternative performance measures that it is undertaking a special review of their use.
However, the regulator also concluded that the introduction of strategic reports has improved reporting. But there is room for improvement, the report said, especially on the responsibility for strategic reports to be comprehensive.
“Comprehensiveness reflects a breadth of information that covers significant trends and changes in financial statements in a depth that is commensurate with their materiality; it does not mean including all possible information.”
Paul George raised the implications of Brexit for corporate reporting and the risk that it may undermine the use of international financial reporting standards “depending on the exit arrangements negotiated by the government”.
He said: “The FRC continues to support the application of a single set of high-quality global financial reporting standards for listed companies. Investors have told us they want comparability when reading company accounts.”