Fresh from this year’s soul-searching over corporate governance, one of the UK’s key watchdogs has now launched a project looking at the adequacy of corporate reporting.
The Financial Reporting Council, Britain’s regulator for governance, auditing and reporting, acknowledges that the country has been here before. Previous projects have attempted to reduce the vast swathe of information that has to be crowbarred into an annual report. Having once sat on a judging panel trying to pick a winning annual report, your correspondent can testify to the huge quantity of information placed in a company’s yearly brain-dump.
The key issue is an old one: rules, regulations, guidance and public demand continually increase the information required for reporting. Meanwhile, users of that information beg for streamlined reports that make it easier to get to the heart of a company’s successes and, perhaps more importantly, its problems. Many suspect reports of being used to hype up the good news while burying the bad in footnotes.
According to Paul George, the FRC director in charge of reporting and governance, the key issues now are the demand for companies to respond to a responsible business agenda, and the need to be accountable to a wider group of stakeholders other than big institutional shareholders who can afford teams of highly trained analysts to comb through reports. The project will also look at new ways to deliver information to stakeholders.
“Reporting is evolving in response to these developments and so the project will examine the extent to which the annual report or other communication channels best serve all stakeholder needs,” says George.
Launch of the project comes just a week after George drafted an open letter to audit committee chairs and finance directors warning them of the issues that need to improve in corporate reporting for the 2018–19 season.
The warnings include concerns about judgements and estimate disclosures, along with the integrity of cash-flow statements. There were also worries about the use of alternative performance measures and, indeed, whether reports were fair, balanced and comprehensive. The FRC added that so-called “viability statements” could reveal more detail on how companies have worked out their prospects for the future.
Paul George suggested in a statement that reporting standards were falling. He raised the spectre of Brexit as a key reason to force it back on track. He also reminded companies this isn’t just about shareholders; “society” has a stake in decent reporting too.
“A lack of transparency in financial and governance reporting undermines trust in business. More accurate reporting and better governance practices are needed to reverse this trend,” said George.
“The UK faces challenges with corporate reporting after EU Exit. Companies should therefore do more to meet the expectations of the market and society in order for the UK to maintain its position as an attractive home for global capital.”
Oddly enough, one of the key criticisms from some experts is that reporting has become too focused on the future. They contend that if you ask business leaders to use crystal balls in their reporting, disappointment is almost inevitable. They cite collapsed construction giant Carillion as an example.
That criticism is unlikely to have much influence. Since the financial crisis, and after Theresa May placed governance at the heart of policies aimed at making a more equitable society, corporate reporting is operating in a new environment. The new corporate governance code responded to that change, placing purpose and societal interests at the heart of its advice. The FRC aims to ensure that reporting keeps up.