This article was first published in the March 2012 UK edition of Accounting and Business magazine.
Some debates, it seems, go unresolved for years despite their importance. The future of corporate reporting is one. It is now more than five years since the leaders of the biggest six accounting firms declared that the reporting system was ‘broken’. They called for quarterly static financial reports to be replaced by real-time reporting, bringing in a much wider range of performance measures. And they argued that more non-financial information, customised to the user and more easily accessible, would have to be issued by companies as part of a process of bringing corporate reporting into the digital era.
In many ways, of course, 2006 seems like a different world. Post-global financial crisis, the pressing issues for companies have moved on from the boom days, and debates on financial reporting may not be top of the immediate agenda for many.
But with more pressure than ever on corporate performance, ACCA recently took another fundamental look at whether the time and effort that still goes into company reports is justified. We surveyed 500 investors and other users in the UK, US and Canada to see whether their views on the usefulness of the annual report had changed since the global financial crisis broke.
More scrutinised than ever
Given the resource they expend on the annual report, companies may find it reassuring that 50% of respondents still named the annual report as their primary, or indeed only, source of information about a company. Clearly, those who argue that the traditional annual report no longer has any value are guilty, at least, of exaggeration. In fact, a majority (57%) of users said they now tended to read reports more carefully than before the crisis.
Nonetheless there were many criticisms of annual reports: 47% said they were too long; 40% too general to be useful; and 35% backward-looking. In addition, 35% said reports were too complex, with more than two-thirds of them blaming reporting standards, as well as legal requirements, for making them so. This follows the pattern of previous research (in a 2009 ACCA report, Complexity in Financial Reporting, respondents clearly indicated they found International Financial Reporting Standards overly and unnecessarily complex) but suggests standard-setters still have much work to do.
Discouragingly, more respondents disagreed than agreed that information provided in annual reports was clear and concise. This is worrying given that the issue of clarity was rated highly in the survey. Is this just the poor state of reporting practice or is the format of the report itself causing the problems? Either way it is an indictment of the current state of reports, given that so many respondents still rely on them.
So what did the users want to see? The biggest single answer (71%) was enhanced reporting on risks, which may not be surprising but is definitive nonetheless. A clear statement of a company’s key risks and how it intended to mitigate them was the most pressing issue. Regulators such as the UK’s Financial Reporting Council have put this at the top of their agenda – a wise move, our study would suggest. The FRC’s ‘cutting clutter’ initiative to reduce the amount of non-essential material in reports would also appear timely.
Despite standard-setters asserting that investors are the primary audience for the annual report – a view that ACCA would strongly endorse – there was still a belief that the variety of audiences using the report had led to a lack of focus by companies. And, more worryingly, just as many respondents disagreed as agreed that standards themselves encouraged companies to provide a correctly balanced view of their performance – ie to include bad news as well as good. Almost half the respondents believed too much promotional material had crept into annual reports, undermining the concept of neutrality that must underpin any meaningful report.
There were some interesting findings in terms of ‘emerging issues’. Notably, while the value of social and environmental data had declined in immediate importance for many investors, the advent of integrated reporting appeared to bring genuine hope of reversing this trend. Including such information in an integrated report (IR) would add value, most said. This finding will encourage the International Integrated Reporting Committee (IIRC) as it tries to deliver an IR framework by the end of 2013.
A move closer to more timely information was also favoured by most, indicating that the 2006 aspirations of real-time reporting are still valid even if not enough has happened over the past five years to take them forward. The report was used by many respondents in conjunction with other sources such as quarterly reports, brokers’ reports and press releases. ACCA believes the profession needs to address how such information – especially given the emergence of social and mobile media platforms offering immediate data – can be assured. This might be key to the future of corporate reporting.
But in the meantime, what conclusions should we draw? First, investors should be repositioned as the primary audience for the report and be better engaged in its evolution. Second, more emphasis on risk and forward-looking information is needed. And third, a determined effort to prune and simplify annual reports would help all stakeholders.
Ian Welch is ACCA’s head of policy