Our corporate reporting is broken: but new research says that it can be fixed
Pressure mounts for substantial changes to company reports, as a survey uncovers ambiguous attitudes
SOME debates, it seems, go unresolved for years despite their importance. The future of corporate reporting is one such issue.
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 about financial reporting may not be top of the immediate agenda for many.
But with more pressure than ever on corporate performance, it’s time to take another look at whether the time and effort that still goes into company reports is justified.
To find out if corporate reports still have a future, ACCA has surveyed 500 investors and other users in the UK, US, and Canada to see how they perceive the usefulness of annual reports after the global financial crisis.
Given the resources they expend on the annual report, companies may find it reassuring that 50 per cent of respondents still named the annual report as their primary, or indeed only, source of information about a company.
Perhaps those who argue that the traditional annual report no longer has any value are guilty, at least, of exaggeration. In fact, a majority of users said they now tended to read reports more carefully than before the crisis.
Nonetheless, there were many criticisms of annual reports: 47 per cent said they were too long; 40 per cent too general purpose to be useful; 35 per cent backward-looking; and another 35 per cent too complex.
Of those who found reports too complex, more than two-thirds blamed reporting standards, as well as legal requirements. This fits in with some earlier ACCA research that found report users and preparers are finding International Financial Reporting Standards overly and unnecessarily complex. Standard-setters still have a bit of work to do, it would seem.
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 terms of importance elsewhere in the survey. Is this just the poor state of reporting as practised by companies, 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 (with 71 per cent) was enhanced reporting on risks; perhaps not surprising, but definitive nonetheless. Regulators, such as the UK’s Financial Reporting Council (FRC), have put this to the top of their agenda, which is a wise move in light of our research. The FRC’s “cutting clutter” initiative to reduce the amount of non-essential material in reports also appears timely.
Despite standard-setters asserting that investors are the primary audience for the annual report – a view 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, as many respondents disagreed as agreed that standards themselves encouraged companies to provide a correctly balanced view of their performance, including bad news as well as good. Moreover, almost half of the investors and report users we spoke to believed too much promotional material had crept into annual reports, which undermined the concept of neutrality that must underpin any meaningful report.
There were some interesting findings in terms of “emerging issues” too. Notably, while the value of social and environmental data had declined in immediate importance, as far as many investors were concerned, the advent of integrated reporting appeared to hold genuine hope of reversing this trend. Most replied that inclusion of social or environmental information in an integrated report would add value.
This is a finding which will give the International Integrated Reporting Council (IIRC) a reason to be optimistic over the next two years as it works on an integrated reporting framework that is to be unveiled by the end of 2013.
A move closer to more timely information was also still a goal 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.
While it’s still the primary source of information about a company for half of our respondents, the corporate report is not the only source; more time-relevant sources of information such as quarterly reports, brokers’ reports and press releases jostle for attention too. Users clearly value more up-to-the-moment information and the challenge for the profession is 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.
In the meantime, and ahead of the imminent kick-off of corporate reporting season, what conclusions should we draw? Firstly, investors should be repositioned as the primary audience for the report and be better engaged in its evolution. Secondly, more emphasis on risk and forward-looking information is needed. And lastly, a determined effort to prune and simplify annual reports would help all stakeholders.
Andrew Leck is head of ACCA UK.