Can FRC align reporting's stakeholders?

COMPANIES SAY one thing then report something else. Investors don't step up to the plate when it comes to understanding the financial statements presented to them in accounts.

Rather than stand by as investors and business maintain frustration with each other, the Financial Reporting Council has stepped in to provide what it colourfully describes as an "experimentation zone" to help drive better financial reporting.

In some ways the FRC's ‘Financial Reporting Lab' does fit its rather fluffy description. The Lab will provide a forum for thinking, involving all relevant parties including corporates, professional investors and retail shareholders.
But behind its attempts to open dialogue is a more pragmatic aim - that of financial reporting improvements.

Yet with such an open framework, how will it work? Who will take the leap and partake in what could be sensitive discussions, and what role will the Lab play in driving legislative and accounting standard changes?

The official launch of the lab, at ICAEW's Moorgate Place HQ, brought together a mix of the types of players the FRC want to get involved in the project.

The panel discussion and questions that followed provided details of the issues the lab is trying to address. On the panel were Blackrock managing director Fiona Ellard, Man Group FD Kevin Hayes, HSBC chief accounting officer Russell Picot and NAPF chairman Lindsay Tomlinson. The audience also included some key investor and accounting personalities, such as Xchanging CEO Ken Lever and Aviva Investors' regional head of corporate governance Iain Richards.

The lab intends to operate as a ‘safe harbour' in which reporting dead-ends and pain-points can be discussed and alternatives mooted. The consensus, backed by fellow speaker BIS director Richard Carter, was that the general premise of the lab was very welcome.

There were suggestions during the event that investor engagement towards solutions were critical, and perhaps had not necessarily been the focus of the investment community in the past.

For her part, Fiona Ellard provided examples where annual reports & accounts contained "standardised text", or boiler plate material, within narrative sections that got in the way of understanding the business' actions over the previous financial period. Instead, boiler plate information could sit towards the back of statements, with any changes in governance flagged up at the front.

Audience members questioned whether the lab's efforts would tread on the toes of legislation or accounting standard setters. Some, included Man Group's Haye, expressed frustration that they were held back from producing better reports due to restrictions in the UK's compliance regime.

The answer was a no, albeit qualified.

While the lab can help investors and corporate come up with improvement on the presentation and inclusion of information, this must not clash with legislative and regulatory requirements, yet examples of better ways of presenting corporate information may well inform better law and rules in the future. Having said that, FRC chief Haddrill pointed out that the lab will not exist to "feed regulation".

The NAPF's Tomlinson, and members of the audience, were exercised over the complexity of pensions accounting.

Tomlinson said: "One pensions lawyer told me that ‘their numbers are meaningless. If the FD doesn't make time to explain them, we have a problem'."

But it was suggested that pensions accounting might require more than just a rejigging of company reports to deal with more fundamental issues of their day-to-day impact on financial statements.

Whether the lab focuses on the front-end or back end of accounts, Xchanging's Ken Lever is more concerned that it doesn't just end up with improvements to notoriously complicated banking and financial services reporting. As a FTSE 250 executive, Lever said "smaller companies and non-banks" have needs in terms of financial reporting requirements.

Another potential sticking point would be that businesses are innovative in a reporting sense are often punished by investors. Haddrill hoped that investors' involvement during the process would mitigate that risk.

But to understand how the lab will work in reality will require some brave companies, and their investors, to make the first move.

Image credit: Shutterstock