Poor communication may have contributed to financial crisis

Not since the Enron scandal has there been so much scrutiny on how companies talk to the outside world, according to a Big Four audit firm, which said poor corporate reports may have contributed to the financial crisis.

Ernst & Young has watched corporate reports become longer, denser and more complex, which may have confused and obscured company business models in the lead up to the financial crisis.

The reporting regulator, the Financial Reporting Council, is taking a look at the complexity of corporate reports, with a view to provide greater clarity and simplification in reporting.

E&Y’s comments were contained in its submission to the project, sent to the regulator last Friday.

Allister Wilson, audit partner at E&Y, believes questions should be asked about the role financial reporting played in the lead up to the financial crisis.

“The question needs to be addressed why financial reporting did not provide an early warning of the impending crisis?” he said.

“Global financial reporting is currently experiencing more scrutiny than it has since the Enron affair.

“Whilst there is no suggestion that financial reporting actually caused the current global economic crisis, there is a broad spectrum of views on the role that it may or may not have played in the run up to the collapse of the banking sector.”

The world’s largest accountancy firm, PricewaterhouseCoopers, believes the “disjointed” international regulatory structure is reflected in corporate reports.

“One of the major reasons for complexity in reporting is the disjointed way in which the current model has evolved and the fact that no single organisation has overall responsibility for its structure relevance or development,” the firm said in its submission to the FRC.

PwC believes a number of issues, including the relationship between remuneration and culture along with business risks, is not being adequately addressed in corporate reports.

“These aspects have not been approached in a logical and structured way, which has resulted in them receiving significantly less attention from those in the corporate reporting supply chain,” the firm said in its submission.