Annual reports slated for clutter and lack of clarity

The majority of annual reports are cluttered and lack clarity according to the reporting regulator which today delivered its verdict on how well UK companies communicate to the outside world.

The Accounting Standards Board (ASB) and the Financial Reporting Council (FRC) today released this report on narrative reporting.

The report found while the vast majority of companies are technically compliant with regulations, they still have a long way to go until they clearly explain to people what they do, how they do it and what might go wrong.

Using a random sample of 50 firms from the FTSE 350 and SmallCap, the ASB set out to study how effectively companies communicate.

When it came to reporting principal risks and uncertainties two out of three companies were technically compliant, “but fell short of the spirit of the requirements”.

In some cases, generic “cut and paste” risks were included like terrorism or influenza. Overall, companies disclosed too many scenarios including one annual report which contained a risk-list which rambled for ten pages. Another listed 33 principal risks, which prompted the ASB to say it had, “trouble seeing how such a large number of risks could all be principal”.

Ian Mackintosh, chairman of the ASB, said listing every conceivable risk just added
to clutter.

“A number of companies resorted to simply providing descriptions of generic risks that could be easily cut-and-pasted into many other FTSE annual reports,” he said.
When it came to talking about trends, one in two companies resorted to using “bland statements” with little context, according to the study.

It was acknowledged, however, the area has historically been a struggle for companies and there was confusion on whether trends should refer to the macro environment or company specific factors.

There were some highlights. Almost one in ten companies were using best practice when it came to communicating non-financial key performance indicators.
Ian Wright, the director of corporate reporting with FRC, said it was critical to provide readers with a good understanding of a business model.

“For many companies, although we understood what they sell, where they sell it and who they sell it to, generally they fell short of describing how all the pieces fit together ­ that is, the business model,” he said.

“Many of the strongest overall reports in the sample included a business model disclosure, which lead us to conclude that good business model disclosure
can drive better disclosure in other areas.”

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