The paper argues only accountants and analysts are well served by existing annual financial statements, with non-expert shareholders swamped by pages and pages of information that is of little use to them.
Instead, annual statements should be more concise and narrative in basis – more like the preliminary results currently published by listed companies, according to the ASB.
This would better serve the interests of smaller shareholders and, with the detailed accounts still filed at Companies House, allow ‘experts’ to access the information that they need.
‘Financial information is useless if it fails to communicate,’ said ASB chairman Sir David Tweedie. ‘As the financial world has become more complex, financial statements have had to mirror these changes through new measurement techniques and disclosures. For the expert this has led to new insights into a company’s financial position and performance.
‘For the informed layman, however, there is a danger that the central features of a company’s performance and financial position may get lost in a welter of detail. This development has left even further behind those many private shareholders for whom accounting has always been something of a mysterious black art.’
The ASB is gathering responses until mid-May and plans to submit a paper to the DTI’s review of company law.
Depending on responses and the government’s view on legislating to allow simplified information, the board will consider publishing guidance that sets out best practice.
As widespread share ownership gathers pace in the UK, and massive growth in Internet stocks is helping to drive this irresistible trend, Sir David said more people were being ill-served by financial statements. The Sids who invested heavily in utility stocks after privatisation had less interest in balance sheets than the chairman’s statement, he added.
The law already allows listed companies to send summary statements to shareholders, but most shareholders are not able to opt for this. The ASB suggests the government change the law so summary statements become the main report for shareholders, subject to the same reporting rules as the prelims. The full statements would continue to be produced and filed.
The move, if adopted, reflects longstanding practice by listed companies in the US. On the other side of the Atlantic, where share ownership is an idea bought into on a far greater scale by the masses, full audited statements continue to be produced for those who request them and for filing purposes.
Without change, Tweedie said there was a danger financial statements would do nothing but serve ‘accountants producing accounts for accountants.’ But he recognised the migration of financial information to the Internet would make much of this debate redundant. For now, however, they needed to contain ‘basic numbers and anything else shareholders should know about’.
John Coombe, chairman of the FTSE-100 group of finance directors and group finance director designate of the soon to be created drugs giant Glaxo SmithKline, said: ‘We are supportive of anything that improves communication to shareholders.’
But he added: ‘I would not want the regulators to impose an additional reporting requirement – if it is instead of, that’s fine. And I wouldn’t want it to interfere with the speed with which we get out our prelims.’