Smaller quoted companies (SQCs), both fully listed and members of the AIM
market, have a key role to play in helping the economy emerge successfully from
recession. They generate significant employment and, over time, some will grow
into much larger FTSE 350 companies, while many others will make a sustained
contribution as solid mid-caps.
We are beyond the era of light-touch regulation, nevertheless, but when
considering SQCs rules have to be proportionate and tailored if we are to strike
the right balance between risk management and promoting entrepreneurship.
In reporting, as other areas, we need to challenge the one-size-fits-all
approach. The same requirements should not automatically apply to SQCs, with a
market capitalisation often well under £100m, as to leading global players with
a value hundreds of times greater.
At the Quoted Companies Alliance, which represents SQCs, we are committed to
fostering a culture of continuous improvement in corporate reporting. We
therefore welcome the feedback provided by the Financial Reporting Council
(FRC), and its constituent bodies, on the quality of financial statements and
business reviews. We are also very supportive of the FRC’s efforts to reduce
complexity in reporting, but believe that, if this project is to make a real
difference, it has to have the support of the International Accounting Standards
Two specific changes could significantly reduce SQCs’ reporting burden.
Firstly, we need a clearer shared view by finance directors, auditors and
regulators of when materiality can be applied to take away the need to implement
particular requirements in standards. Standard-setters tend to cite materiality
to explain why SQCs do not need to be overly concerned by potentially onerous
Preparers, however, bemoan the fact that it is hard to rely on materiality in
practice as the auditors worry that the regulators will not be supportive of
judgements made in this regard. We need to get all the players around the table
to move the debate forward.
Secondly, SQCs should have the choice to use the much simpler IFRS for SMEs when
preparing their financial statements as an alternative to adopting full IFRS,
which now runs to more than 2,500 pages of guidance.
We recognise that this would require a change in the relevant EU regulation
for fully listed companies and in the requirements of the London Stock Exchange
and company law in the case of AIM companies. Pleasingly, though, support is not
restricted to the UK for a reconsideration of the one-size-fits-all approach to
listed company reporting.
Going forward, standard-setters must apply robust cost benefit tests to new
requirements and gain a good understanding of the information investors actually
use. We need to distinguish the ‘might be nice to have’ from that which is
important for stewardship and other decision-making purposes.
Critically, cost benefit assessments should recognise the importance of not
discouraging fast-growing private companies from seeking a market listing as a
means of providing external capital to support their continued expansion. We
must help acorns grow into oak trees.
Anthony Carey is chairman of the Quoted Companies Alliance Financial
Reporting Committee and a partner in Mazars LLP.
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