IN SEEKING to learn lessons from the financial crisis, there is a growing consensus among regulators, governments and investors in the UK and beyond that the quality of corporate reporting could be improved. Put simply, there is a pressure on companies to give a clear picture of their operations and financial health.
There are many companies whose reporting is already of a high quality. You only have to look at the annual reports of winners of the various reporting award schemes out there. What we are now talking about is this best practice becoming the norm.
So what does all this mean? What do companies need to do to build investor confidence and better enable decision-making? They need to tell a fair and balanced story about their business and future prospects. They need to present clear, reliable and relevant financial and non-financial information in a coherent way. And all of this needs to be fully accessible to existing and potential investors, lenders and other creditors.
That may seem obvious, but when you get into the specifics about what companies can be doing differently, and how user understanding can be improved, it starts to come to life. Here are just a few examples we have put forward to policymakers in recent months:
• Improved narrative reporting needs to include details of the principal risks and uncertainties, including qualitative non-financial information, which might affect a company’s financial strength and future viability (eg risks to the financing model). There also needs to be a clear explanation of how such risks are being mitigated.
• Decluttering and better signposting of information on going concern. We estimate that information on the going concern of a business can be found in at least 20 places in a set of financial statements.
• Audit committees to issue a report to investors which would provide greater transparency into key financial statement risks as well as the critical judgments and estimates discussed with management and the auditor.
• The use of technology which improves access to corporate information should be encouraged. To be fully searchable on the web or by other electronic means would be a major project requiring a substantial level of investment by all relevant market participants; XBRL is only part of such a project.
• Rationalisation of the requirements for the Directors Remuneration Report although the Government in so doing needs to have a clear understanding of the desired outcome.
To make this work, policymakers, regulators, investors and even auditors need to give companies enough room. It’s therefore encouraging to see the Government, in its project on the future of narrative reporting, recognising that there needs to be flexibility.
Projects like the FRC’s Financial Reporting Lab will also help incubate new ideas and could help provide an environment where companies feel able to experiment.
Accountants, clients and regulators now need to take this opportunity to maximise the value delivered from corporate reporting.
Hywel Ball is the new head of assurance at Ernst & Young UK & Ireland, and managing partner of Ernst & Young Scotland
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