Building faith in financial reporting

THE RECENT LAUNCH of the Financial Reporting Council’s Reporting Lab concept – which will be used to help solve corporate reporting problems – is a welcome initiative, as companies, investors and regulators continue to struggle with concerns about the increasing complexity and length of company reports.

Over the past decade, the average length of an annual report has almost doubled, with the average length today being 175 pages. Currently, 25% of FTSE-100 companies have reports with more than 200 pages, with some financial services companies producing documents in excess of 400 pages.

This expansion of content is often a result of increasing demands from regulators, as well as investors and other stakeholders. However, the additional volume is not adding value and, in some cases, is having a negative impact on the quality of reporting as the length and excessive detail obscures critical information, rather than helping understanding.

Evolution equals bolt-ons

The evolution of company reports has been driven by separate and different strands of reporting, with additional requirements and information just being bolted on to the existing model, rather than being integrated into it, resulting in a complex and overlapping set of disconnected disclosures.

Although many companies have risen to the challenge and improved the quality of reporting over the years, for others it is still a challenge to meet the demands of the changing environment and reporting is seen as a legal compliance process, rather than a process for communicating what matters.

This new ‘reporting lab’ will contribute to the government’s attempts to simplify companies’ narrative reporting requirements and one of the key challenges it has to address is how to develop Reports that are comprehensive yet not overly complex.

This is an opportunity for business, investors, auditors and regulators to work together to develop and test new thinking in reporting, hopefully taking a large part of the cost and risk out of the process of innovation and reduce the need for regulatory intervention. As lab spokeswoman, Alison Thomas said: “It [will be] a safe environment for companies and investors to identify bugbears in reporting and come up with a grounded and pragmatic solution. We facilitate dialogue and encourage them to innovate in their reporting, where we act as a sounding board.”

Finding solutions will not be easy, but for those involved in the corporate reporting process, the benefit of clear, concise reporting has long been apparent. Not just in the way that good disclosure helps to facilitate the engagement process between companies and investors, but in less obvious ways – for example, as a catalyst for internal decision making or in unifying management thinking.

The key to improving reporting is to demonstrate the business benefits to organisations, investors and regulators alike and the reporting labs are a great initiative, which should provide the sort of collaborative trust and engagement that is required to improve the quality of disclosure and its usefulness. Let’s not miss this opportunity, but embrace it to engender faith and confidence in the future and deliver meaningful change to corporate reporting.

Sallie Pilot is director of research and strategy at Black Sun Plc

Image credit: Shutterstock

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