June 15, 2015 Improving the quality of reporting
As part of its continuing drive to improve the quality of reporting by smaller listed and AIM quoted companies the Financial Reporting Council (FRC) has issued a discussion paper outlining its findings from a recent review. In the foreword to the paper FRC Chief Executive, Stephen Haddrill, highlighted the OECD’s view that small and medium sized companies are “critical to ensuring that economic growth is sustainable and inclusive.”
However the FRC recognises that the ongoing requirements of being listed, such as providing clear and transparent reporting can be costly and time consuming. In the light of this, the review sought to understand and raise awareness of the challenges faced by smaller companies.
One key challenge facing smaller companies is that of providing sufficient information to attract investors. The FRC’s review found that many smaller companies do not see their reports as adding value to investor decisions and therefore treat the production of the annual report as a box-ticking exercise. But the review found that, contrary to belief, investors and lenders paid a great deal of attention to annual reports, with the quality of the information provided affecting decision making.
To illustrate this point the FRC quoted Jessica Ground, Global Head of Stewardship, Schroders who said “We look to the report to provide us with the building blocks on which we make our investment decisions,” adding “my message to companies is that improving the quality of your reporting will make you more attractive to investors.”
If this is the case, which areas do companies need to focus on in order to improve the quality of their reporting? Helpfully the FRC paper not only highlights areas for improvement, it also provides comments both from the FRC findings and from investors. For example, when it comes to cash flow statements, 66% of private investors consider this section of the annual report to be very significant in helping them to make their decision; with concerns being raised about a lack of audit evidence and errors such as non-cash items being wrongly included.
In all areas identified it is the underlying assumptions and explanations which seem to generate the greatest impact, either positively or negatively. Whether looking at the business model, risks and uncertainties; at the accounting policies, in particular relating to revenue recognition and capitalisation; or at the decision process in respect of provisions, the clearer the explanation the better it is received by investors.
The FRC now intends to issue further guidance for boards and audit committees in respect of the creation of annual reports and will also consider whether reporting standards need to be changed in the light of the review.
