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The Bruce Column — Liberating the needle in the haystack

16 Mar 2012

The focus is back on the problem of clutter seizing up financial reporting. Robert Bruce, our resident regular columnist, peers into the dense debate and suggests some answers.

Some widely-sought objectives seem perpetually elusive. This tends to spur people on to ever greater efforts. But it should also be understood that sometimes the reason the objectives seem elusive is because they are broadly unattainable. Into this category falls the serial desire of accountants around the world to reduce clutter, to make the outputs of financial reporting short and pithy rather than verbose, and to save the huge tracts of forest currently felled for its printing.

It is a debate almost as old as any in the accounting profession. And the Chairman of the IASB, Hans Hoogervorst, has entered the fray. ‘We are suffering from disclosure overload’, he told a conference the other day. And he launched into an examination of what is wrong and what could be done about it. He is the latest in a long line. Some preparers hark back to their youth and wave a copy of their financial statements from bygone years in the air and say how remarkably short a document it now seems to be. The UK Financial Reporting Council, rail at the thinking, or lack of thinking, which has allowed reports and accounts to become ever longer. Last year it even issued a commendably short document unequivocally titled: ‘Cutting Clutter’. Yet the mixture of dense figures and verbiage continues to expand.

Some launch attacks at specific thickets of clutter. Last year a joint initiative from the Scottish and New Zealand accountancy institutes, which Hoogervorst referenced in his recent speech, sought ways of reducing disclosures. It was called: Losing The Excess Baggage – reducing disclosures in financial statements to what’s important’.

Its argument was that people simply didn’t think about whether something should go into a report or not, and that people tended to ignore the relevant paragraph in IAS1 which says that entities do not have to provide disclosures required by an IFRS if the information is not material.

But even if the UK’s FRC insists on the duty of companies and their advisors to think things through and cut the verbiage out there is often very little guidance on the specifics. As one highly respected preparer said in a debate on the Scottish and New Zealand accountancy institutes’ proposals: ‘We have never had a regulator say we should leave something out’.

But, as Hoogervorst said, much of this is due to the inescapable fact that businesses are much more complex now and the financial reporting is there ‘to describe this complexity, not to mask it’.

As the FRC made plain last year it is thinking and behaviours which can make the difference. But in a business environment which knows that sticking to process is what makes life easier the chance of people making real changes are slim. Hoogervorst knows this. And he also knows that concerted rather than individual action is what could make the difference.

‘Not all disclosures provide useful information to investors’, he said. ‘Standard boilerplate responses are more about ticking boxes than helping investors really understand what is going on under the hood of the business. This is an issue that preparers, auditors, regulators and standard-setters will have to tackle together’.

But it will be hard. And with so many different users of financial information it will be impossible to agree on the specifics that need to be tackled. Or as Hoogervorst summed it up: ‘There will be few quick wins. One investor’s disclosure clutter is another investor’s golden nugget of information. Taking information away is never easy’. On the other hand he knows something needs to be shown to be done. The IASB’s agenda consultation made it clear that people still feel the elusive objective of reducing clutter is something they want someone, almost never themselves, to do.

Perhaps they need to clear their mind still further. The language of the debate tends not to reflect the technology everyone uses. It tends to hark back to information printed on paper. A swift move towards clearer information and a lack of clutter for financial statement users would be to use electronic systems like XBRL for the golden nuggets of information. People who dip in and dip out in their information gathering would be able to see the wood for the trees. If you have the technology to identify the needle in the haystack immediately then the size, density and difficulty of the haystack ceases to matter. One person’s clutter might just be another’s treasure.

Robert Bruce
March 2012

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