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The Bruce Column — The gradual change that is transforming corporate reporting

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20 Oct 2015

Our regular, resident, columnist, Robert Bruce reports on the expert views discussed at a seminar on the latest Deloitte annual survey of the state of UK annual reports.

When reviewing progress in the world of corporate reporting it is easy to underestimate the scale of what has happened over the last few years. A recent seminar at the Deloitte Academy brought this to the fore. The springboard for the discussions was the latest Deloitte survey of the state of UK annual reports. This is the twentieth such annual survey and it talks of significant change. The seminar highlighted its findings and opened up the discussion. Sallie Pilot, director of strategy and research at consultants Black Sun, talked of quite how far we had come. ‘Ten years ago’, she said, ‘issues like strategy or the business model were rarely talked about’. And it is true. The whole approach to reporting has changed. In those days people didn’t talk about the whole business. They talked about its different parts. Now there is a framework, from strategic reports and business models to integrated reporting, which brings people together across the business.

Integrated reporting, as Veronica Poole, UK national head of accounting and corporate reporting with Deloitte, was keen to point out, is really about the integrated thinking that the concept of integrated reporting brings about. Suddenly we are all talking in terms of transparent reporting which didn’t exist just a few short years ago. And people are talking in much clearer terms. Melanie McLaren, executive director, codes and standards with the Financial Reporting Council, talked of how reporting requirements drive behaviour and how the focus of the FRC was now on communication rather than compliance. And she talked about the introduction by the FRC of the concept of the directors’ report having to be ‘fair, balanced and understandable’. They were ‘the most powerful three words we have written’, she said. It had, as she put it ‘transformed disclosure’. All of these different developments had changed the landscape, as the Deloitte survey had made clear.

But there is much still to be done. Russ Houlden, CFO at United Utilities, referred back to the finding of the survey that the average length of annual reports had quadrupled over the last 20 years and was still growing. He pointed to the possibility that a greater focus on materiality and the resulting possibility of excising of chunks of the annual report might help. But it would all be down to judgement and that, as Houlden pointed out, ‘left companies with concern that potential benefits from cutting clutter could be outweighed by the potential challenge from Financial Reporting Review Panel comments’. He suggested that companies should be able to have a ‘fireside chat’ with the FRC as they mulled over what they might chop out of the annual report on grounds of materiality. Melanie McLaren commented that it is only a small proportion of all companies that are reviewed by the FRRP and receive a letter from them. And she said that the FRC are indeed exploring ways of being more transparent.

One route was suggested by Leon Kamhi, head of responsibility with Hermes Investment Management. He pointed out that in some sectors there were often over 500 pages in an annual report, significant chunks of it unintelligible except to experts. He suggested that putting much of the specialist information into an appendix but putting a short and well explained digest of the information in the front section would help. It would also act as a good discipline for such companies and force them to explain such areas in a clear and concise fashion.

Kamhi also, in the same week that the IASB issued a call for investors’ views as part of its agenda consultation, urged the investor community to speak up and play a more active part in shaping the future of corporate reporting. He wanted them to make the relationship between the clarity of corporate communication and the benefit to the long-term nature of the investment in pensions plainer. And Melanie McLaren was clear how good UK corporate reporting helped. ‘The UK is a place where investors can invest with confidence’, she said. But the need for clarity around the nature of the primary user of the accounts was also emphasised. The IASB’s call for views identified nine different types of investors. It is hard to work out how best to communicate if you haven’t got a clear view of the identity of your audience.

And along with other panel members Kamhi emphasised how the changes in corporate reporting probably worked best when they were voluntary rather mandatory. Russ Houlden was clear that integrated reporting worked best as a system because it was primarily a voluntary rather than a mandatory framework. Melanie McLaren was clear that when it came to the issue of key performance indicators, particularly non-financial ones, ‘we are a long way off mandating what they should be and mandating assurance’. Overall the panel took the view that the system was most beneficial when preparers were encouraged to experiment and tell their story in their own way. And McLaren pointed to the example of the principle of ‘fair, balanced and understandable’ being left deliberately undefined to ensure that managements had to exercise judgement.

The discussions at the seminar reflected a larger overall observation that all these significant changes in the corporate reporting world had been cumulative. The wider message was consistent. The quality of corporate reporting has improved significantly over the years but the changes were coming about one step at a time. And that way they were both more digestible and more effective. The messages from the Deloitte survey stood testimony to that.

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