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ICAEW highlights seven questions for preparers to be asking when writing corporate reports

  • ICAEW (Institute of Chartered Accountants in England and Wales) (lt green) Image

07 Jan 2016

The Institute of Chartered Accountants in England and Wales (ICAEW) has published an 'Audit Insights' publication that “offers seven questions for users, preparers and auditors to ask that will provide better information for this reporting season”. The ICAEW says that these suggested questions should be seen as complementing recent publications of the Financial Reporting Council (FRC) including its most recent publication on developments in narrative reporting.

The questions are:

1. Is everything in the report material?

The ICAEW highlights that “too many annual reports are too long and too complex” and that “the needs of the user needs to be at the heart of deciding what to report and how”.  This will ensure that the information is better understood by the user -‘will the user understand it’ will be a good benchmark.  The ICAEW also comments that only material information should be included.

2. Are performance measures credible?

The ICAEW indicates that Alternative Performance Measures (APM), if used, should be used “honestly”, on a consistent basis between periods and should be sufficiently explained so that a user understands what they are measuring, how they have been arrived at and how they tie into the financial information being provided.  This will ensure the credibility of APMs and avoid them distorting the underlying results.  

3. Is tax reporting understandable?

The ICAEW suggests that, given the increased focus on tax transparency, tax disclosures should be made more understandable by removing “technical tax and accounting jargon which is not well understood by readers”.  The ICAEW suggests that preparers should prepare the tax narrative with a “user’s mind-set” and should be challenged by auditors where the narrative is “unclear or incomplete” in explaining the tax charge and the company’s approach to tax.

4. Does the audit committee report on key issues?

The ICAEW indicates that audit committee reports can improve by ensuring that they are clear in describing what the audit committee did during the year to address key issues and also providing an indication of the issues it faced, debated and challenged.  

5. Is the audit report providing insights?

The ICAEW comments that the need to prepare new extended auditors reports have “greatly increased the quality of debate that auditors have with management, audit committees and boards”.  The ICAEW highlights that there are still examples of “boilerplate, less specific or meaningful descriptions” which do not provide specific insights into the specific audit being performed.  It suggests that the audit reports should be considered similarly to how directors consider the annual report – is it fair, balanced and understandable.  The auditor’s responses to identified audit risks should be insightful and specific and the reader should not be left with the “so what” question after reading the responses to them.

6. Does the remuneration report explain high pay?

The ICAEW comments that information contained within the remuneration report should be meaningful, concise and explain clearly why the executive pay is appropriate and justified.  

7. Is the company putting enough resources into reporting?

The ICAEW reminds companies that the overall quality of information contained within the annual reports can affect lending decisions.  It highlights that if companies are not providing the information that investors want then they will lose interest.  For smaller companies, the ICAEW indicates that the preparation of the annual report is probably “the one chance” that those companies have to communicate with the market and, therefore, to potential investors. 

The ICAEW is using this report to initiate a debate over corporate reporting as it believes “a more radical approach should be considered to address the challenges of complexity, fairness, balance and understandability of corporate reporting in the modern world”.  It indicates that these seven questions will form part of a more detailed report into corporate reporting, to be published in 2016, that will “offer recommendations to improve in the short term the quality of information provided in the “front half” of annual reports”. 

The full report is available on the ICAEW website.

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