We comment on the FRC's discussion paper on the future of corporate reporting

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09 Feb, 2021

We have published our comment letter on the Financial Reporting Council's (FRC’s) discussion paper, ‘A matter of principles: The future of corporate reporting’ (“the Paper").

We welcome this thought leadership paper and the opportunity to reflect on the current reporting system in the UK. We believe that the Paper is timely given the significant pace of development in the UK and global corporate reporting landscape.

While we welcome the aspiration to simplify the corporate reporting landscape to drive accessible, meaningful information for stakeholders, we have significant concerns about the primary outcome being focused on promoting separate reports as set out in the paper. Key points we make in our response include:

  • Connectivity: Reporting affects business behaviour. In our view, the approach to corporate reporting of the future set out in the Paper adversely impacts the critical connectivity that exists between non-financial and financial reporting, driving fragmented and siloed strategic behaviour - a step back from the move towards integrated thinking that Deloitte advocates. The narrative must be connected to judgements and estimates in the financial statements. Separating this narrative would be wrong, and including it twice is a duplicative and expensive exercise.
  • Dilution of board focus: There is a risk that the silo approach may also result in diluting a Board’s focus if separate reports end up at different committees rather than being overseen as a whole by the audit committee. For example, the Public Interest Report may go to a governance committee and the business report to the Executive Committee and then maybe straight to the main Board, thereby reducing the overall level of scrutiny.
  • Audience: The focus of UK annual reports on providers of financial capital as a primary audience is consistent with integrated reporting and the focus of other current global developments. This must remain the priority in order to direct capital to sustainable and resilient business. We believe investors should have easy access to the information that is relevant to their needs and not have to piece together various reports prepared to differing materialities. We are concerned that purely objective-driven reporting, as proposed in the Paper, would be unlikely to lead to the right outcome: although different users of a report may have the same overriding objective or interest in a topic, as the Paper suggests, we believe the needs of users from different stakeholder groups will vary as a result of the different lenses through which the users are viewing the information they are using.
  • Materiality: The distinction between a) users with the objective of making economic decisions, and b) the broader user group focusing on the impacts a business has, is articulated clearly as a “dynamic” and “nested” approach to materiality of sustainability information in recent joint publications by CDP, CDSB, GRI, IIRC and SASB e.g. their Statement of Intent to Work Together Towards Comprehensive Corporate Reporting. We believe this approach to be consistent with that of the FRC to date and that it is a compelling starting point as to how a future system of comprehensive corporate reporting might be designed.
  • Assurance: Assurance is an important contributor to trust, but for this to be the case clarity is needed regarding what level and quality of assurance each piece of information is subject to. We strongly feel that the quality of assurance over the connected ‘enterprise value’ report whose primary user is the shareholder is best delivered holistically by the auditor, recognising that the majority of the value of a company is represented by intangible factors which are currently discussed in the front half of the annual report. However, there is real opportunity for ‘non enterprise value’ data points required by broader stakeholders to be assured by other providers, subject to comparable independence and quality requirements. This approach could promote more choice and competition in the market and should link to the Audit and Assurance Policy recommendation from Brydon. It is critical that the market has clarity on the scope and quality of assurance that is applied to reported data.

The full response is contained within the comment letter.

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