ICAEW publishes report calling for changes to disclosure rules

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

15 Dec 2013

The Institute of Chartered Accountants in England and Wales (ICAEW) has published a report by its Financial Reporting Faculty calling for urgent reform to the regulation of financial reporting disclosures, saying the current situation will get worse as the volume of irrelevant material increases if the system is not changed quickly.

Financial Reporting Disclosures: Market and Regulatory Failures argues that the current disclosure overload is to a large degree an outcome of the regulatory framework. At the same time, the report also states that this framework is a response to failures in the market for financial reporting information. And both market and regulatory failures in part reflect the inherent limitations of financial reporting.

The most important point of the report is, that the problems are created by a 'one size fits all' approach to disclosures that fails to recognise the conflict between regulation and standardisation of financial reporting disclosures on the one hand and the diversity of firms and user needs on the other. This approach has led to regulation requiring firms to disclose the same information to all users, irrespective of the question whether all users will benefit in the same way from long and complex disclosures. Standardisation of disclosures has also led to a large proportion of immaterial disclosures being published as part "an ever-growing list of required disclosures that have been recognised as important at one time or another for at least some firms".

In its report the Financial Reporting Faculty recommends a programme of reform consisting of four ways in which the causes of the problem can be addressed:


    1. Reform the process for setting disclosure requirements
      1. The standard-setting process should be reformed so as to give more weight to the views of equity shareholders who as owners meet the costs of disclosure requirements.
      2. Standard-setters should establish a framework to provide a structure for setting disclosure requirements.
      3. To the extent that firms comply with disclosure requirements even though the resulting information is immaterial, standard-setters should reflect this in deciding whether disclosure requirements are proportionate.
    2. Change the requirements themselves
      1. Disclosure requirements should allow firms to report separate information sets to different types of users.
      2. Standard-setters should regularly review their disclosure requirements to weed out unnecessary disclosures.
    3. Change the way in which the requirements are implemented
      1. To reduce the incentives to provide immaterial disclosures, enforcement agencies should clarify that they will not take action against firms that omit immaterial disclosures, and they should encourage firms to omit immaterial disclosures.
      2. Auditors should refrain from encouraging firms to make immaterial disclosures and should encourage them to omit immaterial disclosures.
      3. Once enforcement agencies and auditors have reformed their approach to materiality, firms should cut out disclosures that are clearly immaterial.
    4. Place more reliance on non-regulatory solutions
      1. Preparers and users should engage directly to discuss voluntary public disclosure of information that is not currently provided, rather than rely entirely on standard-setters to introduce new disclosure requirements.

The ICAEW points out that these recommendations are interdependent and "no one group is in a position on its own to reform financial reporting disclosures and their regulation; a coordinated approach is needed". This comment reflects the main message that came out of the IASB's disclosure discussion forum in January: that users, preparers, standard-setters, auditors and regulators all contribute to the perceived problems about disclosure, and that each of these parties can contribute to improvements. Only recently, the Danish regulator overseeing non-financial entities (Erhvervsstyrelsen or Danish Business Authority (DBA)) was one of the first regulators to actively encourage companies to omit any immaterial information and disclosures in the financial statements.

Further information on the ICAEW website:

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