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ASIC commissioner comments on the ongoing relationship between companies and shareholders

  • ASIC (Australian Securities and Investments Commission) (dk gray) Image

13 Sep 2013

Mr John Price, Commissioner of the Australian Securities and Investments Commission (ASIC) has given a speech to the Pacioli Society and the Accounting Foundation of the University of Sydney discussing the ongoing relationship between a company and its shareholders. In the speech, one of the items on which Mr Price focused was annual reporting by listed companies, in which he notes many suggestions for improving the usefulness of annual reports.

Mr Price notes that there are many controversies about the usefulness of annual reports as they are currently constructed, citing studies and a Australian Parliamentary inquiry which found that the complexity and volume of information in annual reports can be overwhelming and result in "key relevant information in an annual report [being] obscured by information 'clutter'". He goes on to outline the various initiatives around complexity in financial reporting, including recent Australian Financial Reporting Council consultations, ASIC's proposals for better disclosure in operating and financial reviews (OFRs), and the United Kingdom Financial Reporting Council reports Louder than words and Thinking about disclosures in a broader context. This latter report suggested four questions as a 'road map' for a disclosure framework:

  • What information do users want?
  • Where should disclosures be located?
  • When should a disclosure be provided?
  • How should disclosures be communicated?

Interestingly in the context of speech by a regulator, Mr Price continued to note:

I would argue these are very sensible questions to be asking when thinking about disclosure rules generally. More broadly, these questions seem consistent with ideas from behavioural economics that people do not always process information rationally.

To my mind it follows careful thought needs to be given to both the information that users of accounts need and how it is presented. To give you an example – accounts reflect historical performance, yet numerous studies show that past performance of a firm is not necessarily predictive of future performance. So why should the market so carefully focus on accounts compared to say the OFR, which talks about future prospects, risks and strategies?

Mr Price's speech went on to discuss the Annual General Meeting requirement under Australian corporate law, providing a number of options of how to improve their effectiveness, before concluding with the following points:

  • Disclosure (including accounting disclosures) should focus on what information users want and how they make decisions. The issue is particularly important and difficult given different users may want different amounts and types of information.
  • Annual reports should contain useful narrative information to users about what might happen to the company in the future , not just what has happened to it in the past
  • Listed companies need to ensure their investor communication is balanced. Smaller retail shareholders should have the opportunity to participate in communications if they want (either through the AGM or other means) and communication should not be solely focused on institutions
  • Wherever possible we should embrace new technology as an opportunity to improve communication and reduce cost

Click for the full text of the speech (link to ASIC website).

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