KPMG Director, Helen Brennan, believes that a disclosure checklist mentality is the enemy of good communication.
I would agree that many listed company annual reports are too long and overfull with detail. There are good annual reports out there, but there are still many that come up short (or long, depending on your perspective).
The Financial Reporting Council’s (“FRC”) paper Cutting Clutter told us why we might worry: “Clutter undermines the usefulness of annual reports and accounts by obscuring important information and inhibiting a clear understanding of the business and the issues that it faces.”
I suspect there may be a strong correlation between the increasing size of, and detail in, annual reports and the number of pages in the IFRS bound volume. But the standards don’t require immaterial disclosures and say so explicitly. Even the regulators are saying leave out the clutter. So if we accept that users of accounts want to read a simple, balanced, consistent story, told in plain, jargon-free language, why do we still have so much clutter?
One possibility is that the time and effort to produce a better annual report isn’t worth it because those reports aren’t sufficiently valued.
Another factor might be that some preparers (and their auditors) have ceased to trust capital market regulators not to second guess their judgements, in particular on the materiality of disclosures. The Chairman of the International Accounting Standards Board, Hans Hoogervoorst, made the point recently: “Many preparers will err on the side of caution and throw everything into the disclosures. They do not want to risk being asked by the regulator to restate their financials. After all, no CFO has ever been sacked for producing voluminous disclosures, while restatements may be career-limiting.”
The jeopardy of regulatory compliance becomes a cost/benefit equation. The perceived benefit of an uncluttered set of accounts is outweighed by the cost of potential regulatory criticism. The result? Trivial disclosures continue to appear in annual reports … just to be on the safe side.
I believe it’s in the hands of the regulators to seek to restore that trust and to change the cost/benefit equation, freeing companies up to innovate and to deliver annual reports that are more relevant to users.
How? Regulators such as the FRC have already pleaded for action, but perhaps they can do more? Perhaps those regulators, working with the IASB, could amend IFRS to distinguish between:
Perhaps we should debate separately how IFRS could be improved, how enhanced narrative reporting could add to the story of the improved financial statements and whether assurance is needed over the detailed disclosures or over the narrative.
In the meantime, I believe that a disclosure checklist approach is the enemy of good communication. A change that reduces the jeopardy of regulatory compliance would free up all parties to get on with cutting clutter. Corporate reporting could be all the more relevant for it.
Helen Brennan is a Director at KPMG in the UK
Thanks for the comments posted so far. We agree that narrative explanations are a key part of making sense of the numbers and the recent changes to the Strategic Directors’ Report can help. More about the future sounds useful; but what do companies need to make this happen? Is it just a matter of a safe harbour? Helen Brennan, Director - KPMG in the UK
4. The whole profession has been driven down a checklist route to avoid litigation. At the same time this creates the illusion of protection but utterly fails to enable and empower people to make sensible judgements to get the messaging right. A step change is required.
3. Whilst I think that a checklist approach does generally lead to a lack of clarity and boilerplating I do not believe it needs to be so. Imaginative use of databooks and/or appendices easily searchable could deal with the plethora of potentially useful information whilst decluttering the main story book.
2. I agree that time and effort to produce a better annual report isn’t worth it because those reports aren’t sufficiently valued.
1. Words speak louder than a morass of immaterial numbers. What HAS happened is far less important to I vectors than what WILL happen, and it is much more important that corporate reporting gives a lucid description of the prospects, aims and ambitions for the future, but without fear of condemnation that it does not all work out in quite that way as time goes by!
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.