The future of corporate financial reporting – less or more?

By Liz Fisher: There’s a growing agreement that corporate reporting isn’t giving investors the information they need. But how can this be rectified and who should be in charge of making it happen?

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At the recent PwC ‘Meet the Experts’ conference on financial reporting, the audience was asked whether they thought that financial statements would retain their relevance for users in the coming decade; 76% of (preparer-heavy) attendees thought that they would. The answer surprised many of the speakers at the conference, for good reason.

The clamour for reform of corporate reporting has steadily grown in recent months and years – there is a general view that corporate reports have become too long, that financial information is too complex, that disclosures in particular have reached an unmanageable volume, and that the amount of non-financial information provided by companies is making comparison between companies and across sectors increasingly difficult.

The audience’s answer, though, reflected the fact that users will always need financial information and corporate reports will always be the vehicle that delivers it. However, the more fundamental, underlying question is what will corporate reports actually look like in 10 years’ time?

It is clear that the momentum for a complete overhaul of corporate reporting is steadily growing. A number of international bodies are working on projects that are designed either to tackle complexity and information overload, such as the International Accounting Standards Board’s (IASB) Disclosure Initiative, or to attempt to standardise the increasing volume of non-financial information provided by companies (such as the European Securities and Markets Authority’s guidance on alternative performance measures). At the same time, the requirement for additional information from regulators is growing, from country-by-country reporting to the disclosure of risk policy. The result is a mass of often overlapping and confusing information, with little apparent logic behind it. Add into the mix rapidly evolving technology that is changing the way financial information is used and read, and it seems that corporate reporting is falling very quickly into a box marked ‘unfit for purpose’.

Who’s in charge?

What the situation lacks is a common viewpoint on where corporate reporting should go – or at least someone who is prepared to co-ordinate the evolution. Part of the problem is that no single body has responsibility for corporate reporting as a whole. The IASB can explore ways of simplifying the reporting of financial information but, as Ian Mackintosh, deputy chairman of the IASB, told the recent International Integrated Reporting Council (IIRC) conference, ‘we are constrained by our existing mission’. There are also clearly limits to what the IASB can do through International Financial Reporting Standards (IFRS) alone. IASB member Steve Cooper pointed out at the Meet the Experts conference that ’simplification [of accounting standards] would be welcome, but I’d challenge anyone to achieve that, given the complexity of business’.

One option is for the IASB to widen its remit beyond financial reporting. The trustees of the IFRS Foundation are considering the responses to its consultation on proposals to enhance the structure and effectiveness of the organisation, which asked whether the IASB should play a more active role in developments in wider corporate reporting. The trustees themselves, though, said that they ‘continue to view the organisation’s existing forms of co-operation as a more appropriate approach than the IASB broadening its scope of work into areas outside the traditional boundaries of financial reporting. Mackintosh said it was ‘an open question whether we should be more involved or not’.

Co-ordination and integration

There are initiatives intended to bring more cohesiveness and logic to corporate reporting, the most high-profile of which is integrated reporting (described by the IIRC as ‘a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term’). The Corporate Reporting Dialogue, launched in 2014 and in which the IASB, Financial Accounting Standards Board (FASB), IIRC and Global Reporting Initiative all participate, is attempting to create a coordinated discussion about the various reporting frameworks, standards and requirements around the world, but progress has been slow.

So now the Fédération des Experts Comptables Européens (FEE) has taken on the task of ramping up the debate with a new discussion paper, The Future of Corporate Reporting – creating the dynamics for change. The paper argues that the audience for corporate reporting is growing and diversifying, new business models are developing, and technology is transforming our environment at an unprecedented pace – but corporate reporting is failing to keep up with developments. The paper intends to kick-start the debate that needs to happen and hopefully encourage some sort of consensus (or at least coordination) internationally among users, preparers, regulators, standard setters and governments. It is a step outside FEE’s usual remit, having previously concentrated on financial rather than corporate reporting.

‘This has had a long incubation,’ says Mark Vaessen, chair of FEE’s Corporate Reporting Policy Group. ‘It’s clear that there is a need for debate, so we need to stimulate the initiative. This is a substantial thought-leadership piece for us.’

Hilde Blomme, FEE’s deputy CEO, stresses that the paper is not a FEE view on the future, but brings together different views from a wide variety of stakeholders. Vaessen adds that accountants are uniquely positioned to begin the debate: ‘We are natural intermediaries in the accounting profession between users and companies. We have to arbitrate between the two. It’s a natural role for us.’

The FEE report discusses the various developments in financial and corporate reporting, as well as initiatives to simplify accounts and improve communication. It describes integrated reporting (IR) and the IIRC’s IR framework as ‘promising’, but adds that IR is still developing and in an experimental phase: ‘It needs to evolve further to fulfil its mission to establish integrated reporting and thinking within reporting practice as the norm.’

In its report, FEE puts forward its own suggestion. It says that the ultimate aim should be ‘a single, easy-to-understand report’ that aims to address the needs of a wider stakeholder audience. As a way of achieving this, it puts forward a ‘core and more’ approach. The ‘core’ is an overarching report or executive summary, which would include ‘key information that is important for understanding the company’s affairs, key financial results and additional information that’s considered relevant and material for the company’s stakeholders’, based on relevance and materiality. The core report would include information on ‘expectations for the future’. This would be supplemented by (and hyperlinked to) a series of ‘more’ reports, containing additional information such as disclosures for financial statements, to support the information in the ‘core’ report. Users could then pick and choose which detailed information they needed.

The report raises a number of difficult questions that will need to be addressed as part of the debate. Some of them go to the basics of accounting, such as the primary qualitative characteristics on which reporting is based.

Timing is key

The IASB’s Conceptual Framework names relevance and faithful representation as the primary qualitative characteristics, with other characteristics such as timeliness and comparability supporting them. The FEE report, though, concentrates on the relevance and timeliness of information, even if that comes at the cost of comparability. ‘For users,’ it says, ‘the timeliness of financial information is key.

Users seem to be prepared to take risks and rely on incomplete and even unreliable financial information, if it is produced on a timely basis. It is a critical choice whether all of the corporate report should be prepared and issued at the same time, or whether some information may be issued later or earlier or when relevant events occur.’ It adds that relevant information ‘is buried in the ever-increasing volume of financial information’ and that financial statements need to evolve to retain their relevance and not be seen merely as a compliance exercise.

‘Relevance is more important to me than comparability,’ says Vaessen. ‘There will always be a certain level of comparability because of market forces, but relevance trumps comparability.’ Blomme adds that ‘anyone expecting comparability to be the priority in this will be disappointed’. Crucially, the ‘core and more’ reports would not necessarily have to be available at the same time – the core report would need to be timely, while ‘more detailed information such as specific disclosures could become available at a later stage’. ‘Maybe we need to step away from a purely periodic approach to reporting,’ adds Vaessen. Instead, reporting could be a combination of the dynamic, periodic and ad hoc, with information updated depending on the relevance and urgency of the information and when it becomes available.

One of the biggest areas of corporate reporting in need of attention is non-financial measures and information. The paper argues that its increased use means an international framework is becoming essential. It cites an article by Robert Elliott, former chairman of the American Institute of Certified Public Accountants, published in 1998, which illustrated the diminishing influence of financial statements on markets and said there is need for ‘decisive leadership’ in developing a common international framework for non-financial information. ‘Financial reporting is well-developed,’ says Vaessen. ‘It’s other areas that need attention.’

‘The crux of what our report is trying to achieve is how to put some structure around the unstructured information,’ he adds. ‘It’s open to all kinds of manipulation – boards talk about what’s important to them, but without the key performance indicators to measure them. It can often be a story that’s not based on fact.’

The FEE report stresses the need for the accountancy profession to innovate if a solution is to be found. ‘Innovation develops in the market,’ says Vaessen. The UK has done it with the FRC’s Reporting Lab – maybe we could replicate that.’

The FEE paper is open for consultation until the middle of 2016, after which FEE will come up with a list of policy recommendations. One of the first and most important questions to answer, though, is who will be in charge of taking things forward from that point. ‘We don’t have the answer to that; there are a lot of players in the debate,’ says Vaessen. ‘But it will certainly need government support. I see a lot of parallels to the 1970s when the International Accounting Standards Committee was created. The need for global accounting standards was seen and the initiative was taken up by the profession. It took a long time, but without a dot on the horizon, things won’t move.’

By Liz Fisher