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:
- detailed disclosures, which lend themselves to being made available in an appendix to the financial statements or even electronically, as an on-line “reference book” on the company; and
- a greatly reduced volume of key (material) disclosures woven into an understandable story in a true and fair set of annual IFRS financial statements.
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