Louder than words

Louder than words is the title of a report released yesterday by the UK Financial Reporting Council (FRC). The report is the output of a year’s work looking at the complexity and decreasing relevance of corporate reports. The report offers some practical recommendations for improvement and should be welcomed by those who see reporting as a critical mechanism in the workings of our capital markets. The report suggests that the current model is currently aimed to please too many users and that it needs to be refocused on providing investors with the information that is useful for making resource allocation decisions and assessing management stewardship.

The report recommendation can be summarised as:

1. Principles for less complex regulation of reporting. Here regulators are asked to focus on:

• Relevant information reflecting the reality of the business
• Limitation of constant change and
• Cost effective intervention
• Understanding what other regulators are doing in this area
• Delivering an understandable solution (keeping regulations simple and user- friendly)

2. Principles for effective communication in reporting should be:

• Focused, open and honest, clear and understandable, interesting and engaging

3. Call for action to:

• Improve cash flow and net debt reporting
• Ensure disclosure requirements are relevant and proportionate to the risks
• Ensure requirements for wholly-owned subsidiaries reporting are targeted and proportionate
• Improve usability of IFRS - reorganise its standards around accounting topics, with a focus on structure and outcomes
• Cut clutter, here the focus is on immaterial disclosures and the way regulation is adding to the problem

Do take a look at the report; you'll be pleased to know that there is a short version for those who have day jobs. Personally I would agree with all that is in the report but I believe that if we are to make meaningful and lasting change we need to take a more radical look at the whole system of reporting and information exchange.

In this context, I thought you would be interested in a speech I gave to a recent EU Commission conference entitled "Financial Reporting in a Changing World".

I think I have painted a starker picture than the FRC of where reporting is today and a belief that only radical surgery is going to result in the patient recovering and having a meaningful and fulfilling life. While I agree with the FRC that the focus of effort should be on resource allocation decisions and assessing management stewardship, I put forward the argument that the step change needed will only occur if we look at the information set that underpins regulatory corporate reporting, investor relations activity and sustainability reporting as if one. If we do, we will not only enhance reporting, but we will also significantly simplify the processes that support it. 

Do read the FRC report and my speech and support the agenda for change.

As always I am pleased to hear your views and comments on the postings, and to take questions about corporate reporting.

David

Comments

[Mary Adams]

David- The four boxes in your speech depicting the critical building blocks of information are great. The graphic present the best synthesis of the gaps in corporate reporting I have seen to date. Keep up the good work!