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With disclosures running into the hundreds of pages, corporate reporting needs to be streamlined – but who will be the first to start cutting? Liz Loxton examines the challenges facing companies as they try to decide what is superfluous

Illustration: Aron Vellekoop Leon

Bank reporting season always seems to bring out a demoralising, long-winded approach to corporate reporting. The inclination to include every tiny disclosure appears to win over calls to streamline.

HSBC’s annual report for 2012 runs to 546 pages, only marginally longer than that of RBS, at 543 pages. According to a report from Deloitte, the average overall length of annual reports for UK-listed companies has doubled over the past 15 years. They are an average 103 pages and take an average of 71 days to approve.

You’re going to find it easier to disclose than justify why you have decided not to disclose

It is not just that campaigners allege that disclosure-heavy annual reports obfuscate rather than enlighten. Or that these tomes exasperate the public and even, at times, investors. Increasingly regulators are calling time on the tick-list approach to financial disclosure.

On the back of its 2012 report Cutting Clutter, the FRC has issued a call to arms. Annual reports that are “fair, balanced and understandable” are a crucial part of high-quality reporting, it has said. “Disclosures should be company-specific; boilerplate should be avoided.”

Meanwhile, the IASB is working on a disclosure framework and in a speech in June 2013, chairman Hans Hoogervorst set out a plan aimed at helping preparers to become more selective.

James Roberts, senior audit partner at BDO, agrees that we have gone far beyond the point where enough is enough. “Today, reports are extraordinarily long and they have ceased to be useful because you need experts to deal with them,” he says. “They are not as intuitive as they used to be and it is not even easy for business people to know what the numbers tell us. At the same time, this is a document of record that doesn’t move markets any more. There are others that do: production figures, investor presentations and so on, but as annual reports get more complicated, their relationship with other corporate announcements gets more tenuous.”

Companies are increasingly unhappy with accounting languages they find counter-intuitive, Roberts says. “They are almost choosing their own GAAP. Reports and accounts are littered with immaterial disclosures that are included to fend off the Financial Reporting Review Panel.”

A decade of IFRS activity has added to the complexity of the language. However, Hoogervorst argued recently that companies need to be more discriminating in the level of disclosure they apply to their reporting and will need IASB leadership. In a speech at the 2013 IASB conference setting out a new approach for the IASB and compilers, he said: “If a standard is relevant to the financial statements of an entity, it does not automatically follow that every disclosure requirement in that standard will provide material information. Each disclosure will have to be judged individually for materiality.”

Some go farther. “I don’t think it’s beyond us to row back a little without losing the whole initiative of IFRS. A softening of the most complex standards wouldn’t be beyond us,” says Roberts.

Much as regulators have begun the work of trying to persuade preparers of annual reports to question the level of detailed disclosure they include, preparers still face an abundance of real world regulatory issues. They tend to err on the side of caution rather than risk being asked to restate their financials.

William Underhill, corporate finance partner at Slaughter & May and a member of the FRC’s Financial Reporting Lab steering group, says that in practice there is always something in the regulatory environment that weighs against the Cutting Clutter argument. “The new rules on Audit Committee reporting are going to generate a lot of boilerplate statements. They will result in more words and they are going to be regarded as not very useful words.”

More crucially, he says: “The Disclosure and Transparency Rules on not making selective disclosure and requiring that communications such as the annual report must not omit anything of importance all point people towards more disclosure rather than less.

“The safest course is to add to the disclosure in the annual report. Theoretically, the penalties are unlimited fines and getting things wrong would definitely be career-limiting for an FD. And then if you layer on to that the fact that we don’t operate in a UK bubble, you bring on more pressure for disclosure.”

So FRC moves not withstanding, there may be little incentive for companies to alter this stance.

The fundamental thing to keep in mind is that the main users of annual reports are the investors in the company

Andrew Gambier, technical strategy manager at ICAEW, says: “You’re going to find it easier to disclose than justify why you have decided not to disclose. Even if everyone agrees you don’t need something, the newspapers are still going to ask why not? And even if you survive the headlines, the Review Panel is still going to ask why not. I don’t think there’s been a case of the Review Panel criticising a company for over-disclosure. Whereas there is a world of pain in being hauled up to explain why you didn’t disclose.”

So where do we go from here? Helen Brennan, director in audit quality at KPMG, says: “The reason we have such extensive disclosure requirements is partly because of the value we place on audited accounts. Each disclosure is there because people have asked for it.”

Sue Harding, director of the FRC’s Financial Reporting Lab, suggests some common sense first steps that will help preparers to limit disclosures and that the Lab is working on case studies and approaches that should assist. “It certainly seems that with some reorganisation you end up writing things once and therefore cutting some duplication. But it’s difficult to cut without a context and that’s why we are testing different scenarios.”

Brennan says users need to shift away from a stance that argues for making annual reports all-inclusive. “We have now reached a point where trust has been eroded. If we look at this from the perspective of a knowledgeable user, if they see something is missing, do they think that this is because the company has something to hide or because the company has made a rational decision on whether it is material?

“We need to move to a constructive discussion that might prompt users to approach companies for information they are used to seeing directly. Companies might publish the information that people are used to seeing but that did not in their view merit a place in the accounts on their website as reference material. Full disclosure documents are like encyclopedias; we like to have them to refer to, but we don’t read them for entertainment.”

There are others who agree that annual reports have become loaded with an expectation that they should be all things to all people.

“The fundamental thing to keep in mind is that the main users of annual reports are the investors in the company,” says Freddie Woolfe, manager at Hermes Equity Ownership Services. “That doesn’t mean that reports can’t be relevant to other stakeholders or that the interests of others outside the investment community would be different. But the primacy of investors has to be borne in mind.”

Gambier says that care is needed to make sure we’re not overburdening the corporate accounts with information that is irrelevant. “Historically, accounts were more important. Now information is all over Twitter in seconds, so it’s not clear that everything needs to be in the audited accounts. They are an important anchor, but publishing analyst briefings and presentation packs is commonplace and welcome.”

There is, however, still a leadership issue. As long as it is left to companies to declutter annual reports, a ‘you go first’ issue is likely to remain. Brennan says that is both understandable in the current climate and hard to criticise companies for.

And while there are companies seeking to do better, there will always be practical issues around cutting information that used to be there. “Let’s say you cut an element of reporting on the grounds that it’s not material and then you are asked for that information by an investor,” asks Underhill, “is it fair to give that investor the information not knowing whether other investors would also want it? This nice world of Cutting Clutter is actually really hard to achieve. There are a number of companies trying to improve quality of reporting, but I don’t know that anyone is pushing on the materiality point particularly hard.”

So if annual reports are going to change, where is the impetus to come from? Gambier reckons: “The regulator will need to make materiality a key objective of its reviews of the next two years. It will need to make it very clear that over-disclosure is as bad as under-disclosure and offer guidance on the types of disclosure it thinks are obscuring accounts.”

ICAEW’s Financial Reporting Faculty last month issued a new report on disclosures. The latest in the series of publications from the Information for Better Markets initiative, Financial Reporting Disclosures: Market and Regulatory Failures proposes reforms to the disclosure regime that would make financial reporting more user-friendly. The report can be downloaded from

Liz Loxton


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  • Comment by tcopnell

    Communication, communication, communication! It is harder to write a short piece than a long piece ... but if the effort is put in then annual reports could easily be a lot shorter (and more readable) without having to omit much of the current disclosure.