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Professionals frequently conclude that the UK has the best corporate reporting system in the world. But, the reality may not match the perception. Corporate reporting in the UK doesn’t do as much as it is expected to do — reduce uncertainty for investors and increase transparency for all stakeholders, for a variety of reasons. The solution may be more straightforward than many would guess.
There is much to admire in reporting requirements for UK public companies: a principles-based approach encouraging the evolution of best practice; a requirement to comply or explain in governance reporting that many perceive to be particularly enlightened; the supportive and progressive style of the reporting regulator; and, by way of external validation, the spreading global adoption of Integrated Reporting, a framework lifted largely from UK reporting standards. So, what’s not to be positive about? Well, on the face of it nothing, but dig deeper and one quickly finds a number of issues for concern.
There are simply too many competing, unaligned codes and reporting standards – Disclosure and Transparency Rules, Listing Rules, the UK Corporate Governance Code as well as the Companies Act and associated reporting statutes as well as the voluntary Integrated Reporting framework, not to mention the array of sustainability related standards. While the standards and codes roughly align, more or less, changes are rarely simultaneous, complexity rules and conflicts proliferate. Sometimes it seems as if Government, FRC and FCA are pulling in opposite directions, and all with different agenda.
Many question the independence of the FRC, as regulator, from the accounting profession that has helped to set it up and contributes to its ongoing operations. Others look at the cursory efforts of the Financial Reporting Review Panel, the FRC’s executive arm for holding errant reporting companies to account, and wonder just what is its remit when there are so many companies that are barely compliant with reporting requirements and standards?
In this context it may seem less surprising that there are so many premium listed reporting companies with less than coherent Annual Reports. Some seem simply unable to report clearly. Others appear to use the opportunity of lax regulatory supervision to avoid clarity and logic in their narratives. FutureValue’s rigorous and consistent evaluation of FTSE100 Annual Reports confirms a lack of any substantive overall improvement over each of the last seven years. The average overall score for a FTSE100 company of 6.22 over the 2016 reporting cycle is no better than it was in 2010. Our more recent evaluation of governance reporting confirms that almost a half of the FTSE100 is non-compliant to some degree.
And if companies want to report more effectively they often look to award winning companies’ Annual Reports for the example they need to give them guidance. Sadly, too many of the companies short-listed for, or winning one of the burgeoning sets of corporate reporting awards, fall short of truly exemplary standards. Entry fee, nomination, vested interest, panel selection or simply whim are among the varied qualification criteria, when it should simply be the quality of the Annual Report that is the only entry qualification. Small wonder then that mediocrity persists.
Complexity has inevitably contributed to the growth of an industry around corporate reporting, an industry that really doesn’t want change in case it should impact negatively fee earning opportunities. Auditors like the status quo for the unchallenged oligopoly position they seem able to maintain. Report designers like the scope of reporting requirements for the scale and expense of annual reports they demand. Institutional investors like the intricacy and variability for the lack of transparency they sustain, so that privacy of information may rule.
Resolution of the matter is more simple than many would credit. We need a unified reporting structure that aligns the panoply of rules, regulations, codes and statute, under the unchallenged auspices of a single authority. We need a Business Reporting Council at arms length from the accounting profession to work alongside the Financial Reporting Council and take primary responsibility for the front of the Annual Report. We need an independent and unimpeachable assessment of company reporting endorsed and approved by regulators to provide true examples for others to look to, and that becomes the reliable basis for recognition and making awards. And for this all to have some real impact we also need a public dressing down of companies that fail to live up to the spirit as well as the letter of corporate reporting requirements. That shouldn’t be too difficult. If we can achieve all this then corporate reporting will do what it should do, truly benefit investors and stakeholders. Perhaps then we can the talk of a corporate reporting system to be proud of.