ANNUAL reports are in trouble. So much so that a laboratory is now being constructed to see if any new treatments can be devised to inject a new lease of life to the ailing reports.
In October, the Financial Reporting Council (FRC) is launching its Financial Reporting Lab. When Financial Director enquired at the start of September, those who had been invited to don the white coats were not yet being named: that news was held back until a date closer to the official launch on 14 October.
However, Alison Thomas, who is working on building the lab for the FRC, told Financial Director that the regulator has long had a desire to encourage more effective reporting.
“The overall ambition of the lab is simple: effective reporting,” she says.
Indeed, the lab can be seen as part of a series of FRC initiatives to improve communication; it was first suggested in the FRC’s consultation document Effective Company Stewardship: Enhancing Corporate Reporting and Audit, which was published in January 2011. In that document, a lab was proposed “where new financial reporting models and concepts could be explored, tested and trialled (without liability) to enable greater innovation in the market”.
John Davies, head of technical at the Association of Chartered Certified Accountants (ACCA), is giving the lab a cautious welcome. He thinks it has a part to play in the FRC’s bid to reshape annual reports into something more interesting and useful: “There is a general feeling of lethargy around the annual report. It has no clear purpose, and anything that helps to re-establish what works has to be good.”
He points out that the lab is all about ideas for presentation and disclosure, not an opportunity to rewrite the actual accounting standards. “It is a good idea to the extent that there is no formal structure for investors and users to transmit ideas and suggestions to companies,” says Davies.
Thomas describes the lab as a “logical step from the conceptual to the very, very practical. The mission is to produce an environment where investors and companies can bring bugbears and come up with pragmatic solutions.”
Others agree. Oliver Tant, head of audit at KPMG, says: “These environments should encourage innovation and experimentation by companies, and offer valuable input in providing practical solutions to meet the needs of users of corporate reporting in the future.”
But Thomas admits that no one has done anything like this before, and they will therefore be learning on the job. However, she is determined that the lab will not be a talking shop, but will instead work on various projects in parallel.
So what are the experiments we can expect to see? Thomas says that the role of the FRC is to facilitate the procedure by acting as a catalyst for change and as a place where parties can come together, rather than simply driving the agenda. For example, one item that has arisen in her discussions with investors is the presentation of net debt reconciliation.
Finance directors may be involved at one level, such as signing off their companies’ involvement in individual projects. However, it will be others from the company who become involved in the individual experiments, bringing their detailed knowledge of preparing annual reports. And while technical accountants and financial controllers may dominate the discussion about the minutiae of disclosures at the back of the report, others – such as company secretaries and even chief executives – may want to roll up their sleeves and try to bring about changes to the front of annual reports.
As well as providing a neutral environment for exploring ideas, the lab should provide a sense check, ensuring that any initiatives that emerge move financial reporting in the right direction.
It could be argued that such an initiative does not fit into the current environment of gloom and caution. Unsurprisingly, Thomas takes the opposite view, suggesting that transparency is vital at a time when accessing capital is not easy as it lets investors understand a corporate’s story.
And it is absolutely clear that reports and accounts are not helping that process at the moment. David Phillips, PwC partner and an adviser to the Hundred Group of finance directors, says: “A growing number of CFOs have become frustrated with reporting because it is not able to communicate what they believe it needs to. That is why investor relations have become so important. But in a regulated area, the lab is a space to create innovation. Don’t expect to see wholesale changes, but it does give CFOs the opportunity to pick up on topics that are a bugbear to them. They think there is a lot that can be done in the area of presentation.”
Of course, the trouble with labs is that people can toil away for years without getting any breakthroughs that add to the sum of human knowledge. The challenge for the FRC is to ensure that its lab finds some quick wins by proving that financial reporting can be improved, contrary to the evidence of the last few years. ■
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