High drama may be reserved for a listed company’s AGM, but without doubt the high point of the financial calendar is the announcement of the annual results. Perhaps more surprisingly in this era when deregulation means reregulation, and all regulation abhors a vacuum, the formal requirements which govern this announcement are few and far between. Yet the process, and the documents it creates, has expanded into an industry of its own.
For all sorts of reasons, it is desirable that investors, and potential investors, should be given a company’s annual results as soon as they are reasonably firm. The Exchange does not like delay in the release of market-sensitive information: but equally, what is released must be reliable.
Of course there is a tension here, but it is a good deal less than it was.
The basic Stock Exchange requirement is very simple: the announcement need contain little more than the bald profit figure and the proposed dividend. But what actually happens in practice?
Towards the end of last year, KPMG conducted a survey of the preliminary announcements issued by 60 of the top UK companies, by market capitalisation.
One might expect minimalist regulation to be reflected in minimalist preliminary announcements. But companies are generally much more forthcoming. The survey both confirmed this and at the same time pointed to a wide diversity in actual content.
The preliminary announcement has evolved into a much more substantial document than the simple Stock Exchange requirement. On average, there were 18 pages to each announcement reviewed; but some were a good deal longer – one actually extended to 77 pages, but there were some exceptional factors in that case.
Beyond a simple page count, it is difficult to characterise today’s announcements in a few words. Their detail varies from one to another in style, form and content. This seems curious, perhaps, but a few moments’ reflection will point to the reason, which is vitally important when considering the wider issues.
The role of a preliminary announcement is to communicate information to the market – in practice, this means a fairly small number of analysts.
These users are knowledgeable about the company and are in a position to demand, and receive, information which they consider relevant. Consequently, the information which is communicated, and the form of that communication, have evolved by the action of market forces in the circumstances of each individual company. Discussions with analysts give no impression that they needed their position backed up by further regulation – they already get far more information than regulation requires. Indeed, in some cases it could be argued that they get too much, and are in danger of losing the wood for the trees. The truth is, preliminary announcements have often become little more than a mini set of accounts.
Increasingly, the preliminary announcement is based on actual, audited accounts. This comes about for a number of reasons: it is clearly inappropriate for directors to release information which may be subject to change; the Exchange requires that the announcement must be “agreed” by the auditors (whatever that may entail); and the process of accounts preparation has improved immeasurably over the past 10 or 20 years – companies’ systems have improved, often as a result of IT development, and the sheer physical process of typing and preparing accounts has been vastly simplified by the word processor and desktop publishing.
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All this has left the statutory accounts increasingly marginalised. Academics will say share prices move much more on the preliminary announcement than they do when accounts are published. The analysts KPMG spoke to were hard put to think of examples where something had come as a surprise from the statutory accounts.
Clearly, the respective roles of the preliminary announcement and of the statutory accounts now sit uncomfortably together. But, this issue cannot be looked at in isolation. Companies produce and disseminate a vast amount of information about their performance. Dealing with only one aspect could miss an obvious overlap, or create a worrying gap. We need to look at the whole field of annual financial reporting.
This has to fill the needs of a number of different users:
The sophisticated investor is usually represented by analysts, and needs an immediate assessment of the company’s performance. Such investors will also need a more in-depth analysis of the company based upon a good deal of detail. To the investor category could also be added a more general “public record” need for information. However, the purpose of financial statements is to inform investors not to cater for every conceivable need of the outside world.
Some private investors will want a fairly short but high-level report of the company’s performance. Proportionately, the number could be quite high. A recent survey of summary financial statements found that, where such summaries were offered, the take-up rate was about 90%.
Other private investors, perhaps a small minority, will want to see the fullest details of a company’s performance.
To cope with these diverse needs, companies have developed a variety of reports. Nowadays, these go far beyond the basic statutory accounts and (in the best examples at least) give a well-rounded, largely narrative presentation of the company, its activities and plans, which complements the dry numbers. This does not include analysts’ briefings, although great care is needed to ensure nothing is said on such occasions which is not available from other, more public sources. The annual report has become corporate communication in a much wider sense.
The way in which all this information is divided can vary, but the overall package is much the same. What is important is to ensure it carries out its purpose effectively and efficiently. Information overload, for both preparers and users, is an ever increasing problem.
A typical annual package for a listed company would consist of the following: the preliminary announcement – used by investment analysts and as the basis for press comment; the full statutory accounts; the directors’ report; corporate governance reports – Cadbury and Greenbury – which can appear on their own or combined with various parts of the package; a chairman’s statement – the length and content of which can vary significantly; an operating and financial review (or its broad equivalent), sometimes on its own, sometimes as part of the directors’ report and sometimes as part of the chairman’s statement; and summary financial statements, for those shareholders content to receive them as an alternative to the full statutory accounts.
Users have two needs. At the basic level, they want certain items of information but, preferably, these must be presented in a form which is easy to assimilate. Information which is too complete may well fail in this objective.
Of the users listed, the analyst and the private individual shareholder are probably at the opposite extremes of the spectrum. Analysts have an almost unquenchable thirst for information, and the knowledge and resources to use it: private shareholders usually do not, but frankly rely on the analysts, directly or indirectly, to make sense of what a company puts out.
So are these users getting what would be most useful to them, and is there duplication which could be eliminated? The most obvious candidate is the preliminary announcement, used (directly) by a relatively limited number of users and, in theory, with a rather limited shelf-life.
If one looks at the alternatives, what is available? Could, for example, the same document do for both the preliminary announcement and the summary financial statement? Here the question of the audience comes in. While it is clear the analysts appreciate a few, crisp facts as soon as the results are announced, the financial content of most summary financial statements falls far short of the equivalent preliminary announcement.
Of course, it could be enhanced – but what would it then become? Another mini set of accounts? There are already some worrying signs of this tendency.
An obvious solution is to publish the statutory accounts as the preliminary announcement. This does not mean waiting for beautifully presented, multicoloured accounts, but simply a plain paper typescript – or even better, an electronic version made available to the analysts on-screen. Many companies could achieve this now – and many more if deadlines were tightened by only a day or two: not having to produce a separate preliminary announcement could free up that extra resource.
But this is only part of what could be achieved. At the other end of the spectrum, there is far more scope for the use of summary financial statements. Relatively few companies take advantage of the opportunity at present; the economics are not good unless there is a considerable saving in the number of full accounts produced, and that means (usually) that the company will have a very large share register. But this balance could be shifted if the perception of full statutory accounts could be changed. In the KPMG model, they would fulfil two roles: as a source of information for the professional investor, and as a matter of record, available to all if required, but not disseminated nearly as widely as they are at present.
Ideally, this form of record should be an electronic one: provision already exists within the Companies Act for such filing of accounts. What matters is that information should be in the public domain, not that everyone should have it on their desk or hall table.
So where does this leave the annual ritual? The statutory accounts are only part of the information package and KPMG sees this as a possible model:
For the analysts, on announcement day:
- A brief press statement, highlighting key aspects of the accounts (but never creeping back to the length of the present preliminary announcement);
- An electronic version of the statutory accounts; and
- A chairman’s statement and/or operating and financial review (depending on how these elements of the total are put together) – again preferably in electronic form.
For shareholders generally:
- Summary Financial Statements;
- A summary directors’ report, incorporating some – but not necessarily all – the current corporate governance aspects;
- The operating and financial review; and
- The chairman’s statement.
For the public record, in Companies House;
- Full statutory accounts;
- The full directors’ report;
- Full corporate governance statements;
- The operating and financial review; and
- The chairman’s statement.
These things are eminently achievable although it is unlikely many companies will be prepared to dispense with the traditional preliminary announcement.
If this is the case then so be it, but let them at least file their full accounts electronically so that all financial information is available at the same time. Everyone will then be better off – preparers, users and even auditors.
Some of the undergrowth which has accumulated over the years needs to be dispensed with. The KPMG proposals may not be correct in every detail, but the subject deserves an airing. It should be considered in the round, and the impulse to tinker with the system and particularly to regulate, it should be avoided if at all possible. Regulation is both a support and a barrier to improvement.
Gerry Acher is head of audit at KPMG.