'Cut the clutter' call fails to gain full traction

ANNUAL REPORT WRITERS have been deluged in the past year with a tsunami of competing challenges, which may explain why the average company tome has increased in pagination despite growing calls to shorten them.

The multi-headed beast that is the annual report now has to juggle the disciplines of the new strategic report, going concern issues, risk reporting, ensuring better synchronicity between the narrative and financial reporting threads while at all times attempting to keep it fair, balanced, taut and understandable.

Somewhat fortuitously, Deloitte’s head of UK corporate reporting, Veronica Poole, brings her ice-cool analysis to bear alongside that of her colleague, UK head of corporate governance, William Touche.

They do so through the latest edition of Deloitte’s annual report insight analysis, Providing a Clear Steer, which saw their team peruse the annual reports of 100 UK-listed companies to determine its zeitgeist. It provides some illuminating revelations, notably an inability to cut the clutter, increasing in length to 132 from 122 pages during the last year.

Even with the growing length and increased regulatory emphasis on producing cohesive reports, nearly three quarters of companies (71%) failed to show up-front how they link areas such as company strategy, KPIs, business model, remuneration and financial statements.

Incoherence

Poole says: “While we had hoped that the size of reports would start to fall, instead they have risen again…much of it driven by an increase in the length of narrative reporting, in particular the new style remuneration reports.

“But on the plus side some companies have used the opportunity presented by all the changes to restructure their narrative reporting. This is important and it will hopefully give them a good foundation to embrace the Financial Reporting Council’s latest messages on clear and concise reporting.”

The firm’s report found that a continued lack of what the FRC dubbed ‘linkage between the narrative and the financial data in the back’, continues to blight coherence with just 29% showing up-front how their report joined into a coherent and seamless whole.

Some 86% of companies presented non-GAAP measures in their summary pages and 60% of these gave them higher prominence than associated GAAP measures, a trend certain to antagonise regulators. The International Organisation of Securities Commissions (IOSCO) is already consulting on the use of non-GAAP measures, while the Securities and Markets Authority (ESMA) is primed to publish its own set of guidelines before year end.

Integrated reporting (IR) has been one of the key focuses that gained increased traction throughout 2014, glowing with the watchwords of articulating value creation.

While Deloitte’s report found that just 5% of companies mentioned IR, over 80% actually discussed value creation within their annual reports.

However, two separate research surveys by the International Integrated Reporting Council (IIRC) – a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs – and Big Four firm, PwC, capture major behavioural shifts unleashed by the IR discipline.

The IIRC research, Realizing the Benefits: The Impact of Integrated Reporting, conducted in partnership with Black Sun, showed that 91% of all respondents had seen a positive impact on external engagement with stakeholders, including investors. Of those that had published at least one integrated report, 87% believed investors better understood their strategy.

Some 79% reported improvements in decision-making, while 68% said they had a better understanding of risks and opportunities. Almost eight out of ten (78%) respondents saw better collaborative thinking by the board about goals and targets.

The study was conducted with participants of the council’s three year IIRC pilot programme – a network of 140 businesses and investors from 26 countries – that helped it develop and test its International Framework, published in December 2013.

And in further research by PwC, Corporate performance: what do investors want to know?, nearly two-thirds of investment professionals (63%) surveyed said they believed that the quality of a company’s reporting – including information about strategy, risks and other drivers of value – could have a direct impact on its cost of capital.

Articulation

Paul Druckman, CEO, IIRC, said: “I am delighted to see the very significant positive impact that IR is having on businesses that have taken a lead in making their corporate reporting and thinking fit for purpose.

“It is crystal clear from this new research that adopting IR is leading to important breakthroughs in organisations’ understanding and articulation of how they create (and destroy) value – a staggering 92% of respondents say it has improved their understanding of value creation.

“It is also encouraging to see that IR can give investment professionals more confidence and enhance their analysis.”

When it comes to financial statements, a minority of companies were found to be innovative in their approach at presenting accounting policies and incorporating narrative reporting.

Non-GAAP measures retained their seemingly immortal popularity, with almost seven out ten (68%) including these metrics in their income statements. Many firms embraced the FRC’s reminders about the use of exceptional terms by not describing recurring items as exceptional.

Despite repeated calls to cut the clutter, some companies still included voluntary disclosures. Almost half (44%) included net debt reconciliations and 10% included insight on tax governance and strategy.

And as the new reporting season cranks into gear, so annual report authors will have to factor in the new proposals of going concern and risk reporting, while those in the mining and other extractive industries will need to embrace the demands of country-by-country reporting.

Even with the UK’s comply or explain model, more than half (57%) of companies said they were compliant with the UK Corporate Governance Code – a figure which showed no improvement from the previous year.

The independence of directors and the composition of audit committees proved to be the most common areas for failing to comply.

Companies are, however, making some progress, albeit somewhat glacial, in appointing women to the board, with 73% having a female in the boardroom. Yet the overall number of female directors is just 15% – up from a paltry 13% last year. The glass ceiling looks like it won’t even be reached, let alone breached.

Balanced and understandable

With 2014 seeing the introduction of the requirement for directors to state that the report and accounts are fair, balanced and understandable’, all but four of the companies sampled – all at the smaller end of the spectrum – did so, predominantly in the director’s responsibility statement.

Another element of the corporate governance umbrella- audit committee reporting – showed great progress, according to the report, with two thirds of companies making it a distinct section – way up from last year’s figure of 45%.

This is a direct reflection of the enhanced profile being given to the audit committee’s stewardship and reporting responsibilities, according to Veronica Poole.

What all the research points toward is the fact that companies are now set on the path of truly embracing the challenges of delivering clearer and more joined-up annual reports.

What is clearer still is that that journey may be somewhat more tortuous and meandering than many may have first envisaged.

Rome, nor its unforgivingly straight Roman roads, were built in a day.