SOME OF THE UK’s top companies are failing to adequately report poor performance and sometimes obscure their true profit figures, the accounting watchdog has found.
In its annual review of corporate reporting, the Financial Reporting Council (FRC) raised “substantive” queries in a third of the almost 200 company reports of the FTSE 350 it reviewed, an issue which it says erodes trust and undermines the quality of corporate reporting.
Of the 192 reports the watchdog reviewed in its annual assessment – detailed in the Annual Review of Corporate Reporting – 64 were found to have some compliance concerns relating to issues such as judgements and estimates.
Some FTSE companies were still failing to fulfil the spirit of the law – as well as the letter – when it came to reporting, by an “excessive use” of underlying profit or “inappropriate use” of alternative performance measures, the report said. Underlying profit figures are not the required accounting profit that is recorded in financial statements.
Recognising revenue recognition issues
Many companies still need to be more specific on revenue recognition. “Companies should provide a clear linkage between their business models and their revenue policies and explanations of exactly when and how revenue is measured on complex long-term contracts, such as those entered into by outsourcers,” the report said.
Another area of scrutiny for the regulator this year, because of the growing public interest in it, was tax. Companies needed to include more information in their reports about where they pay tax, and consider whether their tax strategies were sustainable.
Strategic reporting ‘of benefit’
The strategic report has been an “effective tool” for improving the quality of reporting, according to the research. But the regulator said it was concerned whether these reports were “sufficiently balanced”. Often reports failed to include critical investor information, such as a discussion of effective tax rates or non-financial key performance indicators.
Paul George, FRC executive director for corporate governance and reporting, said: “Our work on corporate culture this year highlighted that stakeholders and society in general have a vested interest in healthy corporate values, attitudes and behaviours that lead to sustainable growth and long term economic success. High quality corporate reporting can contribute to improved trust in business, so important to a successful economy.”
The report however found improvements in the way companies report on cash flow statements and capital management disclosures, and said that overall compliance was “good”.
Most companies where concerns were raised agreed action to resolve the matters satisfactorily, primarily through their future reporting, the FRC said.