A former financial director of my acquaintance, who for obvious reasons does not want to be named, is somewhat cynical about the process of writing the annual report and accounts. According to this FD, for years his task of getting the words in front of the numbers consisted of reaching for the previous years accounts and simply using the same form of words, being careful to adjust the dates. Sometimes more sophisticated methods were used, such as going back a couple of years to ensure slightly different tried and trusted wording. However, this boiler-plate approach to pushing out the words in the annual report may have had its day. In recent years, the increasing emphasis both in the UK and the rest of the world on non-financial performance areas has prompted quoted companies to look afresh at their narratives. At the same time, the increasing convergence and internationalisation of capital markets has meant larger companies are looking beyond their traditional sources of funding. Boards are also being forced to look beyond the original constituency of shareholders and address the wider stakeholder who wants a different information than those just interested in the financial return. Even those who are interested in the numbers want more than just history in figures. The emphasis on creating and delivering shareholder value calls for a different kind of report so that institutional investors in particular can assess the likelihood of the organisation delivering long-term cash flows and creating long-term wealth. These confluent pressures were meant to be addressed in the UK with the London Stock Exchange recommending that listed companies comply with the Operating and Financial Review (OFR) statement issued by the Accounting Standards Board in 1993. The voluntary OFR drew from but was not an exact copy of, the US’s Management Discussion and Analysis (MDA) which Stateside listed companies – and UK and other foreign companies whose shares are traded on Wall Street – have to provide in their annual report. Although focussing on liquidity, capital, resources and results of operations, other areas addressed in the MDA included general economic and industrial conditions, known prospective information and infrequent events or transactions. While lots of words have always been a feature of the annual report, along with generally terrible photographs of the board and a couple of factories, the OFR and MDA spur organisations into making the words work harder, notably by trying to give a balanced view of the world rather than a load of puff. However, it is clear that for the majority of UK companies there is still some way to go. Price Waterhouse recently produced a report on narrative reporting, which attempted to show off some of the best examples from across Europe. It is heartening to see that some of the best reporting is UK-based. For instance, information and communications group Reuters, in its review of operations, demonstrates two different approaches to presenting the company’s operating costs. These are analysed and trends explained both by cost type – staff, service, deprecation, office space – and function-production and communication, sales and marketing, so a Reuters shareholder will understand not only how much staff cost during the year but how much was attributable to increases in headcount and how much to paying the employees more. Similarly enlightening is Kingfisher’s 1996 operational review of trading conditions at DIY giant B&Q. The management gloat about how splendidly things were going was put into some sort of context with words and figures describing how B&Q had increased its share of the total DIY market from 15.4% to 15.9%. B&Q’s other notable strength was its refreshing decisions to spell out the bad news: “However,” says the report, “disappointingly our sales growth fell well short of our original expectations and was not enough to offset higher costs … as a result profits fell by a third to #55.4m.” This sort of admission is still all too rare. When the Scots ICA asked FDs about their use of the OFR, the institute reported: “They could all point to some wording somewhere in the annual report which set out an explanation or indication of an adverse aspect of the results of the period. However, this was not always in the areas designated as an OFR and there was no systematic signposting of such information.” The persistent reader could locate information on good and bad aspects of the performance but, asked the Scots rhetorically, could the reader be sure this was the totality of bad news? Never at a loss for an answer, the FDs from FTSE-100 companies when asked about the apparent lack of bad news in the OFR – and hence the crucial balanced view – replied that they could not afford to wait to use the OFR to report bad tidings instead relying on prelims, interims, AGMs or Stock Exchange procedures to spill the beans. For some strange reason the setbacks were not reported again in the annual accounts. As well as a reluctance to come clean on poor results more than is absolutely necessary, there is evidence that annual reports and accounts are still poorly-worded, backward-looking affairs. When Arthur Andersen systematically examined a random sample of the 1996 annual reports of 100 listed companies, the firms found a large overlap between the accounts and the narrative section and a paucity of forward-looking information. The firm concluded there had to be scope for cutting down on giving essentially the same information in two places. Although it is clear that duplications are probably as much the fault of the regulators and standard setters, as it is of the preparers, FDs clearly think it is better to stick everything in twice rather than risk breaching some disclosure rule. But that just leads to obfuscation. With the number-crunching aspect of financial reporting enjoying a period of relative calm, FDs have to accept that equal care and precision must be taken over the words. Rambling, repetitious boiler plates are out.
Peter Williams is a freelance journalist.
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