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The future of financial reporting

Thunderstorms in late summer are unpredictable things. They rumble over celebrations of the last days of sunshine, threatening disaster and disappointment, but all too often pass by for another day.

This summer, regulators have done the same thing. Issues like stewardship, prudential regulation and establishing quite what auditors still bring to the mix have rumbled on, but remain unresolved. As autumn gathers pace and holidays are a distant memory, finance directors and everyone else need to gather their senses and fix a course through these issues.

A hurdle is the uncertainty among the regulators themselves. No one yet has a clue what might happen to, for example, the Financial Reporting Council (FRC). Will it remain on the useful side of the fence, where it currently resides? Or will it turn out to be another quango merged into some other, larger, shinier new agency that will subsume other regulatory bodies, losing a couple of years’ progress to the business integration with another structure?

I’m visualising reincarnation as a sort of Markets and Financial Reporting Authority: this could turn it into the UK equivalent of the US regulator Securities & Exchange Commission. Or it could decline into a position of boilerplate manufacturing.

There is precious little time left for lingering uncertainty of this magnitude. Gathering pressure for serious change in the relationship between the triptych of the FD, auditor and shareholders cannot be held back forever.

There is still a need for some definitive line on how this economic crisis failed to show up on the radar before it struck. And there is ever more shouting about how the reports and accounts FDs merrily sign off are couched in terms and produced in formats that do the opposite of providing readers with useful information.

Then there is the stewardship debate: do the great investment houses really care about how the companies they invest in or analyse for their clients are governed? Or are they happy simply to be able to jump ship earlier than everyone else when decline or disaster sets in?

Perhaps the amount of deconstructive think­ing required on these issues will keep the powers that be from ever resolving to resolve them. Take the argument about management commentary and whether a simpler narrative about how a company has performed should be audited as rigorously as the figures, or audited at all.

The recent research published by the Institute of Chartered Accountants of Scotland on what users want from external assurance and management commentary contains one wonderful quote from an anonymous fund manager that sums it all up. “Would having the commentary audited inhibit directors?” he asks. “I would be tempted to throw that back and say, ‘well, why are you saying things there that you are not comfortable with and that cannot be substantiated or stand up to scrutiny?’”

In other words, in too many cases the absolutely obvious is ignored or shunted away because it is too embarrassing. The same is true with stewardship. On the surface, the Steward­ship Code issued over the summer by the FRC makes everything clear. Using the comply or explain mechanism, institutional shareholders must make clear whether they voted on the important issues, how far they monitored companies in which they invest and how far they have pushed for management change.

This is an example of the absolutely obvious. Why would large shareholders not seek to ensure that the companies that they, in part, own behave in such a way as to maximise their investment? Alas, that is not how things work. We may simply have another structure of boilerplate being erected.

And among the cosmic noise, where is the FD’s focus? FDs are now much less concerned with stewardship than they are with glam­orous big business. For them stewardship has become rather lost because they perceive it as dull and boring. Which suggests more disasters ahead.

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