Louder than words – and seriously missing the point

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The UK’s Financial Reporting Council issued a report today called Louder than Words. I suggest that the title that the title I have given to this blog is substantially nearer the truth. And for those who don’t want to wade through the whole thing, there's a short form available here.

The report is a consultation paper.  It says:

Concerns about the increasing complexity and decreasing relevance of corporate reports have been growing in recent years. Many people point to the increasing length and detail of annual reports — and the regulations that govern them — as evidence that we have a problem. Others are more worried that reports no longer reflect the reality of the underlying businesses, with key messages lost in the clutter of lengthy disclosures and regulatory jargon.

I agree: this is very obviously true. When I try to analyse tax paid in a set of company accounts people (usually those who prepare or audit those accounts) tell me that this is an unreasonable thing to do, but offer no alternative data on which to base research.

When I try to ask the reasonable questions an informed individual might ask of a company — like how much do you earn where, I find it is impossible to get an answer.

So there’s no doubt the FRC are right: complexity is being used to hide the data that users need: unsurprisingly they think the data irrelevant as a result.

But the difficulty is that what the FRC is doing has no hope of resolving the issues that financial reporting faces. Let me give you one reason why: for the first time ever in the history of accounting there is a mass popular campaign calling for a particular form of financial reporting. We call it country-by-country reporting. Organisations as prominent as Oxfam, Christian Aid, Action Aid and many more are calling for it. So is it mentioned? No, of course not. How can the FRC hope to address the issues when it ignores them?

How too can it address issues when it persists with the idea that the only users of accounts are investors and suppliers of capital? It says in the report:

There is a need to re-establish the principle that corporate reports should be designed for their primary purpose — providing investors with information that is useful for making their resource allocation decisions and assessing management’s stewardship. This is consistent with the IASB’s latest thinking on the conceptual framework for financial reporting, which identified the primary users of corporate reports as ‘present and potential equity investors, lenders, and other creditors’.Æ'± For the purposes of this paper, we consider users to be capital providers and their advisers.

That though is plain straightforwardly wrong. Way back in 1975 a predecessor of the FRC, then called the Accounting Standards Steering Committee issued a report called The Corporate Report. It was groundbreaking (and is not available on the web). It suggested the users of accounts were:

¬? The equity investor group (shareholders)

¬? The loan creditor group (banks and bondholders)

¬? The analyst-adviser group who advise the above groups

¬? Employees

¬? The business contact group

¬? The government

¬? The public.

In 2007 UNCTAD identified the users of accounts as:

¬? Investors and financial institutions;

¬? Business partners;

¬? Consumers;

¬? Employees;

¬? Surrounding community;

¬? Civil society organizations; and

¬? Governments and their institutions.

I make the comparison deliberately. Over more than 30 years little has changed. Except that is that the FRC, following the Inter national Accounting Standards Board’s lead has retrenched into saying that only the investor / lender / analyst group count. And the point that the FRC / IASB do not get is this: the first group do not require information for its own sake. Investors / loan creditors / analysts are not an isolated silo working within society (although it might very often feel like it); they act ultimately on behalf of those in broader society. That is, the business partners, customers, employees, surrounding community and its organisations and governments that interact with the reporting entity. So if you do not provide information that meets the needs of the end consumers of data you cannot meet the interim needs of their advisers. For which reason I suggest — as my title does — that the FRC is seriously missing the point in starting their consultation using the assumptions they do. Which is, no doubt why they will get the wrong answers.

I’d encourage readers to make comment to the FRC. Some detailed observations will follow in other blogs.

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