Tunnel vision
3 May 10
In his first column, incoming ICAS President Alan Thomson explains why he believes financial reporting is at a crossroads
by Alan Thomson
One year ago, the Treasury Select Committee published its report on the banking crisis. Below, I’ve picked out a couple of quotes which I think sum up a major challenge for our profession.
“…the complexity and length of financial reports represent a missed opportunity to improve the understanding that users of accounts possess of the financial health of companies… financial reports… do not tell the reader much of a story.”
“…the fact that the audit process failed to highlight developing problems in the banking sector does cause us to question exactly how useful audit currently is. We are perturbed that the process results in ‘tunnel vision’, where the big picture that shareholders want to see is lost in a sea of detail and regulatory disclosures.”
The problems spelled out by this highly influential group of MPs have become more acute in the last few years. I was well aware of them in my role as a FTSE 100 finance director and remain concerned now as a public company chairman and non-executive director. We now have the environment to address these issues – a post-crisis requirement for change in financial regulation. But it seems to me that there has been very little change since the Committee made its comments. What change would make a difference?
ICAS is making a contribution to tackling the increasing complexity of financial reports by issuing our report Making Corporate Reports Readable. Our proposal aims to provide the main users of corporate reports, the investment community, with the information of most value to them – how a company earns its profits and the board’s view of how that can be sustained. This is demonstrated through the example of a fictional global bank – and all in less than 30 pages!
By focusing on the needs of investors, the document highlights the problem with current annual reports – they have become documents that try to serve many different audiences. Much of the information, important though it is, could be made available outside the annual reporting cycle, on websites or in different corporate publications. This will require changes to regulation, but that should not be an insurmountable challenge.
What then, of the value of the statutory audit? The limitations of the audit have been widely debated. It provides assurance on the financial statements but not the business model. It is not a shareholder safety net nor an excuse for inadequate management to rely upon. We also know that investors value the audit opinion. There needs to be recognition that the statutory audit is valuable, but can never answer all the questions that shareholders and other interested parties expect.
Consequently, alternative assurance needs must be met by a different model. This will require bravery on the part of our biggest audit firms. It will require firms, businesses and investors to tackle the liability issue with more maturity than has been the case in the past.
If you are making big judgements on risks, you can be bolder if you know you have directors and investors who appreciate and recognise what you are providing. ICAS is about to embark upon a project to assess the future of assurance and will report its findings and recommendations.
The business community is currently focused on providing the facts. Our role as ICAS members should be on enabling users to interpret them.
See also Interview, page 25