Company reports are a mainstay of the financial reporting process. However, their usefulness is all too often being called into question. Is it time for a major overhaul of the information that businesses include within their reports or do they still have a purpose to serve in their current form?
Over the past few years the debate surrounding the value of company reports has been growing, with calls from a number of bodies for significant change. In this time, the average length of the reports has increased and they are taking longer for businesses to compile. This hasn’t, however, increased the usefulness of the documents. Indeed, some would argue that their value has, conversely, diminished over time.
Experts within the industry have been calling for a wider review of the company reporting process. Their main arguments centre upon the sheer volume of information now required. Many deem this to be unnecessary, serving merely to pad out the report or to provide background detail. The principal audience for these documents has always been investors, but the focus of these documents has become diluted as businesses attempt to appeal to a wider market.
A recent survey of Accountancy Age readers found that 88% of them wanted significant change to the content of annual reports. They indicated that there should be a limit as to the information that is included, with a return to the form appropriate to the purpose for which they were originally designed.
Company reports will often be read by a wider audience than that for which they were originally intended. However, this doesn’t mean that those who are preparing them need take everyone into account. Any attempt to appeal to a wider spectrum can so easily distract from what is really important; namely the details that investors require. In particular, past financial performance and future growth outlook are essential to any investment decision. And yet today’s reports all too often lack the structure from which private or institutional investors can form an accurate view, with the salient information masked by or buried in irrelevance.
The problem isn’t that company reports exclude the requisite information. Rather, the issue is that this has become hidden in amongst unnecessary detail, partially or wholly obscuring the reader’s view of essential facts and figures. Readers are struggling to obtain a clear picture as to exactly how the business is performing and any problems it may be facing. This limits any insight to be gleaned from the report, rendering it less than meaningful for investors. Annual reports are still seen as one of the most important markers for a business, but potential investors and other interested parties are all too often forced to look elsewhere for essential details. Company reports are no longer their primary source of information.
Core financial document or marketing material?
Whilst it is accepted that a key purpose of company reports is to “sell” a business to the investment community, they should never be viewed as simply a marketing exercise. In reality, they are frequently reduced to precisely this, notably in the opening sections of the report. Rather than providing an unbiased view as to the overall performance and outlook of the business, they focus too heavily on the positives and try to bury the negatives. This marketing spin makes it difficult for investors to obtain a true picture of the business and has engendered a growing mistrust in the information thus provided.
Inaccurate financial details
Following the financial crisis, investors have found it increasingly difficult to rely upon the financial details companies include in their reports. Due in no small part to the length of time required to create reports in the current format, they are almost invariably out of date by the time of release, serving at best to provide an historic and outdated snapshot of performance and outlook. As such, there is limited insight as to how the business will prosper or suffer in the future or, indeed, what’s happening right now.
All too often companies spend too much time exploring arcane history, organisational composition and market factors. This narrative copy often remains unchanged from year to year, with only minor changes and serves very little purpose. Many reports simply state the obvious, providing company background material, much of which will be immediately accessible from the business’ website. Any serious investor will have already assimilated this material, its presence thus merely serving to prolong the time required to elucidate essential material contained within the report.
No one party can be held responsible for the compromised value of today’s annual reports. The combined efforts of everyone involved, including regulators, auditors and other advisors are all to blame. Businesses have become overly focused upon regulatory compliance, all but ignoring the need to appeal to the investment community. So is it possible for the reports to be compliant and to address the needs of investors at the same time?
Change doesn’t have to happen from a regulatory perspective in order for company reports to appropriately evolve. Individual businesses can initiate the process by making their own elective changes. This should start with a better planning process, driven from a clear idea as to the desired outcome and the steps required in order to achieve it. Finance teams can start by looking back at their previous reports and identifying opportunities for improvement.
Changes to the way in which audit committee reports are compiled will go a long way towards improving the details contained within company reports. A report compiled by the Financial Reporting Council’s Financial Reporting Lab highlighted that investors want to see a rather more bespoke approach to corporate reporting, which takes each company on an individual basis. This will provide the figures with a greater degree of accuracy and will allow investors to readily elicit the details rather than having to search elsewhere.
Focus on essentials
Those responsible for compiling reports must thus return to basics, directing their efforts in addressing a seasoned investment audience. This should result in far more constructive and insightful output. Any attempt to appeal to a wider audience will invariably compromise this outcome.
If companies move away from using their annual report to market the business, the result will present a realistic picture as to how the business is performing, whether it has had a good year or a “challenging” one. Investors cannot base a decision on inaccurate or misleading information and will resent any attempt to blind them with positivity.
Company reports need to be created through an integrated approach that utilises the knowledge and expertise of all relevant parties. It is by no means solely the firm’s financial position in which investors are interested. Any factor that may present a present or future risk to the business must be clearly identified and explored. These may include any present or anticipated litigation; regulatory changes in the client’s industry; and any environmental factors. This information will provide the basis upon which SWOT or PEST analyses can identify possible threats and opportunities that may present themselves in the future.
Company reports can never be completely ignored by investors, nor is it time to replace them with a new form by which a business can be audited and assessed. Rather, it is time that complacency and repetition were replaced with a focused report appropriate to its audience and to the industry in which the business operates. Such an evolutionary approach will ensure that annual reports will once again become a trusted mainstay for the investment community.