eviews reveal the state of UK corporate reporting. By Louise Ross, accounting specialist, CIMA.
Risk management information in company reports from FTSE 100 firms is good. Reporting on key performance indicators is getting better. But forward-looking information needs improvement in most companies. These were the main findings of three studies published over the last few months.
Reports from agencies Black Sun and Radley Yeldar and a review published In January by the Accounting Standards Board (ASB) reveal a range of reporting choices. Some companies report to the standard of an OFR. Others meet the lesser requirements of the Business Review. Overall the reporting was fairly thorough but most companies fell down when it came to providing forward-looking information.
Black Sun
Communications agency, Black Sun, analysed the annual reports of 23 FTSE 100 companies with a March 2006 year end. These included British Airways, Sainsbury and Vodafone. Of the 23, 11 called their narrative statement an OFR. Six explicitly stated they were reporting in line with the OFR best practice reporting statement. The reporting stars were Land Securities and National Grid, with honourable mentions (overall good practice with few weaknesses) for Kelda Group and Tate & Lyle.
Radley Yeldar
Radley Yeldar - one of CIMA’s partners in the Report Leadership initiative - analysed 55 FTSE companies with a year end of December 2005. 41% of them called their narrative statement an OFR. The stars in this report were BG Group, Cadbury Schweppes, Friends Provident, GlaxoSmithKline and Rio Tinto with honourable mentions for five others. Note that the RY companies thought that they would have to report to a statutory OFR until it was axed in autumn 2005. The Black Sun companies knew about half way through their reporting period that they would only have to comply with the Business Review requirements.
ASB
The ASB’s offering reviewed several different reports, including the above two. The summaries and bibliography alone make it a useful document for those interested in corporate reporting practices. Its practical suggestions for improvement elevate it to a ‘must read’.
So what did all three discover about the state of reporting?
Risk management information
Radley Yeldar felt this was a good area, singling out Friends Provident for its presentation by business division and extensive discussion. The best companies not only identified risks but also assessed their potential impact on long-term value.
Black Sun, too, felt this was the strongest area, categorising 13 of its companies as ‘good’ or ‘best practice’. However, only 35% of companies referred to the risks they disclosed as material. The ASB was sufficiently worried about this to categorise risk management as an ‘area for improvement’. It found companies reported between four and 33 risks, and reasonably asked ‘can a company really have 33 principal risks and uncertainties?’
Key Performance Indicators (KPIs)
Black Sun thought that about a third of its companies were ‘good or best practice’ under this heading. It felt that it was the quality of non-financial KPI disclosures that seemed to make the biggest difference. Nearly 60% specifically identified KPIs and about half of those provided definitions. This was an improvement on an earlier Radley Yeldar analysis which identified this as a ‘could do better’ area.
The deciding vote goes to the ASB which marks this as an ‘area for improvement’. It commented: ‘The requirement to disclose KPIs is a matter of judgment for the directors. But the lack of inclusion of any KPIs in a Business Review in the future could indicate to the Financial Reporting Review Panel (FRRP) that the review may not be compliant with the law.’
Forward-looking information
The ASB considered this the most problematic area, a view shared by Black Sun. It could identify no best practice companies, and felt that 10 of the 23 merited a ‘very poor’ or ‘poor’ score. Radley Yeldar also considered this a ‘could do better’ area, as was the disclosure of strategic information. All mentioned directors’ concerns about making themselves ‘hostages to fortune’. Hopefully many will have been reassured by the provisions in the 2006 Companies Act protecting directors from liability for forward-looking statements made in good faith.
Although no company in the sample entirely fulfilled the best practice OFR suggested by the ASB, many exceeded (by a long way, in some cases) the minimum requirements of the Business Review.
There are good reasons for companies to exceed the statutory requirements, however. Investors are more confident about companies that can explain how they protect their revenue streams by risk management. They are consequently often more loyal, too. Investors are also reassured by companies that use both financial and non-financial information to describe important drivers of success. And they value relevant forward-looking information if it is robust and supported.
Standard is best
While it is encouraging that many companies exceed the Business Review requirements, CIMA still regrets the abolition of the statutory OFR. While the OFR best practice statement remains optional, there is nothing to stop companies selectively adopting its provisions. As the findings indicate, you cannot assume that, because a statement is called an OFR, it complies with the ASB suggested practice.
OFRs by their nature, and because of the principles-based approach of the guidance, are always going to be individualistic - and rightly so. But a standard would impose just enough consistency and balance, and prevent the temptation to cherry-pick disclosures.
More information
Request a copy of ‘What’s happening in corporate reporting: the first 23’ from the Black Sun corporate reporting web page.
Request a copy of ‘Narrative reporting content in the FTSE 100: how does it stack up?’ from Radley Yeldar’s website.
The ASB’s ‘A review of narrative reporting by UK Listed companies in 2006’ is downloadable from the FRC website.
For practical ways to improve corporate reporting, visit the Report Leadership initiative.