Supervisors comment on quality of reporting
In recent weeks, the authorities responsible for regulatory examination of the accounts of listed companies in Ireland and in the U.K. have both issued reports of their review activities during 2009. The Irish Auditing and Accounting Supervisory Authority (IAASA) published its Annual Report for 2009, chapter 4 of which deals with 'Monitoring the compliance of certain issuers' periodic financial reporting with relevant frameworks'. In the U.K., the Financial Reporting Review Panel (FRRP) published a report based on its reviews of reports and accounts commenced in the year to 31 March 2010.
In the IAASA report, the purpose of its review activity is described as:-
- Protect and promote the interests of users of issuers' periodic financial statements
- Promote public confidence in the quality and reliability of issuers' statutory financial reporting
- Contribute to the achievement of the objective of the consistent application of accounting standards across EU regulated financial markets
The FRRP would have a purpose consistent with this in carrying out its activity.
The FRRP report concludes - 'The panel found continuing improvement in the general quality of IFRS financial reporting. It was particularly pleased to note improvements in the descriptions of significant accounting policies and the disclosures of judgements made by Boards in applying those policies'. Nevertheless, the FRRP report comments on a number of areas where there is significant scope for improvement.
The IAASA report does not express any overall conclusion of this nature with two factors evident as to why not, being that this is only the second year of IAASA review activity, compared with numerous years for FRRP, and the substantially smaller number of reviews carried out by IAASA. However, it is positive that IAASA has not had to resort to the highest level of sanction available to it, which involves Court proceedings, or to impose a non-voluntary amendment to financial reports. IAASA comments again in its 2009 report that those issuers subject to review that are most forthcoming with the requisite information, clarifications and explanations are those that bring their contacts with the Authority to a successful conclusion in the most efficient and expeditious manner.
A good set of accounts??
The FRRP has responded in its most recent report to requests over the years to highlight some good practices in financial reporting, a request which is consistent with its aim of improving the quality of financial reporting.
The FRRP comments that beyond basic compliance with the fundamental requirements of the law and accounting standards there are characteristics of corporate reporting which the FRRP believes make for a good annual report. These include:-
- A single story - consistency between front-end narrative and back-end accounting information
- How the money is made - a clear and balanced business review, good news and bad, which includes an explanation of the company's business model
- What worries the board - descriptions of risks and uncertainties which are sufficiently specific that the reader can understand why they are important to the board
- Cut the clutter - important messages, policies and transactions are highlighted and supported by relevant context and not obscured by immaterial detail
- Clarity - language used is precise, jargon and boiler-plate are avoided
- Summarise - items are reported at an appropriate level of aggregation and tables of reconciliations are supported by the accompanying narrative
- Explain change - significant changes from the prior period, whether matters of policy or presentation, are properly explained
- True and fair - the spirit, as well as the letter, of accounting standards is followed
In 2009/10, the FRRP reviewed 308 sets of accounts, with similar numbers reviewed each year for the past number of years. It is reasonable to presume that its prolific review work has given it a unique insight into corporate reporting, the good and the not so good. Therefore, this section of its report is a valuable template for all companies in giving due consideration to how to improve their annual reports. There are undoubtedly firm indicators for all companies, not only listed companies, of how their annual reporting could be improved.
FRRP - matters of concern
The FRRP report is divided into commentaries on a number of targeted reviews:-
- Directors' reports
- Targeted review of impairment disclosures
- Half-yearly financial reports
- Accounts with qualified audit reports Financial institutions
The review of directors' reports highlights that disclosures relating to principal risks and uncertainties continued to be a weakness in the reports of many companies, with much boiler-plating and listings of headings without any adequate explanation of the issues.
The most significant section of the FRRP report is its commentary on its review of annual financial statements. Some of the more significant features, some of which tend to recur annually, are:-
IASI: Presentation of financial statements
Issues continue to arise with the disclosures of judgements and estimates
Poor level of compliance with capital disclosures requirements, particularly by non-financial services companies
IAS 18: Revenue
A significant number of companies were asked for additional information to explain the accounting policies applied to their main revenue streams
IAS 24: Related party disclosures
Difficulties continued with defining key management personnel and disclosure of their remuneration
IAS 36: Impairment of assets
Failures were noted in providing all the relevant and often extensive disclosures required about impairment testing
The above is merely an indication of the nature of comment included in this section of the report which extends to nine pages and comments on issues regarding ten individual standards.
IAASA - matters of concern
Many of the issues identified in the IAASA report are similar in nature to those addressed in the FRRP report.
With a view to providing readers with a flavour of the types of issues that arose during their review work and the IAASA response to those issues, a section of Chapter 4 outlines a number of case studies which are highly summarised and simplified versions of what were, in some cases, protracted engagements with issuers on, often, quite complex issues.
The selected case studies deal with:-
- Related party transactions - inconsistencies in covered institutions' interpretations as to what the term 'Government' includes
- Failure to prepare consolidated financial statements
- Failure to provide disclosures relating to financial instruments
- Failure to properly account for gains and losses on foreign currency translation
- Presentation of items outside 'operating profit'
- Related party transactions - failure to provide required information in respect of the compensation of key management personnel
- Omissions of segment disclosures in half-yearly reports
The range of matters dealt with in the case studies is clearly indicative of the significant issues arising in IAASA's review work.
Listed companies have had since 2005 to become masters of IFRS reporting and the overall observation expressed by the FRRP would indeed indicate that there has been continuing improvement. Nevertheless, both IAASA and the FRRP identify from their review work a considerable number of areas where there is significant scope for improvement. With 2010 calendar year end looming on the horizon, it may be a good time for companies to dust things down and take a concentrated look at what can be done better.
First published in Finance Dublin online