(c) Institute of Chartered Accountants of Scotland. Contact ICAS for permission to reproduce this article., Corporate Governance, Financial Reporting

Restoring trust and relevance in corporate reporting

By Amy Hutchinson

A look at how ICAS is shaping the debate on corporate reporting.

ICAS has highlighted the importance of considering the corporate governance and corporate reporting environment in the ongoing UK audit quality debate.

We cannot look at audit in isolation – it is one part of a wider system of assurance which is also provided by the quality of governance and reporting in companies, and the stewardship of investors.

The roles and responsibilities of auditors, company directors and investors must be considered collectively to deliver meaningful changes to the audit environment. This approach is key to addressing the audit expectation gap.

The gap between what the public and investors expect the audit to deliver, and what the statutory framework for audit requires, arises, in part, from a lack of clarity about the purpose and scope of corporate reporting. ICAS believes it is vital to address the reasons for this gap and to consider the future role and purpose of corporate reports.

Corporate reporting should engender trust

Corporate reporting needs to adapt to remain relevant and to assist in building trust in business. During 2018, ICAS worked with a group of investors and other experts to develop a new vision for corporate reporting. The aim was for corporate reporting to:

  • Become more concise and understandable.
  • Keep pace with technological innovation.
  • Better identify and explain what underpins the creation of value for a company’s stakeholders and therefore what is likely to drive value in the future.
  • Assist the development of long-term sustainable business and investment models.

Their report was published in July, with the aim of stimulating further debate amongst investors and other users, and ultimately to develop a consensus around an improved model of corporate reporting.

A new corporate reporting model

The proposed reporting structure consists of a ‘strategy’ report, which provides a concise and coherent summary of key information about the company, its business model, values and long-term strategy.

This strategy report would be the entry point for new or potential investors in accessing broader company information and a reference point for existing investors in holding management to account. It will not necessarily be updated annually but will be updated for significant changes and developments in strategy, governance etc.

More frequent ‘performance’ reports provide more detailed updates about how the company has performed against its planned strategy and longer-term objectives. Benefits will include setting more meaningful and comprehensive benchmarks against which the stewardship of directors can be assessed, as well as enabling accountability for a broader range of impacts and outcomes.

The performance reports are crucial in differentiating between performance over time and period-to-period changes and show the links between long-term value creation and shorter-term performance.

The model will be more flexible to suit the changing demands of stakeholders and the future opportunities that evolving technology will offer for corporate communication. One of the advantages is that our strategy report highlights changes, allowing the user to focus on information that has been updated.

Informing the audit debate

Although our proposed model is still a work-in-progress, we believe that its central ideas and concepts address many of the concerns highlighted in the audit quality debate, and will provide invaluable input to discussions on the future corporate reporting environment in the UK. In particular:

  • The model should result in a streamlined, and therefore clearer and more comprehensible reporting structure. This will make it easier for users to access and analyse the key information they need.
  • The working group has considered the complete corporate reporting cycle, not just the annual report, with the result that the proposals incorporate the best elements of various corporate communications such as investor presentations.
  • This approach will enhance the overall clarity and consistency of reporting.
  • The input of investors in this project is key in identifying what users expect from reporting, and ideally will drive greater engagement of the investment community in the corporate reporting discussion.
  • The proposed report structure is intended to enable a better assessment of governance and the accountability of the directors, thereby building trust in directors and companies.
  • By providing a clearer, rationalised structure of reporting, the ICAS model forms a starting point for determining the level and extent of assurance required and how this should be provided.

We need to act now

ICAS is continuing to discuss and develop these themes with investors, preparers and other stakeholders, in particular, thinking about how the proposals can be operationalised.

The corporate reporting recommendations of the Kingman review of the FRC and the announcement of the Brydon review of audit provide the ideal opportunity for change. Now is the time to consider the improvements to corporate reporting that ICAS is proposing.

Amy Hutchinson is the Head of Corporate Financial Reporting in ICAS.

This article was originally published by ICAS.