A Financial Reporting Council (FRC) report has found that improving the quality of reporting by smaller listed and AIM quoted companies could increase the external investment they receive.
Below is a summary of the main findings and the proposals for improving quality.
Importance placed on the annual report by investors
There is a perception that the annual report is not an important tool for communicating with investors. This means that companies do not necessarily prioritise producing high quality documents.
However, the FRC’s research contradicts this perception:
'In fact, our evidence shows that the annual report in this market segment is particularly important to investors in the absence of analysts’ reports and that the quality of reporting can affect investment, rating and lending decisions.'
It’s not just equity investors that pay particular attention to the annual report, the FRC found lenders also appreciate high quality accounts:
'Those making or influencing lending decisions also pay particular attention to the detail in an annual report and the quality can affect their rating and lending decisions. Accordingly, high quality annual reports improve a company’s access to capital and potentially reduce its cost of capital.'
Knowledge and training
The FRC acknowledges that the IFRS reporting environment is challenging:
'Sometimes smaller quoted companies lack sufficient skilled resources and are not up to date with reporting requirements and standards. This is at a time when the company may itself be entering into more complex and transformational transactions.'
The FRC is keen to influence the IASB and other standard-setters to ensure that the frequency of changes is proportionate and that the impact on smaller quoted companies is considered.
The FRC have recommended that all companies should have at least one non-executive director with relevant financial expertise.
The FRC has also suggested training may provide the answer to finance staff keeping up to date with the volume of changes to IFRS. RSM has suggested the FRC further engages on a detailed level with preparers of IFRS accounts to understand their perceived challenges in preparing high quality financial reports.
Ultimately the directors are responsible for the quality of financial reporting. The auditors’ role is to form a view on the financial statements prepared by the entity and external reporting expertise cannot be provided by the listed entity’s auditor or any other department within that firm. The FRC have identified this as a problem:
'In addition, companies may have limited access to additional external reporting expertise.'
The FRC has proposed the creation of a Corporate Governance Code for AIM companies to cement the importance of the tone at the top of the company.
Another avenue may be to seek advice from financial reporting experts who are independent from the auditors.
The annual report is a fantastic opportunity to communicate clearly with both your existing and potential investors and lenders. The research from the FRC shows that these decision makers really do value a well presented annual report and that the quality can impact on investment decisions:
'An investor is more likely to invest if the annual report conveys a clear message of the business model of a company and its position and prospects, is prepared in accordance with clear and appropriate accounting policies and gives insight into these and other judgements, estimates and provisions. Yet it is in exactly these areas that the FRC finds issues of quality.'
'Making improvements to the quality of reporting would provide better and more relevant information to investors and potentially open up greater access to capital for some companies.'