Accounting: When annual reports communicate complexity with simplicity

Can you imagine a company’s annual report weighing in at less than 30 pages? For finance directors and their teams who are currently finishing off the massive tomes that are the annual reports of the 21st century, a mere few pages seems like a pipe dream.

Not so, says the Institute of Chartered Accountants of Scotland (ICAS). It has produced a pro-forma report which it says points the way ahead to a slimmer annual report which delivers better value to shareholders.

It perhaps should be noted that ICAS has some previous on this. About once a decade or so the institute offers radical thinking: notably, the 1988 Making Corporate Reports Valuable and before that, The Corporate Report in the mid-1970s. You can still read the former on the ICAS web site and a quick skim proves it was an agenda-setting work. This latest work is equally radical.

There is little disagreement among finance professionals that corporate reporting is obese. Over the last decade reporting has become impossible to navigate, especially in banking and financial services.

The Financial Reporting Council looked at the causes of complexity from the different perspectives of finance teams, FDs, investors and analysts (see Financial Director, September 2008) but the pace of change is glacial. And good intentions are swamped by disclosure requirements, which may seem necessary and worthwhile in themselves, but just add to the overall sense that no one actually reads this stuff. The net result is a decrease in understanding.

The modern world has developed methods of communicating complexity, admittedly mostly in the worlds of marketing and advertising. But those techniques have bypassed corporate reporting. An annual report should tell a story: instead it is a slickly designed compliance document. ICAS is insistent that its so-called ‘short-form’ report is not a reworking of a summary annual review. The short form should explain the business model and make clear how the business makes money.

There should be one statement issued by the chairman on behalf of the board. On the technical side, ICAS wants to see the most significant accounting policies, judgments and notes identified and summarised.

However, producing a short form would mean editing, cutting copy and figures and telling colleagues and users that what they champion has been left out. At the moment producing an annual report, while difficult, is more akin to curating – in other words, collecting – and ordering a mass of information.

If we are ever going to realise the vision, we have to use technology to give stakeholders the detail that some of them may want. Media companies, for example, have taken on the Web 2.0 revolution using tools that allow communication in video, audio, online and print. It would be possible now to produce a FTSE-100 management report which concentrates in essence on the elevator pitch, but which contains embedded links and uses eXtensible business reporting language, or XBRL, to drill down to a whole wealth of information that only the most committed analyst could ever need.

Corporates could adopt these ideas now if they saw enough competitive advantage in experimenting with the digital age, beyond the usual CEO talking head that some of the largest companies have been doing for a while, to engage their stakeholders on the detail and decisions behind them as well as the reason for their approach in the future.

In today’s fragile environment, however, it will be only the brave FD who brings this idea to the board.

Hear how management reporting and more narrative could help you demonstrate your company’s value by clicking here

Peter Williams is a chartered accountant and freelance journalist