The accounting watchdog’s new forum for companies and investors to “come together to develop solutions to today’s reporting needs”
The Financial Reporting Council, the UK regulator for promoting high quality corporate governance and reporting, announced the launch of its “Financial Reporting Lab” on 14 October 2011 . The aim of the Lab is to provide an environment where companies and investors can work to find practical ways of making company reports more useful to investors. The FRC’s “Guide to the Financial Reporting Lab” can be read here and the accompanying press release is here.
The creation of the Lab is a response to the increasing complexity and length of company reports and, in the FRC’s words:
“…is the first time the Lab concept has been used to help solve corporate reporting problems which, for many years, have been the frustration of investors and companies alike.”
The Lab’s focus will be on improving corporate reporting through experimentation and dialogue; it is not designed to produce or suggest changes to the law and regulation that actually drives the contents of company reports. This practical approach is in contrast to initiatives such as the FRC’s own “Cutting clutter” in reporting – which we discuss in this post – and the Government’s work on improving narrative reporting (see this post).
The Lab’s work will centre on “helping quoted companies communicate more effectively with investors and analysts”. The FRC suggest various ways in which this help may be given:
- “A forum for exchange: Whilst management meet with analysts and investors on a regular basis, the need to discuss business trends typically outweighs a review of the effectiveness of their corporate reports or audit reports. The Lab would offer a “space” for such discussions.
- Regulation: Respondents to recent consultations have suggested that the ability to enhance and streamline reporting today is in part hindered by the regulatory construct and environment. Firstly, some have identified duplication in the various codes and reporting standards, which results in repetition, a separation of related financial and non-financial information and an interrupted narrative flow in annual reports. Secondly, there is a concern amongst some in the reporting community that innovation in reporting format and content will not be well received by regulators and auditors. The Lab welcomes debate about such issues. By having representatives of both the regulatory authorities and the audit community at the table, such issues can be addressed directly.
- Risk reward: For companies, change – particularly around the regulatory model – brings risk. Consequently, they often believe it easier and safer to stick with the status quo. From the investor perspective, helping to assist in the development of reporting is seen as a distraction and a costly use of time. By providing a hub to support the process of innovation, the Lab will offer the potential to accelerate change to the reporting model and enhance the risk-reward equation for those involved.
- The benefits of change: Finally, and most critically, it is the intention to use the work of the Lab to provide evidence to the corporate world from the capital markets that a given reporting format is valued. In so doing, the need for regulatory intervention in driving change is reduced.”
The Lab will be guided by a Steering Group drawn from the FRC, listed companies, investors, lawyers, the ICAEW and academia.
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