The Financial Reporting Council (FRC) says it intends to take action to strengthen corporate reporting in smaller listed or quoted companies, after its annual review found this category had made less progress towards improving standards than larger companies.
The FRC's Corporate Reporting Review (CRR) Annual Report for 2013 covers reviews of 264 sets of accounts, conducted in the year to 31 March 2013. Of these, 91 companies were approached for further information or explanation.
The review identified seven areas of corporate reporting that are commonly raised with companies. These are business reviews; revenue; cashflow statements; alternative performance measures; financial KPIs; investment property valuations; business combinations and impairment.
There were also a number of situations where exceptional provisions made in the economic downturn are now being released through the income statement as part of profit before exceptional items, which the CRR says may make it harder for users of annual reports to appreciate the components of the current year's profit and the status of the remaining provision.
The CRR says that reporting by larger companies, particularly the FTSE 350, remained at a good level. Any issues that did arise generally involved unusual or complex transactions where, in order to determine whether the accounting treatment applied was appropriate, it was often necessary to examine source documents to check the specific facts and circumstances.
In contrast, reviews of accounts produced by smaller listed and other entities often identified issues that related to straightforward areas of non-compliance, rather than management misjudgement of complex matters, which the CRR says suggests were the result of the company not having sufficient or appropriate resource to recognise or address accounting questions.
The report advises boards to consider carefully where there is scope for directors' judgement in the application of accounting standards, saying the FRC will challenge instances of 'aggressive' accounting, as well as companies which overlook a specific requirement, and 'will not be swayed by arguments based on the overriding spirit of the standard.'
Overall, the CRR was disappointed that few boards appeared to have taken onboard the concept of 'cutting the clutter' to ensure that key messages are highlighted and supported with relevant, concise disclosures.
The FRC reviewed fewer reports and wrote to fewer companies than last year, which the regulator says is a reflection of the number and complexity of the cases brought forward as work in progress. Most of the companies asked to provide additional information complied, although court action was threatened against two companies, one based overseas, that had not provided the material requested.
Four sets of reports and accounts were subject to Review Groups, a formal process to look at particularly complex issues. Three cases involve questions around the interest held by a company's pension fund in a Scottish limited partnership controlled by the company. The fourth had a focus on revenue recognition.
Richard Fleck, chairman of the FRC's Conduct Committee said: 'We operate in an environment where reputation is enhanced by transparency and openness supports integrity. It is important that boards are willing to hold open and constructive dialogue with investors and respond well to suggestions for improvements to the quality of their reports.'