A CALL TO ACTION

The government’s proposals to modernise corporate reporting will impact the vast majority of CAs, from those in small accountancy practices through to the largest multinationals. This special column examines some of the key talking points from the consultation and calls on ICAS members to seize the chance of shaping this crucial piece of legislation by taking part in a survey

BY 
David Cruickshank CA, ICAS President
James Barbour CA, ICAS Director of Policy, Leadership
Chris Barber CA, ICAS Chief Financial Officer

On the evening of 6 September, the UK government announced that it would be publishing a landmark consultation titled Modernising Corporate Reporting to support long-term economic growth the following day.

Business Secretary Jonathan Reynolds MP described it as a “once-in-a-generation review of corporate reporting” and it is certainly fair to say this sort of thing comes along once in every 10 to 15 years.

The context

In short, the government is looking to establish the corporate reporting framework that the UK will require going forward to support economic growth – and the UK’s international competitiveness. It will also seek to ensure that the framework will remain fit for purpose as further technological changes will undoubtedly emerge.

ICAS welcomes this consultation. Indeed, we’ve been at the forefront of the call to look at how corporate reports are produced since 1988, when we launched the seminal research report Making Corporate Reports Valuable.

This report was instrumental in the development of International Accounting Standards, and ICAS Past President Sir David Tweedie played a key role in this regard as the first chair of the International Accounting Standards Board.

ICAS also published further papers including Making Corporate Reports Readable in 2010, when we proposed the introduction of a short-form report to provide a clear, concise and consistent message about a company’s past, present and future.

We remain at the forefront of influence. That’s something that will continue.

What does the consultation cover?

The consultation covers everything from disclosures around directors’ pay, to who needs to have audited accounts, and what is actually reported in those accounts.

It provoked immediate pushback from some areas, but we believe there is the chance to strike a balance. So, there can be high levels of accountability to shareholders by having clear information, while also reducing the burden on business of producing accounts, which often people simply don’t read. The government wants the consultation process on its proposals to have concluded by 30 November. That’s a very short turnaround, as it takes time to get people together and canvas views. But, hopefully, what it also suggests is that there is genuine desire from the government to make things happen, and at pace.

We see this as a call to action for ICAS and our members. We have a responsibility to represent your views along with those of your clients and companies you work for, not just within Holyrood, but also Westminster and Number 10 North. We will get to the details of how we’re engaging with members to collect feedback and opinions on the consultation towards the end of this piece. Before we get to that, let’s examine the major points from the consultation.

The key issues and what they could mean for CAs

The government starts by adopting the premise that the annual report is intended for investors and creditors. This is quite an assumption given the myriad stakeholders who would now claim to have an interest in the activities of a corporate entity, including those with an interest in sustainability-related matters.

Furthermore, the category of investors is not homogeneous, but is made up of a wide-ranging spectrum of individuals and entities. Notably, the consultation does not adopt a narrower view of investors, for example shareholders, for which the directors of companies have a legal responsibility to prepare accounts.

“Large language models and AI are already changing the way people digest information in today’s world”

As we all know, high-quality communication requires knowledge of the intended audience, so this is key in getting the future of corporate reporting right. Having a single document, like the annual report, might not be the correct approach and technological advances could help in terms of presentation. Large language models and AI are already changing the way people digest information in today’s world.

Another wide-ranging proposal is to only have overarching high-level principles in legislation and place the detail in standards – allowing the financial reporting framework to respond faster to societal changes, including in technology. Such an approach would mitigate the risk of legislation no longer being fit for purpose.

The government also recommends removing the requirement for many medium-sized companies (those with a turnover of more than £15m but not more than £54m) to have an audit. The impact of this proposal must be carefully assessed, and it will impact on our members.

Companies of all sizes have audits for any number of reasons, be it governance, compliance, satisfying the banks and HMRC. For charities, an audit can provide assurance to donors, foundations and grant givers, and therefore is a good measure of corporate control. So, rather than being a statutory requirement, an audit for institutions of that size could be presented as a ‘value add’.

Also on the government’s list is a proposal for the development of a voluntary new assurance engagement to satisfy market demand. This type of engagement is widely used in the US but has struggled to gain traction in the UK.

The government also envisages a streamlined financial reporting framework based around four principal accounting standards: UK-adopted International Accounting Standards (UK-IAS), UK GAAP for large companies, UK GAAP for SMEs and UK GAAP for micro-entities.

Then there is the constantly growing area of non-financial reporting. What content should companies be required to include in their strategic report, and is such a document even necessary? Does it add value? Could such information be reported elsewhere?

“This is your opportunity to help shape the UK’s and also potentially other jurisdictions’ future corporate reporting frameworks.”

Another proposal is to radically change how directors are required to assess whether a company can pay a dividend. This would lead to the introduction of a solvency-based test which was considered and previously discarded in the consultations that took place when modernising the Companies Act 1985, which ultimately resulted in the Companies Act 2006.

If the UK does go down that route there are lessons to be learned from other jurisdictions that have, to varying degrees, adopted a similar approach, such as Australia, Canada and New Zealand.

Clearly, these proposals would impact the vast majority of CAs, ranging from those in small accountancy practices to those in the largest multinationals.

As well as being considered by several ICAS policy panels, we have issued a short survey (see the link at the end of this article) to members to seek your views on some of the key points. We will also be holding roundtables with representatives from the Department for Business, Innovation, Science and Trade to explore their proposals in more detail.

At a helicopter level, the focus on simplification must be welcomed but we all know that reducing complexity is generally never straightforward. Additionally, there could be unintended consequences. For example, if medium-sized companies were not required to have an audit, would that further reduce the number of audit firms and potentially increase the challenges that smaller charities encounter in trying to find an auditor?

On the other hand, would it present an opportunity for the directors of medium-sized companies, banks and other funders to demand that an entity is audited because of the value it provides?

Whatever your views, this is your opportunity to help shape the UK’s and also potentially other jurisdictions’ future corporate reporting frameworks.

It is most certainly in the public interest that CAs provide their insights to make sure that any revisions to the existing framework are well developed, carefully thought through, serve the needs of users (to be agreed) and fit for the future.

Take part in the Modernising Corporate Reporting survey