At this time of year, it’s nigh on impossible to get hold of any of my finance controller colleagues. Anyone whose company has a December 31 year-end - and that’s an awful lot of us – will be busy toiling away to produce the statutory accounts. To the outsider that might seem a reasonable use of the time and the talents of educated, financially literate individuals, but to those FDs who spend large parts of each year recasting their numbers to satisfy company legislation, it feels like an extraordinary waste of time.
A few years ago, one academic labelled the statutory audit process as “busy, useless work.” It is an uncomfortably apposite phrase: the lack of relevance of the statutory financial reports to anything that you or I know as real life is as big a problem for the quoted multi-national as it is for the small owner-managed business. Who reads them? Virtually non-one. Who understands them? Virtually no-one.
One FD who contacted Real Finance recently summed up the issue brilliantly. His problem wasn’t the statutory year-end report but his frustrations are just the same. “I’m preparing a budgeted P&I and balance sheet for an MD” he says. “He’ll never read it; if he does, then he won’ understand it; and more important, he has far bigger day-to-day issues to think about than the formal accounts.”
If you’re the FD of a quoted company, the excitement is in the analysts’ presentations and prelims, not in the glossy brochure. Surely, only insomniacs crawl through those pages of obscure notes to accounts.
And who is reading the accounts of unquoted companies? Thousands of copies of accounts are sent to bank managers – and then neatly filed. For banks, shareholders and other creditors, the control and reassurance lies in receiving audited numbers, not reading them. Periodic management accounts provide relevant performance information.
When I go through statutory accounts I, like you, simply read between the lines. And that is the trouble. It is always going to be difficult translating the activity that is your business into figures and, to a lesser extent, words without losing most of meaning on the way. While commercial activity has changed out of all recognition, the way we “do” accounts is still stuck in the format best suited for the manufacturing-dominated era of their birth.
Now that looks unlikely to change. We missed a big chance with the Company Law Review (CLR) that eventually ran itself into the ground last summer after countless hours of committees and sub-committees. You may soon be filing your accounts electronically with the Registrar of Companies instead of trusting the post to Cardiff, but the contents of your submissions would still be distinctly recognisable to the Victorians.
The Statement of Principles for Financial Reporting (SoP) published by the UK Accounting Standards Board (ASB) identifies “relevance” and “reliability” as the primary characteristics of useful accounting information. With the audit threshold heading inexorably towards the £4m-plus turnover mark, you could argue that reliability is in doubt for many companies – their accounts won’t even be seen by an audit firm. However, the question of relevance is the killer: year-end accounts aren’t used by the people who assess businesses because they simply don’t look at your key performance indicators.
When Robin Jarvis of Kingston University did some research into the use of financial reports among small and medium-sized enter-prises, he confirmed what we all know: managers rely on regular updates of management accounts, budgets and cash-flows to steer the ship. In particular businesses are focused on liquidity ratios: how fast are you collecting debts, what’s the bad debt, are trade creditors under control, how is the cash-flow? These are the questions that interest management and investors. I’m not even suggesting that accounts should be forward-looking. For many, it’s like asking the direction of the tanker without knowing which is the front end. And where would you start first? With Europe, the UK or international rules? Should you try and reform all financial reports or go for unquoted companies because they have a greater need to tie in management information with reported data?
The only hope is that enlightened FDs will have the time and the wit (with maybe some help from a professional body or standard-setter) to put meaningful information in an operating and financial review (OFR)-type statement. Not only would it help the shareholders to know how things actually are, it might make those of us toiling away over year-end accounts feel a bit better about our labours.