Annual reports have become too lengthy, according to Richard Moriarty, the chief executive of the Financial Reporting Council (FRC).
The average public company annual report now contains around 98,000 words, which is longer than JRR Tolkien’s The Hobbit.
Moriarty notes that much of the extra content is focused on environmental, social, and governance issues, such as sustainability and gender pay equality.
They believe that this time could be better spent on entrepreneurial activities and innovation.
The increased length of annual reports has resulted in higher production costs and a significant time commitment from company directors.
Moriarty suggests that the current state of annual reports is a result of the “weight of expectation and cost” that has built up over time, comparing it to geological layers.
The FRC has been working with prominent City figures, including fund manager Nick Train, to address the issue of “reporting bloat” and find ways to make premium value more accessible.
Moriarty argues that audit quality in the UK has improved significantly since 2018, despite recent fines on Big Four accountancy firms.
He believes that blaming the auditor is not always fair, as the board of directors should be the first line of defense.
The role of the FRC, according to Moriarty, is to support growth and underpin trust and confidence in UK businesses, rather than preventing corporate failure.
Richard Moriarty acknowledges that risk is a necessary component of growth and that the FRC should help businesses support responsible risk-taking.
Moriarty also highlights the issue of large private companies, such as Thames Water, not being subject to the same regulatory standards as publicly listed companies.
The government is currently consulting on modernizing corporate reporting, which raises the issue of the relevance of the annual report and accounts in the digital age.
Moriarty suggests that the current system may be outdated, given that most businesses produce information throughout the year.
He also touches on the issue of virtual-only annual meetings, noting that the law requires a physical location for these events.
Despite the challenges facing the audit market, Moriarty remains optimistic about the future.
He believes that the need for highly professional and competent auditors will continue to exist, even with the advent of AI.
The FRC’s efforts to address the issues surrounding annual reports and audit quality are likely to be closely watched in the coming years.
They seek to balance regulation with the need to support business growth.
