ICAEW is calling for urgent reform to the regulation of financial reporting disclosures, saying the current system is responsible for a drop in quality and must be changed or the situation will get worse as the volume of irrelevant material increases say Harris & Co accountants Northampton.
In the report, Financial Reporting Disclosures: Market and Regulatory Failures, ICAEW’s financial reporting faculty says that because the current system is set up to meet users’ potentially limitless information requirements, all the incentives are to over-disclose, not limit disclosure to relevant and material information. It wants companies, auditors and enforcement agencies to be given greater scope to use their judgement in deciding what should be disclosed, rather than the present ‘one size fits all’ approach.
Robert Hodgkinson, ICAEW executive director, said:
‘We need a major culture shift, where everyone is working to ensure that relevant and material information is disclosed, and immaterial disclosures are omitted. Regulators, standard setters, companies and auditors should all face the challenge of explaining what they are doing to ensure that disclosures are clear and focused, rather than complex and overwhelming.’
ICAEW wants to see a change in disclosure requirements so that firms can report separate information sets to different users, as long as all the information is available somewhere, for example online. These should be regularly reviewed to assess need and weed out unnecessary disclosure.
The ICAEW wants enforcement agencies to make it clear that firms will not be penalised for non-disclosure of immaterial information, but rather are actively encouraged to omit it. Equally, auditors should refrain from encouraging disclosure where immaterial, and support its omission.
There should also be more emphasis on non-regulatory solutions, so that preparers and users engage directly to discuss voluntary public disclosure of information not currently provided, rather than relying solely on standard setters to introduce new requirements. It also wants the standards-setting process reformed to give weight to the views of those who bear the costs of disclosure, and to ensure that disclosures are only required when they are needed, weighing up the costs of disclosure against the need.