This article was originally published in The Accountant in March 2018.
The Accountant: If I asked you how fit for purpose the corporate reporting landscape is in the EU, what would be your answer? What general assessment would you give of the current landscape?
Hilde Blomme: When we talk about the future of corporate reporting, we have especially focused on the larger entities. When we first start to look at that, on a European level, we have IAS regulation and the use of IFRS at least for the consolidated accounts of quoted companies. We have the non-financial information directive that requires them to report on this type of information. The IFRS are not perfect and they are not ideal. However, they are the major game in town and we are very huge proponent of international standards, so we are happy that they are widely recognised. We think we’re on the right way. We also like it that the IASB has finally decided to do its project review on the management commentary. We feel that, potentially, there is a willingness to not see two different things: financial reporting v non-financial reporting. We’re really happy that the ones that set the financial reporting standards, slowly, little by little open it up to something wider. We are hopeful – and this might take a little bit of time – that that may mean we have full integration of financial and non-financial information reports. We’re not yet quite there, but at least there are doors that are opening towards getting there. If, however, we look into everything other than large entities, if we look at what we call the 99% – the small and medium sized entities – they’re under the accounting directive, where there was a lot of member state options for implementation. This is still driven nationally, basically. There were some principals and requirements that were the same, but there is still a lot that differs from one country to another. When we, as Accountancy Europe, look at smaller entities and the current reporting obligations, we can’t really say there is a European approach to that. That’s not really the case yet. Will we ever get there? It’s a question mark – I don’t know. There are a lot of things that are happening, digitisation and things like that but they have nothing to do with regulation or legislation. They just happen because they are business development matters, rather than anything that is set by our regulators or legislators. Also, as far as really trying to create a European capital market and have a proportionate regime to list and then, once you’re listed, to record every year. We don’t really have this because IFRS are often seen and often are too complex for smaller entities. There is definitely a lot of work that would need to be done to see how can we get smaller entities to grow, to get listed and to have a proportionality to that burden. Because often now, that’s not how it is seen. It’s seen as too burdensome for smaller entities and that’s a pity although there are reasons for that. I mentioned digitisation and technology. The funny thing is that digitisation is a little bit of a two-edged sword because if you want to use the European single electronic format (ESEF), which is coming in 2020, or if you want to do XBRL reporting, you need standardisation. But if you really think about the digital revolution, the first thing you would want to think of is flexibility, is experimentation and that it’s doing things differently – and that’s exactly the opposite of standardisation.
The Accountant: On that point, at our magazine’s event last October, someone said that on the digitisation side of things, it wasn’t so much a question of regulators getting up to speed, but standard setters were a bit late on that front. If I understand correctly what you just said, you agree with that and you think that maybe the standard setters should up their game
Blomme: I think with the different ways of what we refer to as core and more. You have hundreds of pages of annual report – if you really want to speak to and tailor to the different audiences you now have for corporate reporting, you have to be able to have a tool to tailor it towards what they would be most interested in. But for that to happen, you need to have a bit of a digital experimentation to bring those things together, there is a need to be flexible in annual reports. But at the moment you can’t be flexible in the format of the annual reports, or even with the requirements that we have for annual reports. The IASB is completely absent from that discussion, as far as we see it now. Will they ever embrace this? Maybe. I think they don’t even consider this to be their game for the moment, so there I definitely think they are absent. They might see it as something for software providers, for the SAPs and the Oracles of this world. I don’t know but, as far as we know, they are not looking into that level of digitisation.
The Accountant: Similarly, you mentioned the management commentary, isn’t that a bit of a cold feet approach to the question of sustainability? Because at the moment the IASB’s narrative is “we’re not experts in the non-financial standards, and there are initiatives out there that do it better than us. So, we will just revise the management commentary”. Isn’t that a bit of a cold feet approach? Or do you think, no, it’s first step in the long sequence?
Blomme: I think for now, we want to give them the benefit of the doubt and believe that it’s the first step. It’s better to see that happening than having nothing at all. Will that get us anywhere? I don’t know but at least there is an openness. Will that respond to the evolutions in business, and what users want for corporate reporting quickly enough, it’s an open question. But we want to give them the benefit of the doubt, definitely. When, for instance, I talked about proportionality of burden between the smaller and larger entities, it’s also something that the IASB is not very good at. For instance, when it first released the disclosure initiative, we thought: “Wow, that’s good.” Because oftentimes it’s especially the disclosure requirements that are considered to be very burdensome. We were very positive and optimistic when we saw this initiative. Now that we’re further into it, we have a better appreciation of the type of proposals and what we might get out of it, and we’re a bit less positive, I have to say, as far as really seeing that this will get us into really more proportionality, as far as disclosures.
The Accountant: You mentioned the core and more principle, that Accountancy Europe coined. Can you remind me: is the idea to have one report or is it two separate reports?
Blomme: It’s not one report, it’s not two reports – it can be one core report with many more reports. In our publication, we gave some indications of what could be included in the core report, although we say the main principal is that it needs, really, to be what is core for the company itself, for giving a real insight into their business. We said that what we could potentially see as covered by the core report would be: business model and strategy, the key figures on the financial statement which is not necessarily the primary financial statement, key information on non-financial information matters, risk mitigating strategies, key aspects of corporate governance. Then we said the next layer from each of those, if you were a user that is interested in the primary financial statement or even in the key figures of the financial statement. You could click through and then you would get more reporting, one of the more reports that actually gives you the primary financial statement. If you were interested in the main risks, you could click through into yet another more report, and you get more information on risk management reporting and on the internal controls and so on. But if you are more interested in the non-financial information key matters, you would click to then get into sustainability information, climate and environment diversity policies, human rights, social responsibility, bribery, whatever you have, and the list can be longer. So it is only one core but it can include a number of other reports, as many as you feel, as a company, you would need to cover your business in the level of detail that you appreciate your users might want. Some users might only look at the core report, but others might click through to one or two more reports because that’s what they are most interested in.
The Accountant: When you released that paper, the introduction mentioned that the audience for corporate reporting was widening. I went to the UNCTAD/ISAR meeting last October, where someone raised a very interesting question around this idea that there’s a widening of the audience of corporate reporting. The person asked: “Is it a widening of the audience or a widening of the interest from the original audience?” Because we are talking about stakeholders that are as wide as civil society and NGOs. Are those people actually accessing the reports published by the company? Are they going on the website and reading them? Is it more the question of investors and shareholders that are more and more sensitive towards the issues, such as sustainability or non-financial information.
Blomme: I think it can very well be both of those things. The traditional audience is the capital providers; the investors are now paying attention to matters which 10 or 20 years ago they wouldn’t look at. Indeed, their perspective has widened. If you talk about NGOs – it’s actually funny you used them as an example – I think it’s quite clear, based on the comments that they make on companies or businesses that these comments are based on firsthand information. You see NGOs commenting on company’s tax strategy or the company’s reporting on tax matters for example. And sometimes they would say what the company did not report, or did not report enough. It’s almost like a prime example of core and more. They might look at some of the reporting by companies, the matters that are of most importance to them. You might be very right – the NGOs might not look through the whole annual report, because they would not consider most of it to be of interest to them. But there are definitely certain things, based on the knowledge that they demonstrate when they are speaking about it or when they are writing about it, that show they have looked at in quiet detail, for instance, on tax strategy and tax disclosures. When we did our first work in 2015 on the future of corporate reporting, we had about 30 stakeholders writing back to us with their responses to our questions. That’s what they communicated: most of them indicated that the primary audience is still the capital providers, the traditional investors. But nevertheless the audience is now more diverse than they used to be.
The Accountant: I’m not sure if it’s part of the fitness check or if it’s something that was already on the table, but I think there is a willingness to review the nonfinancial reporting directive this year. Am I correct?
Blomme: In the fitness check, they refer to it. This directive had to be implemented by mid-2016. Now, let’s be honest, quite a number of countries were really late, so 2017 is the first year where you can really have, in our estimate, those 12,000 companies or so throughout the European Union do the non-financial information reporting as required by the directive. So we will first start to see this reporting in the coming weeks or months for the financial year 2017. We had not quite expected that being reviewed so soon because the implementation was late, but it doesn’t come entirely as a surprise if you look at the sustainable finance work that the commission has sponsored: the High-Level Expert Group released their interim report last summer and their final report a few weeks ago, and we are now expecting the commission’s action plan in March. So to review non-financial reporting directive was to be expected, I would say, because there is a linkage between the two. We just hadn’t really expected them to do this so soon. After one year of reporting, will they have enough there to give them all the elements to see how it has gone? It remains to be seen. At one year, it’s not a lot, and the first year often you have a bit of experimentation, finding out how you can do things. Then, in the second year, you’re getting better at it. But there is also some positive. I think you referred in your emails to the “old debate on financial and non-financial information”. And that’s one of the things they really want to look at and bridge to potentially have more integration. It’s the first time that we see them be so clear on that. And on that note, we use the term “non-financial information” but some use the term “pre-financial information” for non-financial information. Which is saying something because, eventually, most non-financial information has a financial aspect to it. It’s not one against the other, they really should go hand-in-hand, but there are a lot of differences still now, as far as the level of maturity in the frameworks that you can use. The commission didn’t want to express themselves in the use of a framework for non financial information, even though in practice, it’s about 70% that uses GRI and less so integrated reporting. It seems that the Commission really wants to look into that in further detail. Overall, that’s a good thing because in the non-financial information reporting there is a lot of work that needs to be done to really bring it together. For companies it’s now a little bit all over the place. You might recall this call for action we issued in September last year, where we say there’s really a need in the NFI area, to have more cooperation, coordination and consolidation in the frameworks. We’re far, far from that.
The Accountant: Let’s fast forward and imagine 10 or 15 years from now, if everything goes according to Accountancy Europe’s plans, objectives and vision for corporate reporting in Europe. What is the ideal landscape that you would like to see?
Blomme: The ideal would be to only talk about corporate reporting and we don’t think in terms of categories of financial and non-financial but in terms of really integrated and longer term information. We really like our core and more concept, where what is really important is very visibly and you can actually go into more detail if you wish to, but not everything is right in your face in 300 pages. Also, there’s something that the commission has not got in their road map. But we really have this dream to have a UK FRC corporate reporting lab extended to the European level. If this could take off, it’s a way to get into really experimenting with corporate reporting: what could we do? Where should we get at? The UK that has brought together preparers, investors and regulators around these questions and if that could be replicated at the European level it could really accelerate development.
The Accountant: That could actually be included within the remit of EFRAG, right?
Blomme: That could be the case. You will maybe have read in the High-Level Expert Group report on sustainable finance, that they refer to EFRAG. I think EFRAG itself was quite surprised about this, because until now, they were always told their remit was to write endorsement advices for the IFRS and that was it, nothing more, nothing less. Then, all of a sudden, they were considered to have a role in something wider, I think there was a surprise, but I think they were, hopefully, positively surprised. It would also mean that EFRAG needs to reinvent itself, because that is not the mission that it was set up for. The wider remit than for the moment, financial reporting, is not in its DNA. I think that overall the discussions in the EFRAG board – where we have two members, so we follow this quite closely – have been positive towards opening up the agenda, but there is a lot that needs to happen before they actually can fully embrace it and take it forward. It’s definitely possible.