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Narrative reports and back-end financials: numbers must back up words

Author: ICAEW Insights

Published: 08 Oct 2021

Companies need to do a better job of providing more consistency between front-end and back-end reporting in their annual financial statements if they are to engender trust with stakeholders and tap into the burgeoning appetite among investors for opportunities to invest.

Speaking at ICAEW’s Financial Reporting, Audit and Assurance conference on 11/12 October, Danielle Stewart OBE, Head of Financial Reporting at RSM, and Jake Green, a partner at KPMG, will highlight how alignment between companies’ narrative reports and their back-end financials are key to engendering trust among stakeholders.

And yet FRC reports continue to flag up inconsistencies between the non-financial reporting at the front end and the financial reports at the back end of the annual financial statement. Although it’s not necessarily rocket science, companies still struggle to achieve it and avoid boilerplate reporting, Stewart warns. 

“There is still too much of a disconnect between the front end narrative or non-financial reporting and the back end financial reports in the annual financial statement - companies need to work harder on this,” Stewart says. 

“It’s almost like the marketing people get hold of the front end and tell a great story but it’s not supported by the accounts,” Stewart warns. “The recurring theme here is linkage and making sure your story is consistent the whole way through,” she adds. 

In her presentation at the ICAEW event, Stewart will offer advice on the practicalities of writing the front end report. “This is about trust and integrity in financial reporting. You can’t have integrity if two parts of a document from the same organisation are singing a different song and the numbers don’t back up the words. How can you engender trust in the users of your accounts if you can’t get the story straight?” Stewart asks.

Green, meanwhile, will focus on the thorny issue of going concern after KPMG analysis of FTSE 350 audit reports found that the number of times going concern is a key audit matter in the audit report of listed businesses has increased four-fold in the last year and the number of material uncertainties had trebled. 

“We’ve been through a really tough year and businesses have struggled. There’s a lot that can go wrong, business models are very complicated and there are a number of dependencies. It’s important that companies tell the story of how they get comfortable with going concern and how they reassure themselves that if a bad thing happens in the next 12 months, that they will be able to survive. It’s all about highlighting the risks and uncertainties you face and what you’re doing to mitigate them,” Green says.

Green will also touch on how plans by BEIS for companies to produce a new annual resilience statement - described by Green as “going concern and viability on steroids” - could work in practice. The new statement will set out to expand on viability statements and set out how directors are assessing the company’s prospects and addressing challenges to its business model over the short, medium and long-term. 

“Viability statements had a bit of bad press. With resilience statements, BEIS is trying to bring a bit of rigidity and structure to what people are doing at the moment while still leaving room for businesses to tell their story,” Green says. 

Green said rather than see resilience statements as an onerous reporting requirement, companies should approach them as an opportunity to explain the resilience of their business models. “When people think about going concern, I think they assume they only have to tell people when they think things are going wrong but I think it’s a great shop window to say we have a really resilient business model that we’ve stress tested. Companies are reluctant to include more in the going concern and viability assessments because they don’t have a problem.” 

Danielle Stewart and Jake Green will be presenting a session at ICAEW’s Financial Reporting, Audit and Assurance Conference taking place on 11 and 12 October. Other speakers include Lord Callanan, Minister for Business, Energy and Corporate Responsibility and James Ferris, Head of UK Auditing Standards at the FRC.

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