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OPINION

Magic carpets this way

Magic carpets this way
October 26, 2012
Magic carpets this way

Bless the Financial Reporting Council (FRC). After a big reorganisation of domestic accounting regulation this year, the FRC is now quite a heavy hitter. It has become the integrated kingpin regulator, with a budget of £20m and 100 employees including a £400,000-a-year chief executive (Stephen Haddrill, who moved into this kind of role after a pretty dynamic career as a civil servant) and a £120,000-a-year chairlady, Baroness Hogg, a one-time City scribbler who went on to head Prime Minister John Major's Policy Unit and then chaired 3i during some extremely tough times. They head a board of 16, mainly with City backgrounds and a pleasing emphasis on goodness rather than greatness. The FRC has our best interests at heart. But I wish it would be a bit more imaginative about advancing them.

The FRC has been lamenting financial reporting for years. In 2009 it put out 'Louder than Words' which rued the growing complexity of annual reports and suggested those who write them, no less than those who say what must be written in them, think again. Three years on, the new report says the same again, although in different words with a new buzz-phrase, "the disclosure framework".

Perhaps it is unsurprising that a body charged with overseeing financial reporting is too focused on this kind of report. But that's not the only problem and the other is that the FRC cannot see the wood for the trees. It wants to convert wild forest into an arboretum - a kinder environment which investors would understand better. It should leave the forest be and prescribe a magic carpet.

The trees are all the things that the company is obliged to say. The Stock Exchange says it must describe A, B and C. The Financial Standards Authority demands D, E and F. International Financial Reporting Standards wants G to Q. The FRC itself insists on R, S and T. That probably does not encompass half of it. The company delivers A to T and all the rest, whether they are significant or not, because that's the easiest and least risky thing to do - they don't want to be sued for non-disclosure. They can write 150 pages of forest without even thinking.

And they don't want to make arboretums. When you're running a company, why would you want to dole out really meaningful information? Why would you want to say, for instance: "Dear shareholder, What you should really focus on this year is tree N. This is our weakest link. Oh, and we had a tremendous row with the auditors about writing off some goodwill. But finally, they caved in." There is about as much utility in keeping your shareholders well-briefed, as your competitors. Far better to be conventionally optimistic. To pull all the good things together in the chief executive's letter. Damn the bad stuff - that can look after itself!

If I was running the FRC, I'd have fewer reports and more awards. I'd have a worst report award as well as a best report award. I would look back five years, not just 12 months because the biggest howlers can take years to emerge. I would intend the shortlist for the worst report to be embarrassed into improving their act. I'd ask some headline comedians to review the material. Instead, we must rely on the Investor Relations Society, who recently put out their 2012 awards shortlist. They don't do worst, and they don't do comedians.

I have been studying the shortlisted annual report from Land Securities. This is conventionally excellent, verging on an arboretum. But you could not do it justice in less than three hours. And it is impossible to avoid a sneaking feeling that you're getting the message sunny side up. I scan through the headlines in chief executive Robert Noel's statement… "A plan for every asset… Well-timed development pipeline… A strong, quick-thinking team…" The message is devalued by its very framework. Robert! What kept you awake last year?

You could not possibly tell us, could you? But what you could do, and what the FRC should urge you to do, is to hire a clearly independent person - probably an analyst or a journalist - to put their reputation on the line by writing an independent two- or three-page evaluation of Land Securities for your annual report. He might even be our magic carpet.