Richard Moriarty, chief executive of the Financial Reporting Council (FRC), says annual reports have become far too big and are burying investors and directors in corporate guff. He points out that a typical public company annual report is now 98,000 words long, longer than J.R.R. Tolkien's The Hobbit.
"The weight of expectation and cost around annual reports and accounts has grown over time. It's a bit like geological layers," said Moriarty, 52. Much of the extra length comes from environmental, social and governance material such as sustainability and gender pay equality reporting, he said, and the cost of producing the documents has ballooned along with the time they take up.
"We want [company] boards to spend their time on entrepreneurial activity," Moriarty said. "The more they are in a defensive posture box-ticking, the less they are thinking about innovation and growth." He added that outsized annual reports also make it harder for investors and creditors to find the important information.
Moriarty said the FRC has been working with prominent City figures including fund manager Nick Train, who has repeatedly lamented "reporting bloat." "It's a long overdue conversation, and the way I put it is: wouldn't it be good if this were a once-in-a-generation reset?" Moriarty said.
A regulator with growth in mind
Moriarty, who previously headed the Civil Aviation Authority, took over the FRC three years ago after the audit profession and the FRC itself went through what he calls a traumatic upheaval. Between 2016 and 2019, a string of high-profile corporate collapses, including Carillion, BHS and Patisserie Valerie, brought harsh criticism of their auditors and of the FRC.
The scandals led to a review by Sir John Kingman, who concluded the FRC was a "timid" watchdog that resembled a "ramshackle house" and was not fit for purpose. Kingman recommended replacing it with a stronger independent body called the Audit, Reporting and Governance Authority (ARGA). That plan, along with an audit reform bill, was shelved by the government a few months ago.
Fines and ongoing investigations
Moriarty said the scandals have not gone away. Recent fines on Big Four accountancy firms include penalties on EY for its audit of furniture group Made.com and on PwC for its work on defence firm Babcock. PwC is also being investigated over TG Jones, formerly known as WH Smith, where there was a large accounting black hole.
Even so, Moriarty argues there has been a big improvement. "Audit quality in the UK has come a hell of a long way since that dark period of 2018. There was a complete breakdown of public trust and confidence in the audit profession and indeed its regulation," he said.
"Too often, when a company fails, people blame the auditors. Don't get me wrong, where they've failed, we will find it and we will hold them to account. But simply blaming the auditor is a bit like blaming the goalkeeper when the defence has walked off the pitch," he said, adding that the first line of defence is meant to be the company's board.
"The role of the FRC is to underpin trust and confidence in UK plc and support growth, but we are very clear our role is not to prevent corporate failure," Moriarty said. "It's quite counter-cultural for a regulator to say this, but risk is not a dirty word. If we want growth, and for that growth to make its way into the pockets of people and their pension schemes, then part of the role of the FRC is to help businesses and support responsible risk-taking. If we have no risk, we have no forward movement."
Thames Water and a regulatory gap
Moriarty said he is philosophical about the shelving of ARGA and the audit reform bill, saying the FRC is getting on with the job regardless. But he described one "opportunity lost": the chance to hold large private companies such as Thames Water to the same standards as stock market firms.
At present, privately owned businesses face a much lighter regulatory regime than companies listed on the stock exchange. "It leaves us with some odd situations where the legislation hasn't caught up. The best way I can exemplify this is to say Severn Trent and United Utilities [which are both quoted on the stock market] are within my perimeter, but Thames Water is not," he said.
This is despite the fact that the owners of Thames Water loaded it with £19 billion of debt and took out billions of pounds in dividends, leaving the company in a state of near-collapse and unable to fix its crumbling network. "If I take another example, Sainsbury's and Tesco are within my perimeter, but Asda is not," Moriarty said.
"I don't think it's right for me to speculate on Thames Water specifically. But in general, what it undoubtedly means is that there are businesses in the country that Parliament, politicians and the public would regard as systemically important, yet which don't have the audit regime that their equivalent listed businesses would have," he said.
Modernising reports and AGMs
The government is consulting on modernising corporate reporting. Moriarty raised the question of whether the annual report and accounts, which is months out of date by the time it appears, is an anachronism that could be replaced with faster, more dynamic online reporting in an age of AI. He did not offer an answer but said it is a question that needs to be covered: "What is the salience of that backwards-looking, once-a-year report, when of course most businesses will be producing information throughout the year in any event?"
He also raised the question of whether companies should hold virtual-only annual meetings instead of face-to-face events. "The law, the Companies Act, talks about the annual meeting having a place, and I don't think it's been tested in court as to whether a purely virtual meeting would meet the Companies Act's requirements," he said, adding: "I hasten to add I am not a lawyer."
London listings and the future of audit
Moriarty dismissed suggestions that onerous governance and disclosure rules are driving companies off the London stock market toward Wall Street. "What I will say is that listings on the London market are really important. They're part of our national psyche. When the newsreader says 'and the Footsie is up twenty points' we all feel good about it. It's deep in our national consciousness," he said.
"My friends at a dinner party may not get excited about this, but I do think the audit market's going to be a fascinating place over the next five years," he said. On the threat posed by artificial intelligence, Moriarty said: "I don't think AI will do away with the need for highly professional, highly competent auditors who bring judgement to bear. We've been here before. The audit profession survived the abacus, the adding machine, survived the spreadsheet and it will survive AI."
