The idea that the Financial Reporting Council is working on a project reviewing complexity in corporate reporting could be greeted with a degree of cynicism. Finance directors have witnessed a sustained increase in the volume and difficulty of accounting, and related rules their companies must follow, and when politicians or regulators promise to reduce red tape, you can only expect another level of laws, codes and guidance teetering on top of all that has gone before. A prime example of unfulfilled expectations is the Company Law Review started amid the New Labour dawn in the late 1990s that promised to build from the bottom up, but ended three years later in a damp squib.

This is not what the FRC is trying to do. Instead, it is trying to analyse what is meant by complexity, and to whom. Breaking down the corporate reporting process suggests there are three main groups involved in the process of corporate reporting: those who prepare, those who explain and those who analyse. Those three groups all have different views on the complexity issue and those perspectives must be considered and understood by those who inform the corporate reporting process ­ the law makers, standard setters and other regulators.

The first goal for the FRC is to understand the causes of complexity in corporate reporting and then engage in a debate on how to stop complexity increasing further. To achieve this, the FRC needs to understand the different perspectives of finance teams, directors, investors and analysts.

One example the FRC working group is looking at is share-based payments. The equation may go something like this: FDs and their teams may find accounting for share-based payments a difficult task that requires some steady thinking and detailed modelling that takes up a lot of time. Therefore, should that requirement be adjusted? The answer may well be ‘no’ if those tasked with explaining the company performance and those charged with understanding performance ­ analysts, shareholders and debtholders ­ find those numbers meaningful and useful. So there may be no simple answers and one stakeholder’s complexity may well be justified by the response of others.

Yet some areas of complexity are more difficult to justify. At present, a company reports on aspects of liquidity in half a dozen places within its annual statements and it should be possible to plan such information flows which would improve the process for all three main stakeholders.
And it is worthwhile re-examining some of the motherhood and apple pie principles many of us hold dear. For instance, many are convinced that accounting standards should be based on principles rather than detailed rules, but it is less than clear whether anyone really understands what principle-based standards look like and how they might operate.

The scope of the FRC project includes requirements relating to financial statements plus the accompanying management commentary and other reports. This area of complexity seems even more difficult to tame than the numbers. The past few years saw annual reports increasingly targeted by lobby groups and government as the location where companies should report on essentially non-financial matters such as the environment, or corporate social responsibility. An example of this is the European rules on takeovers, requiring corporates to disclose material contracts that contain a clause about change of controls. The idea is to unearth embedded defences against hostile acquisitions by materially impacting the value of the company. But in implementing the idea, presumably no one thought of who benefits and at what cost to others? Define material contracts, then set up a system to capture all the relevant information. No problems.

Complexity is a trend that has been festering for some time. The fuss in 2007 over the HSBC annual report was a trigger highlighting how far we have travelled down the path of complexity ­ or not, in the case of the postmen who were cautioned not to carry too many of the bank’s 454-page, 1.47kg annual report. The consultation paper the FRC will produce will not offer immediate solutions. In this complex, global world it is no longer sufficient to convince the UK’s Accounting Standards Board or the Department for Business, Enterprise & Regulatory Reform, progress will only be made if the IASB and the European Parliament are convinced. This is the start of a process which looks unlikely to have a neat ending. A huge web starts to become clear once the idea of complexity in corporate reporting is scrutinised more carefully and more calmly than the usual one-dimensional approach of judging individual standards or laws.

Attempts to simplify or streamline reporting requirements are usually met with resistance from at least one group of stakeholders. So change will only happen if consensus can be reached among a myriad of groups scattered across the globe. That underlines the importance of what is being attempted. It may be difficult, but is not futile; complexity is one of the more serious threats to regaining and maintaining confidence in corporate reporting and corporate governance.