Annual reports must not obfuscate

V Ranganathan | Updated on July 05, 2021

Often, key items of accounts and audit report are buried in a maze of unnecessary information

Never has corporate India provided so much information for so many, and yet understood by so few. The annual reports of today, which should be more like medical reports, are made like marriage invitations of a typical expensive Indian wedding.

In the years gone by, one had to write to Levers, ACC, ITC and Alacrity Housing, to name a few, to get the booklets of the AGM speeches.

Unlike today, information was not available at the touch of a keypad. Reading those speeches became a way to know the state of the economy and the business, and also held polish one’s language skills.

The annual reports of yesteryear carried only the essentials. Over time however, the reports have, by virtue of both regulatory developments and professional agencies wishing to prove their worth, become like high school textbooks, talking of everything under the sun but not what the reader is anxious to know.

The most important component of an annual report, the accounts, are often difficult to locate. In this era of soft copy downloads, one needs to scroll endlessly to spot it.

For instance, a leading consumer goods company has the financial information starting after page 125, and one of the top conglomerates has it after about 250 pages. And as if to provide variety, one company allows scrolling one page at a time, and in another it moves two pages at a time.

The fault is not entirely that of the management. Regulatory overdrive is a primary reason for this malaise. Dumping of information is seen as way to de-risk against allegation of inadequate disclosures.

It would not only be useful but also essential to conduct a survey of investors to figure out how many read the integrated report that often looks like a shop-floor manual than a product of the intellect.

In fact, it will be worthwhile to find out how many directors themselves read the MDA and the board, sustainability and integrated reports of the companies where they serve as directors. It is not an easy task to read them in entirety before appending one’s signature.

The more important question is: Do the reports do justice to transparently provide a true picture of the strengths and weaknesses of a company? The answer is almost always a ‘No’, especially with regard to the latter.

While the reports dwell at length on the peripheral aspects such as developments in the business and the company and expatiates on the positives, specific details about the downsides of the business and the potential risks the company is exposed are seldom indicated.

Most of the discussions on risks are generic and may be largely similar across companies. Risks and problems that are specific to the entity are seldom shared, nor are the shareholders given to understand issues that the top management feels stressed about.

When have annual reports talked about a failed product launch, an aborted project, a disagreement in the board, a brewing dispute between two key shareholders, default in payment of a debt, absence of a proper successor(s) for key positions, reasons for paying a penalty or a fine, etc? The regulations have identified certain areas like related-party transaction as critical disclosures. How many cases there have been of corporate insolvency where monies were siphoned out but with reporting being statutorily compliant.

The present annual report disclosures are like a patient being examined on a doctor’s table fully clothed in a three-piece suit. The corporate (report) is like the patient, and the shareholder or anyone reading the annual report for knowing the truth, is the doctor. With so much dressing, how would it be possible to examine the real health condition of the patient?

The directors must keep their mann-ki-baat more meaningful.

Sensitive space

The audit report, the other key component of the annual report, treads into a more sensitive space. In the earlier days, the audit report wasn’t even long enough to fill an A4-size paper.

But over the years the size has more than quadrupled, thanks to layers of disclaimers and a declaration of inability to decipher any devious and divergent designs of the management. In essence the drivel that passes for audit report leave the readers distinctly confused.

Auditors take shelter under the platonic expression of ‘true and fair ‘. Like, beauty, ‘true and fair’ is that which lies in the eyes of the beholder. Most audit reports read the same, like the standard weather bulletin before the advent of advanced satellites.

Along with the directors’ report, the audit report should actually pinpoint deficiencies in key areas of control and highlight areas where fraud can potentially occur, even if the audit profession continues to hold its stand that a regular audit cannot detect frauds.

Audit report in some form and manner should highlight key errors or deficiencies that were noticed and corrected in accounting and reporting. It would be a step forward if the audit committee is mandated to provide a report of how the audit process helped the board get assurance that the accounts have a high degree of reliability.

However, once a fraud is declared, the audit report changes its tone totally and anything and everything is doubted. The audit report of a company like Dewan Housing for the years up to 2018-19 and beyond is a classic case in point. The fraud was detected in January 2020 and everything changed, like how politicians who change sides talk about their previous party and leader!

Ideally, there should be no standard or templated audit report. Auditors should only report on things that need further attention/improvement and opine on the way the audit committee functions in its role of oversight of the accounting and financial controls.

When Mahatma Gandhi was accosted by reporters, post his meeting with King George V, on his scanty attire for such a meeting, Gandhiji’s reply was “the King was wearing enough for both of us!”

There is a need to peel off many a layer from overdressed annual reports and expose the real company to the investors.

The writer is a chartered accountant

Published on July 05, 2021

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