Banking analysts believe banks’ annual reports to be unhelpful in their forecasting work or for preparing reports for their colleagues working for potential investors, finds new research from ACCA (the Association of Chartered Certified Accountants), prepared by the University of Northumbria and the University of Newcastle.
The aim of the research was to consider the real usefulness of banks’ annual reports to this important group, asking questions such as is the information useful and is it material to fund allocation decisions made by investors?
The analysts questioned expressed views on voluntary narrative disclosure categories, including management commentaries such as the chairman’s statement, the chief executive’s review, operating and financial reviews, risk reporting and corporate governance statements. Social, environmental and ethical reporting were also discussed.
Dr Steve Priddy, director of technical policy and research at ACCA, says:
“The findings show that analysts are dismissive of anything other than directly value-relevant numerical data. Their belief that no narrative reporting is capable of informing, amending or challenging a financial forecaster is a curious one and raises the thorny question of what can be done to change the situation. Do we need to break up the annual reporting system or carry on regardless?”
Given the sheer weight and volume of recent banks’ reports – in 2006 HSBC’s ran to 458 pages and Barclays’ to 310 pages respectively – some of the analysts’ comments are blunt:
Risk disclosures were generally viewed as too general to be useful and their content resulted in frustration from analysts, with one saying:
“….then we are immediately into risk management and control, which is almost always useless. So we’ve got pages on foreign exchange rates, tax derivatives and uses, realistically there is nothing that you can say from the outside about how someone else’s treasury is working. This stuff is just completely useless.”
The chairman’s statement was dismissed as irrelevant to the investment decisions or forecasts being made:
“The chairman’s statement I’d sort of regard as slightly watered down version of the CEO’s statement – what the chief exec says is more interesting and more relevant to me.”
Business ethics statements also came in for withering commentary:
“Business ethics – blah blah blah. I’m not being funny, but it just wouldn’t occur to me to look at that.”
Corporate governance reports – now mandatory under UK listing rules – were usually unread too, simply because governance in UK banking was generally trusted by the analysts.
Dr Priddy concludes: “By its very nature, an annual report has many audiences – but all involved in the lengthy process of preparing annual reports and of interpreting them, need to decide whether what is produced now is right for the volatile economic climate. Going forward, the right balances have to be struck to present common sense reports that are both meaningful and material.”
Dr Afra Sajjad, Head of Education and Policy Development of ACCA commenting on the findings of the research study observed, “In Pakistan banking analysts usually only consider numerical data. Analysts and other users of annual reports still are not aware of the value of inclusion of information about risk management, corporate governance, environment, ethics and future plans in the annual reports. One of the possible aftermaths of the current credit crises would be the demand for enhanced transparency in disclosure and this may result in narrative reporting becoming an excellent framework for inclusion of information about risk management, corporate governance and future plans.”
