Post #72
October 4, 2023
Claire Bodanis
Claire takes heart from a conversation with Maria Kepa of EY, who explained that the new requirement on the horizon to include a resilience statement in the annual report needn’t be the nightmare we report writers thought it might…
Remember Section 172? It’ll come as no surprise to regular readers of this blog that, just as with S172, while I wholeheartedly support the principle behind one of the Government’s latest initiatives to affect corporate reporting – the introduction of a resilience statement – I am, as ever, frustrated by the potential consequences when it comes to putting said initiative into practice, viz. in the writing of the annual report (AR). It’s the same old story of deciding you want companies to do something, and making it happen by shoving the requirement into reporting, without considering how that shoving will affect the AR as a whole. And, critically, whether or not it will support or hinder the overall purpose of reporting, namely: to build a relationship of trust with investors and other stakeholders through truthful, accurate, clear communication that people believe because it tells an honest, engaging story. [1]
The new resilience statement is a bigger challenge than S172 because it has potentially far wider – and worse – implications for the strategic report [2] than S172 ever did. For the less geeky amongst you, let me explain. The idea of the resilience statement (clue’s in the title) is to get company directors to express a much longer-term view of the likely future success of the business than is currently required, in either the ‘going concern’ statement (which requires a view of a minimum of 12 months), or the ‘viability’ statement (which tried to do the job by requiring companies to give a view ‘significantly longer’ than 12 months, but in practice led to companies generally only talking about three years).
Getting companies to talk more broadly about their belief in the long-term future of their businesses is a good thing, and I wholeheartedly support it. Not least because there’s barely an annual report today that doesn’t include 2030 targets, or even 2040 or 2050 ones when it comes to the thorny question of how companies plan to reach net zero. It seems a bit daft, then, when you get to the viability statement, that all they’re talking about is the next three years. Presumably, if a company has plans to 2030 and beyond, the directors have a reasonable expectation that it won’t fall off a cliff in three years’ time. So if the new regulation can square that circle, I’m all for it.
However, in practice the requirements of the resilience statement, as originally set out, would demand a rethink of a lot of the strategic report, particularly the risk report. But, and here’s the infuriating bit, not all of it. So you’d end up with a long, no doubt boring, compliance statement that incorporated quite a lot of the current strategic report, and a lot of head-scratching over what to do with the rest of it: not least because you can’t, in my view, define resilience simply in terms of risk. The reason the strategic report more or less works at the moment is that in practice, companies have the freedom to include the necessary disclosures in a way that best allows them to tell their story – which in itself is the core principle of reporting, according not just to me, but to regulators and Government as well. Requiring us to put some of those disclosures into a compliance statement would undermine that principle, making reports harder to write as a joined-up story, and thus harder to read as well.
I must admit, with all the activity in the last few months around sustainability standards (ISSB, ESRS, TPT, TCFD, TNFD – don’t you love an acronym), the revisions to the UK Corporate Governance Code, and the Government’s review of non-financial reporting, not to mention my own agitations around regulating the use of AI in reporting (new proposal to come in my November blog!), I’d rather forgotten about the looming spectre of the resilience statement.
Fortunately, others hadn’t. And I was thus mightily relieved to hear, over lunch last week with my favourite auditor, Maria Kepa of EY, that she had flown the flag of good sense in an FRC roundtable on, amongst other things, said resilience statement. In the meeting she asked the key question – can the resilience statement simply cross refer to the rest of the annual report? And she succeeded in pinning the powers that be to the right answer: yes. This may sound like a small point, but it’s absolutely critical for writing because it means that we won’t have to reshape the entire strategic report around a compliance statement. Rather, we can continue to write the story in the way that makes most sense to the company, and cross refer from the new resilience statement to the necessary disclosures.
And thus you have it. Panic over. Thank you Maria, you have done all of us report writers – and readers – a great service!
If you’d like to read the Government’s new draft regulations on the resilience statement amongst other things, you can find it here.
[1] I floated my definition of the purpose of reporting at a focus group meeting on the Government’s consultation on non-financial reporting, and received resounding support – you can read my response to that consultation, and why I think it’s an opportunity to reshape reporting here.
[2] For the non-reporters reading this, the strategic report is the first, narrative, part of the annual report, the ‘report of management’; as opposed to the second, also narrative, part, the governance report, which is the ‘report of the Board’. These are distinct from the third part, the financial statements and notes, which are what they say they are.