Graham Holt, P2 examiner
F7 and P2 relevant article from Student Accountant, August 2012
Many, many years ago there was an ACCA question – I think it was in the old paper 2.1 Information Technology – which read “More information leads to better decisions. Discuss”
The suggested solution concluded, without any cautionary note, that the statement was clearly true.
I read the question …. and applied some logic / deeper thought.
- when a reader is presented with factual information, sufficient for them to make an appropriate decision, does the provision of every text book on the relevant subject, a library full, ( ie the provision of more information ) necessarily lead to a better decision?
- where a company has an incompetent board of directors, the decision makers, will the provision of “more information” improve the quality of the incompetents’ decisions. The English idiom “You cannot make a silk purse out of a sow’s ear” seems to summarise that point.
- if our existing board of directors is already making optimal decisions, will the provision of additional information improve something that is incapable of improvement?
For these three reasons alone, one has to query the original premise in the question – that more information leads to better decisions.
And it is this point that underpins the article “Bin the clutter” in Student Accountant, August 2012 by the P2 examiner, Graham Holt.
The article is identified as being applicable to both F7 and P2 but, as a potential basis of an examination question, it seems to me to be more orientated towards P2.
Graham Holt kindly offers a website definition of “clutter” for those readers unfamiliar with the word. I’ll not repeat the definition here but summarise it as “unnecessary detail” in the context of matters to be disclosed in sets of financial statements.
A summary of Graham Holt’s article:
- IASB has commissioned a report hopefully leading to a reduction of clutter
- a preliminary discussion paper observed that:
- there is substantial scope for segregating information which rarely changes, either to a separate section of the annual report or to the entity’s website
- immaterial disclosures are unhelpful and should be omitted
- barriers to removing clutter are behavioural
- there continues to be a need for further debate about the concept of materiality from the perspective of disclosure
- for a capital market to operate efficiently, it requires key information, but not excessive information
- but shareholders and other stakeholders are entitled to full information – openness and transparency being two elements of corporate governance
- there is, therefore, no justification for inequality of extent of disclosure and it would be positively dangerous to allow or encourage entities to be discriminatory
- a significant cause of the clutter problem is the requirement of compliance with
- listing rules,
- corporate governance requirements and even, possibly,
- overseas requirements like those of the Securities Exchange Commission in the United States
- an easy way to satisfy the requirements of all interested parties is for entities to disclose everything which any individual potential user could possibly require
- this is really the same mentality behind the very first Internal Control Questionnaires – include EVERYTHING! In the days before tailored industry-specific ICQs, page after page of questions were not unusually crossed through as being “not applicable”
- a possible solution to this “excessive detail” issue may be to have adaptations applicable to entities of different sizes but therein lies the existing problem of differentiating between small, medium and large
- yet another issue behind the continuation of publishing excessive detail is the existing mentality of “cut and paste”
- where there is an ever-present threat of litigation from aggrieved users or the possibility of disagreement with the auditors, is it not easier simply to cut and paste, either from last year’s annual report or from another entity’s report
- by following this mentality, future conflict can be pre-empted – just give complete, excessive, comprehensive disclosure
- a further issue – say an entity disclosed a matter last year and it’s still apparent this year. Where entities start to reduce the extent of disclosure, is it not inevitable that stakeholders will ask “If last year the report were true and fair and this year the disclosure is reduced, how can this year also be true and fair?”
- many years ago, the Consultative Committee of Accountancy Bodies in the UK took legal advice about the role of accounting standards in the world of True and Fair
- the subsequent ( expensive! ) legal opinion included the line “People expect to receive what they normally receive and if what they normally receive complies with standards and is claimed to be true and fair, then to continue to comply with standards will be to continue to be true and fair”
- information may not change from one year to the next – standing information – but, if it is relegated to some appendix, separate document or even the entity’s website, a new user will then be faced with the task of searching for that information
- additionally, not everyone has constant access to the internet!
- some clutter is now “standard”
- a review of published annual reports would show that a number of elements are virtually identical from one entity to another
- Graham Holt identifies the Report of the Audit Committee and the Statement of Directors’ Responsibilities as two examples
- I would add the Report of the Auditors – where it hasn’t been modified
- materiality continues to be an issue. Matters may be disclosed because:
- they were last year
- a competitor discloses their similar matter
- the matter may influence the decision of a reader
- what does it cost us to disclose it
- better too much than too little
- it’s on a checklist so it could be important
- it’s not even the fact that annual reports are too long – length is not the issue because information can be compartmentalised and a reader can thus skip over any compartment which is of little interest to them
- Graham Holt refers specifically to the accounting policy note which may extend over several pages and within which may be obscured new or amended policies
- he argues that it’s not the policy itself which is of real interest
- rather, in a situation where choice of policy was available, it’s the directors’ reasoning behind the selection of the chosen policy which is of greater interest
- IASB was the driving force behind greater disclosure leading to more meaningful comparability but, in response to stakeholders’ complaints about excessive volume, the IASB is now asking for comments concerning possible ways of reducing the clutter
- but what a telling quote from Graham Holt who states in his final paragraph “…in the short to medium term, a reduction in the volume of accounting disclosures does not look feasible …”