Risk & Compliance

Grant Thornton: U.K. Companies Slack on Filings

IFRS and a lack of intellectual capital are to blame, according to the auditor.
Alan RappeportFebruary 5, 2008

Although International Financial Reporting Standards may be simpler than America’s equivalent, that doesn’t mean they’re simple.

They’re anything but, according to a recent survey by Grant Thornton’s U.K. division. The study found that nearly 60 percent of companies on the FTSE 350 claim they’re not meeting compliance standards.

One of the main culprits appears to be IFRS. “In pursuit of the transparency agenda, the introduction of IFRS has achieved the opposite of what was intended, in the short term at least,” the report said.

Much of the problem appears simply to have to do with a lack of intellectual capital when it comes to the standards. Indeed, Grant Thornton found that 20 percent of the FTSE’s 350 companies couldn’t identify someone in their organizations with the relevant financial experience to explain IFRS accounts and to obtain assurances.

In 2007, however, IFRS problems cropped up in just 9 percent–down from 10 percent the year before–of U.K. companies complying fully with the “combined code” of the Financial Regulatory Council, the regulator responsible for promoting confidence in the country’s corporate financial reporting and governance. The code on Corporate Governance sets out practice standards in board composition and development, director pay, accountability and audit, relations with shareholders, and other issues.

The United Kingdom’s principles-based system of financial reporting, however, doesn’t necessarily punish companies for their lack of compliance. They’re given the option to comply or explain why they couldn’t.

But U.K. officials may be more inclined to take a firmer hand with companies. Sir Christopher Hogg, chairman of the FRC, said in October: “While respondents strongly endorse the flexible ‘comply or explain approach’, it is clear that it is not always applied as intended. All parties share responsibility for ensuring it remains an effective alternate to regulation.”

Grant Thornton also warned that U.K. firms should avoid complacency in their filings. One common practice that companies were guilty of using was “boiler plating,” or repeating the same financial statement information from year to year without noting changes of circumstances. In 2007, 58 percent of FTSE 350 failed to make changes, and half of those that did made updates that were “no more than superficial.”