The accrual system of accounting was one of the
biggest turning points in financial reporting. Everything changed once it was
adopted and accountants came to be counted upon more than ever before. In a
lighter vein, an accountant is someone most likely to know what is actually
going on in a business!
While we have come a long way indeed, churning out
literally tons of paper on financial reporting – both information and analysis
– with a view that the reader must know what the preparer knows, however, the
semantics of this information hasn’t been more incomprehensible than it is
today from the perspective of a lay investor. The test of understandability is
not yet bridged.
The auditor is also part of this financial
reporting quagmire. Reporting by auditors has expanded in extent and
significance but perhaps not in reaching the minds of the lay reader. There are
facts, definitions, information, laying down of responsibilities, KAM and
auditor’s response, and so on and so forth.
The grapevine has it that a new CARO 2020 is about
to come, and hence this thought process. Today, the auditors’ report (AR) for
most companies contains the independent auditor’s report with two annexures in
the form of the CARO and the report on ICFR. A word count comparison of
Microsoft (2018) and TCS (2019) audit reports shows 75% more words in the
latter (470 vs. 1966) – and this is excluding CARO, KAM and ICFR reports! But
that is just the size of the content.
The general feeling in India is that size will
cover up for shortcomings in quality of content. Or that size reflects
effective content. People are looking for effective, clear, simple, succinct
content. Often, investors complain that auditors word their reports
defensively. Of course, this was called for considering that the profession is
blamed for many things for which it is not even responsible! We need something
better and clearer because everything that needs to be communicated cannot be
written, and what is written is often not understood if it is long and complex.
For all these years, till F.Y. 2017-18, the opinion
came only towards the end. In F.Y. 2018-19, it was upgraded to the top in the
main report (we have to follow the international standards). But the ICFR
report still has opinion at the end. As if this wasn’t enough, we got ‘Other
Information’ recently that adds to the confusion, and even managements had to
be explained what it really meant.
The auditor signs the AR at three places and
financials at four to five. Signature is important, but one wonders if it would
make any difference if an auditor signed just once instead of thrice in the AR.
Considering the many difficult words in use, we
perhaps need a Glossary of Words as a standard part of an Annual Report for lay
readers to try to understand the meaning of these words. Consider ‘Other
Comprehensive Income’. Literally, it means nothing, at least the first two
words. There are also words such as ‘management’ and ‘those charged with
governance’. To a lay reader this is out of bounds, especially in the words of
FMs, 99% companies are SME. Section 134(5) doesn’t even segregate the two.
There is some conflicting verbiage under the
‘responsibility of management…’ – the words used are financial position and
financial performance in the context of the preparation of financial
statements. While these words refer to the same thing referred to elsewhere,
but they confuse a lay reader. We do have a concept of Nature and Function in
accounting, and here both are at play talking about the same financials.
While we have heavier reporting, we need not have
heavier jargonised lingo. We need better naming and a glossary to be a standard
part of an Annual Report to make sense of financial information. After all, the
financial information is for the reader and not the accountant or
administrator. The understanding gap of GAAPs is wide! This gap must be
bridged, and soon!