UK Audit Watchdog Chief Calls for Annual Report Overhaul

Richard Moriarty, CEO of the Financial Reporting Council (FRC), the United Kingdom's audit watchdog, has called for a significant reduction in the length and complexity of annual corporate reports. Moriarty stated that these documents have become excessively long, with an average report now reaching 98,000 words—longer than J.R.R. Tolkien's "The Hobbit."

He believes the extensive length, often filled with environmental, social, and governance (ESG) disclosures, diverts directors' time and attention from core business activities. "The more they are in a defensive posture box-ticking, the less they are thinking about innovation and growth," Moriarty said. He added that the sheer volume of information makes it difficult for investors and creditors to identify crucial details.

The FRC has been collaborating with prominent figures in the financial sector, including fund manager Nick Train, who has also expressed concerns about "reporting bloat." Moriarty described the current situation as a need for a "once-in-a-generation reset" for annual reports. He acknowledged that this perspective is somewhat unusual for a financial regulator, who are not typically known for advocating for less regulation.

Moriarty, who previously led the Civil Aviation Authority, aims to foster a regulatory environment that not only enforces standards but also promotes economic growth. His tenure at the FRC began three years ago, following a period of significant corporate failures such as Carillion, BHS, and Patisserie Valerie between 2016 and 2019. These failures led to harsh criticism of the auditors involved and the FRC itself.

A review by Sir John Kingman had previously described the FRC as a "timid" and "ramshackle" organization, recommending its replacement with a stronger body called the Audit, Reporting and Governance Authority (ARGA). However, government plans for ARGA and an audit reform bill were recently shelved.

Despite these challenges, Moriarty asserted that audit quality in the UK has significantly improved since the period of low public trust in 2018. He addressed the common practice of blaming auditors when companies fail, comparing it to blaming a goalkeeper when the defense has collapsed. Moriarty emphasized that the primary responsibility lies with a company's board. "The role of the FRC is to underpin trust and confidence in UK plc and support growth, but we are very clear our role is not to prevent corporate failure," he stated. He further elaborated that "risk is not a dirty word" and that supporting responsible risk-taking is essential for economic progress.

Moriarty highlighted the missed opportunity from the shelved audit reform bill, particularly concerning the regulation of large private companies. He pointed out that companies like Thames Water, which is not publicly listed, operate under a lighter regulatory regime than their stock market equivalents, such as Severn Trent and United Utilities. This disparity exists even when private companies, like Thames Water, accumulate significant debt and face near-collapse, while publicly traded competitors like Sainsbury's and Tesco are subject to stricter oversight. Moriarty suggested this creates a situation where systemically important businesses may not have the same level of audit scrutiny as their listed counterparts.

Regarding the future of corporate reporting, Moriarty questioned the relevance of the annual report and accounts in an era of AI and real-time data. He posed the question of the "salience of that backwards-looking, once-a-year report" when businesses are increasingly producing information throughout the year.

He also touched upon the debate surrounding virtual-only annual general meetings, noting that the Companies Act requirements for such meetings have not been definitively tested in court.

Dismissing suggestions that stringent governance rules are pushing companies away from the London stock market, Moriarty stressed the importance of London listings to the national psyche. He anticipates the audit market will be a dynamic area in the coming years, asserting that while AI will impact the profession, it will not eliminate the need for skilled auditors. "The audit profession survived the abacus, the adding machine, survived the spreadsheet and it will survive AI," he concluded.