The announcement 10 years ago that the Financial Reporting Council was planning to create a Financial Reporting Lab was greeted with some surprise. Regulators engaging in this way with those they regulate was something of a new departure. But a decade on and the FRC says it has had a meaningful impact on improving companies’ disclosures.
‘From the start, the lab was different,’ says Sue Harding, its first director. ‘There was nothing out there quite like it. It offered a pragmatic approach to helping companies improve the usefulness of the information they report. Both companies and investors recognised a genuine need for the kind of insight the lab could bring. As a result, the goodwill from both communities has been great – they really want it to work.’
Direct feedback
Current director Phil Fitz-Gerald explains: ‘It is important to give investors the opportunity to express their expectations and to have a real impact on the quality of reporting. For companies, the lab offers really direct feedback on what investors want from reporting in general and, in many cases, on their actual reports.’
Harding adds: ‘There really isn’t any good substitute for getting people together and talking things through. The various stakeholders might not agree on everything, but at least you know where you disagree – a critical starting point for making practical progress on any topic.’
‘One hour working on a lab project saves a day of trying to work out what they might put into a report’
What is the Financial Reporting Lab?
The Financial Reporting Lab was launched in 2011 to provide a safe environment for investors and companies to come together to develop solutions to today’s reporting needs.
Companies use the lab to test new reporting formats with investors, and investors can indicate areas where management can add greater value through the information they provide.
The lab’s focus on gathering and sharing evidence from the market aims to provide the broader corporate community with feedback from shareholders on the value that new reporting formats bring.
They say the lab’s work has changed reporting practice in a number of ways – most obviously, by bringing about improvements to corporate disclosure.
‘Lab reports are widely seen as a great resource for companies that wish to improve,’ says Harding.
‘We do studies to see how reporting changes, to see if companies have adopted lab recommendations. And in large numbers, they do,’ says Fitz-Gerald.
He attributes the lab’s success in part to its focus on the practical. Each report explains what investors need and why they need it. They then illustrate the key recommendations with extracts from existing corporate disclosures.
‘One company summed up its willingness to participate by saying that one hour working on a lab project saves a day of trying to work out what they might put into a report,’ Fitz-Gerald says.
Shifting mindsets
But both point out that the lab’s influence goes beyond improving the quality of reporting information; it has also helped to encourage shifts in mindset and behaviour.
‘It has inspired a better level of interaction between companies and investors, both within the lab projects and with other reporting-related workstreams,’ Harding says.
‘The focus has typically been on compliance,’ says Fitz-Gerald, a former auditor ‘but I think the lab has shifted this a little. Of course, companies have to comply with the various regulations and standards. But they also need to attract investment or to be able to explain how their strategy is evolving. This is where the lab has been influential.’
‘Our reports are often cited by standard-setters as they try to understand the need for changes’
Fitz-Gerald says the quality of the lab’s engagement with stakeholders has also been noticed by standards-setters and regulators. ‘We never start with a compliance angle, but our reports are often cited by standard-setters as they try to understand the need for changes to a particular standard or disclosure requirement,’ he says.
The lab has also had to respond quickly to a new reporting challenge – Covid-19. It quickly published practical guidance for those tasked with engaging with shareholders.
Future focus
And what of the future? Fitz-Gerald talks of two areas where he expects the lab to increase its focus over the next five years: environmental, social and corporate governance (ESG) reporting; and the use of technology in reporting.
‘We need to turn the volume of data that is reported into something that investors and other stakeholders can use. The only way to do that is through technology,’ he says. ‘We have already issued some reports on aspects of digital data [Reporting on risks, uncertainties, opportunities and scenarios and Cyber, digital and data risk]. As digital reporting starts to become a reality in the UK, we will work with investors and companies to ensure that the use of technology is maximised.’
Harding agrees that there is still much to do. ‘You might even say that the role the lab can play is greater than ever.’
