EY's Isabelle Santenac: Has detailed financial reporting gone too far?

London is home to some of the most complex and systemically important companies in the world.

As a global financial centre, every major financial institution has a base here, which is what makes the city such a diverse and competitive environment in which to do business.

Seven years on from the financial crisis, companies – especially banks – are rightly being called upon to provide meaningful transparency about their operations.

Both local regulators and those on the European stage require firms to disclose details on corporate governance, business performance and financial indicators and this is an important part of maintaining confidence in the markets.

But as regulatory requirements increase, there is a risk that the purpose these disclosures are meant to serve is obscured by the detail.

We recently polled a selection of top analysts of financial services firms who told us that banks’ reports and accounts already run the risk of becoming too complex.

Almost two thirds of those polled said that reports were hard to digest, with 73% admitting that they do not read them cover to cover. A fifth of respondents said that reports are no longer fit for purpose.

This is a worrying trend, as reports and accounts are a critical part of investors’ decision-making process. The easier they are to understand, the more investable the stocks concerned are.

Too much detail, or excessively lengthy reports that obscure the key financial details analysts need, makes them a hindrance to the investment decision.

Despite the increasing length and complexity of reports, some analysts complain that the right information is not being disclosed. Revenues are a key element of reporting, for example, but disclosure on costs remains mixed, despite that being a key metric for investors judging the health of a company.

Efforts are being made to address this, through bodies such as the Enhanced Disclosure working group which is working to standardise company reporting, and innovative suggestions such as the production of one report for regulators and another for investors. But the direction of travel remains in favour of complexity rather than simplicity.

Event risk is adding to the trend and for this investors have to take some responsibility themselves. When a situation such as that in Ukraine arises, analysts clamour for extra detail on a company’s exposure to the hot spot, which adds to the burden on companies from a reporting perspective.