Why SMEs should embrace culture of full disclosure

James Hadfield

Guest post by James Hadfield

As business reporting regulations continue to evolve, organisations of all sizes are being encouraged to share more than just headline financial information.

Although many larger companies are required by law to disclose more information about their activities, regulators and auditors are encouraging SMEs to take a similar approach in order to reap the benefits.

While the fundamental principles of financial reporting and disclosure remain the same, there is a growing appetite for businesses to provide more complete and understandable information, making reports more valuable to the end user.

Increasingly, businesses are embracing a culture of full disclosure which can provide a great tool for helping to boost their employer brand and attract new talent, as well as improving lender confidence. So, what exactly does full disclosure mean and how should SMEs adapt their reporting?

With the green agenda remaining a pivotal focus for businesses, Streamlined Energy and Carbon Reporting (SECR) was first introduced in 2019 as a requirement for all large businesses.

These regulations require large organisations to disclose their energy and carbon emissions, along with any efficiency measures taken, in their statutory accounts.

SECR was introduced with the aim of encouraging more businesses to take action to tackle the effects of climate change and, in doing so, boost green and sustainability credentials.

Large companies are also required to include Section 172 disclosures in their Strategic Reports. Introduced as part of the Companies Act 2006, Section 172 states that directors must act in a way that promotes the success of the company for the benefit of its members as a whole.

As long as directors have behaved in good faith and their performance has been strong, these disclosures can help to promote the success of the company

While the precise requirements will depend on a company’s individual circumstances, the information provided should include details of how the director has engaged with their employees, suppliers and customers, as well as how they have driven employee culture and fostered business relationships.

As long as directors have behaved in good faith and their performance has been strong, these disclosures can help to promote the success of the company.

The Financial Reporting Council (FRC) has published guidelines detailing their expectations for the improvement of strategic reporting. For example, Strategic Reports must include information about an organisation’s business strategy, the main risks and uncertainties it is facing and an assessment of its current financial performance and position.

While this is not a new area of disclosure for large and medium-sized companies, many SMEs have historically adopted a “bare minimum” approach to these requirements which regulators would like to see change.

The so-called ‘going concern’ disclosures have been a particular area of focus for companies due to Covid-19. With many businesses impacted significantly by the pandemic, there has been increased pressure for companies to provide more information about how the business responded and what happened as a result.

Highlighting their response to market shocks, such as the pandemic, can send a message of reassurance to the marketplace.

Employees are increasingly looking to work for companies that can demonstrate a strong purpose and commitment to environmental and social governance

Most of these disclosure requirements are designed to make statutory accounts more useful and accessible to end users. The hope is that by including information that goes beyond headline financial data, reports will become more meaningful and beneficial to both stakeholders and businesses.

Taking a more open and transparent approach to reporting could even help to reduce the number of unexpected corporate failures.

Many SMEs will not be required by law to disclose such information (Small Companies, for example, have very few mandated disclosures in this area), but they should not dismiss doing so altogether.

Providing stakeholders with more information about the business, allows them to have a deeper understanding of its operations, whilst feeling more engaged. For SMEs that are doing particularly well, corporate reporting is the perfect opportunity to shout about their successes and secure some positive publicity.

Similarly, if a business is struggling additional disclosure can give the business a chance to explain the reasons for any under-performance and how it is being addressed.

Another reason to disclose more information is the benefit it could bring in terms of boosting an employer’s brand. There is a significant skills shortage affecting many sectors at the moment and finding and retaining top talent can be incredibly challenging.

Employees are increasingly looking to work for companies that can demonstrate a strong purpose and commitment to environmental and social governance (ESG). Top employees buy into a company culture, so being as transparent as possible in all corporate reporting can help to enhance their reputation.

Corporate reporting is increasingly no longer just about compliance, and it is important that SMEs recognise this and embrace a culture of full and transparent disclosure.

It is likely that in the next few years, businesses will face more pressure from auditors to report more fully anyway, so the earlier they start, the better. They could also reap the benefits of being an early mover.

James Hadfield is an audit partner at accountancy firm, Menzies LLP

LEAVE A REPLY

Please enter your comment!
Please enter your name here