Could the COVID-19 pandemic improve narrative reporting by SMEs?

Unless they qualify as small or micro entities, all companies are required to present a strategic report each year that is published alongside its financial statements. This report should provide additional commentary that aids understanding of the results presented by the accounts and offer insight into the key risks being faced by the company.

At Mercia we review hundreds of sets of accounts each year, and one area that we often find requires improvement is the strategic report. Too often we find them to be excessively brief and lacking the balanced overview of the company’s financial performance and position that is required. Recent changes to the auditor’s reporting responsibilities to specifically comment on whether the narrative reports have been properly prepared and are consistent with the financial statements, were introduced in part to help improve narrative reporting but so far this doesn’t appear to be working.

Could the COVID-19 pandemic prove to be the catalyst for change, as accounts preparers begin to appreciate how narrative reporting can be used to improve the quality of financial information it presents to shareholders and other stakeholders?

Many companies will have been adversely affected by the pandemic and seen their financial performance deteriorate as a result. The directors of such companies should be keen to limit the damage caused by the pandemic and maintain confidence in the company’s future prospects. One way this can be achieved is through the use of the strategic report. Directors that may have previously been reluctant to say too much may now appreciate the benefits that come from being open and transparent. Indicating how the company has been affected by the pandemic can help bring context to the company’s results, and providing details of how the company has responded to the crisis can help to reinforce the assessment that the company is a going concern.

Let’s hope that companies and their auditors take this opportunity to acknowledge the importance of effective narrative reporting and to improve the quality of the commentary they produce.

How we can help

Our COVID-19 Resource Package is designed to help accountants keep up to speed with the business and individual implications of the pandemic, including details the latest auditing and accounting considerations such as how the outbreak impacts upon narrative reporting.