Asset owners call for global debate on materiality in financial reporting (Update)

Response to European regulatory consultation

(Updates to include submission from Eumedion)
A group of major asset owners have supported calls for a global debate about materiality in financial reporting – saying they are frustrated when useful information is “buried in a slew of data”.
In a response to a consultation by ESMA, the European Securities Market Authority, the investors want more clarity about materiality and “and more confidence among boards in applying the logic which materiality requires”.
“In order for this to happen, we believe that there needs to be a full debate of the issue on a global basis,” with involvement from the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB).
The comments have been marshalled by Hermes Equity Ownership Services on behalf of a number of major institutions. They include the UK’s British Coal Staff Superannuation Scheme, the BT Pension Scheme, the Lothian Pension Fund and the Mineworkers Pension Fund.

Also backing the reply are Highland Good Steward (US), the National Pension Reserve Fund (Ireland), Pensioenfonds PNO Media (Netherlands), Public Sector Pension Investment Board (Canada) and VicSuper (Australia).

“As users of accounts we are frequently frustrated to see useful – and material – pieces of information buried in a slew of data which is not material and which should not be disclosed,” they say.“Equally, we are frustrated when we find that information which is material to an understanding of a company’s performance and status is not disclosed at all.”

A similarly worded contribution came from the Corporate Reporting Users’ Forum (CRUF), signed by representatives from Hermes, the Association of British Insurers, WestLB, the Toronto CFA Society, Goldman Sachs JB Were and Fidelity Worldwide Investments. The institutions see the ESMA consultation as the start of the formal debate – but add they do not think ESMA should “close off the debate” by attempting to set standards.

“There needs to be a full debate of the issue on a global basis”

Eumedion, the Dutch-based corporate governance network which represents around €1trn in assets, also replied to the consultation. It says that discussions on materiality between the eternal auditor and the reporting company rarely surface “to a level visible to investors”.

“We strongly support the European Commission’s proposal to improve disclosure on materiality, as we expect it to help raise investor awareness.”

ESMA launched the consultation in November last year and plans to publish a final report later in 2012. Last month the watchdog launched a consultation about proxy advisors, with a ‘feedback statement’ due in the fourth quarter. Link to ESMA consultations page