Accountancy & Management: Shorter but no sweeter: Summary financial statements are not proving an easy read for shareholders. Roger Trapp reports

ON THE face of it, the case for summary financial statements is clear-cut. The new share-owners created by the privatisation boom are often less sophisticated and less interested in the details of companies than the professionals in the City. It is surely reasonable not to expect companies to send them all a full set of accounts.

Indeed, at a time when most companies are presenting an environmentally conscious face to the world, there is almost a requirement not to waste paper on glossy reports that are not read.

Nevertheless, there were raised eyebrows when the 1989 Companies Act allowed listed companies, under certain conditions, to issue summary financial statements instead of the full reports and accounts. Following the publication of two recent reports, the concerns are being voiced once more. Summary Financial Statements, published by the Institute of Chartered Accountants' research board last week, suggests that the initiative has been a public relations exercise that has diverted attention from the problem of getting financial information across to lay users.

The report's authors, Sidney Gray and Clare Roberts of Warwick University, also point out that, since in most cases the profit and loss and balance sheet figures in the summary statements were identical to those in the full report (but without the relevant notes), they are often more, not less, difficult to understand than the full report.

This observation is echoed in the booklet, Evolution of Summary Financial Statements - Practical Experience to Date, published by the institute's financial reporting committee (FRC). The summary profit and loss account and balance sheet specified in the legislation is 'far from user-friendly', it found.

The move might not have achieved its stated aim of promoting greater clarity and understanding of accounts. But it has achieved one result that should appeal to accountants everywhere - substantial cost savings.

According to the FRC report, only one of the 10 companies interviewed failed to cut costs. The other nine claimed savings on paper, printing and postage of between 20 and 33 per cent. The report says cost savings are the main consideration for most companies in deciding whether to issue summary statements.

So far, only about 20 companies have opted to send out the shorter reports. In the industrial sector these are mainly privatised entities, such as BP, BT, British Gas, BAA and Thames Water, while the financial sector participants are predominantly building societies. BICC flirted with the development but reverted to the traditional approach for its 1991 annual report.

It is not yet clear what the general shareholder view is. Most companies ask recipients of the report and accounts to fill in a form if they want to continue receiving them, and apathy would play a part in the response.

But Ken Wild, chairman of the institute's financial reporting committee, said research by Bristol University's Roger Hussey had confirmed his view that the wide acceptance of summary statements was largely explained by the approach taken by the companies.

Instead of producing a special summary as well as the full report most have divided the old report into two. One part contains the technical information presented in a dry manner; the other, often called the annual review, has the chairman's statement, illustrations and items of wider interest, as well as the summary. Shareholders' willingness to accept the summary may have more to do with the pictures and narrative material than the financial material, he says. But this would change if companies set about improving communication with their investors.

For the moment, though, the low take-up by companies suggests that boards are not convinced of the benefits. The FRC report says that those considering summary statements need to decide on a number of issues before taking the step. First, the company needs to set its objectives. If cutting costs is the main reason, much can be done with the main report - reducing colour, cutting out photographs and the like - without issuing a summary report.

There are also administrative problems. If, for example, a company has an overseas listing it may be precluded from issuing summary reports in one territory and not another.

The institute believes that at least part of the problem lies with the legislation, and has lobbied the Department of Trade and Industry to seek changes. In particular, it feels that easing the requirements on the order of information and the wording to be used would aid understanding.

But the concept of the summary report is still new and legislative changes are occurring. Only recently, a statutory instrument extended the right to receive summaries to holders of debentures and those entitled to receive notices of general meetings.

It is also felt that the Accounting Standards Board's planned operating and financial review provides an opportunity for companies to present a full, easily understood picture of their affairs. Such a clarification of the full accounts, rather than killing off the summary, could introduce a fresh spirit that would lead to it being enhanced.

(Photograph omitted)