Anyone who has spent time with accountants will probably have noted that the word 'materiality' pops up in conversation quite frequently.
For an accountant, something is 'material' if it is important and could influence your views on an issue. For example, if you read something in a set of charity accounts that makes you more or less likely to make a donation, then that information is material.
Accountants tend to develop rules of thumb to determine what sum of money they consider material in a set of accounts. If an error is more than X per cent of income or Y per cent of net assets, then it is material and must be corrected if the accounts are to give a true and fair view.
But what does materiality mean in the context of narrative reporting and information disclosures? What it should mean is that relatively minor events should be ignored but the major ones should always be fully reported. But this does not always happen in annual reports.
Earlier this year, the Financial Reporting Council published a discussion paper, Cutting Clutter, which highlighted the need for financial reporting to pay more attention to the material. All too often, the report says, the approach adopted is 'kitchen-sink' reporting - everything is thrown in and the result is that the sheer mass of information obscures the important points.
Anyone who has ploughed through 192 pages provided by Royal Dutch Shell will understand their concerns. A recent study by Deloitte, by contrast, found the average length of trustees' annual reports and accounts to be a more manageable 36 pages. But there is no room for complacency in the sector. I can think of a few charities whose annual report and accounts now approach 100 pages.
According to the FRC, the blame for kitchen-sink reporting is shared by preparers, regulators and standard-setters, with auditors and professional institutes contributing to the problem. But I would argue that it is more about a lack of confidence. I agree with the FRC that preparers often follow checklists and templates too mechanically in putting together their reports, rather than starting the process by asking "what is material? What is relevant to our stakeholders?"
Most accounting standards require that kind of judgement. The Charities Sorp, for example, tries to take explicit account of materiality in the way it sets requirements. If an issue covered in the Sorp is material to your charity, you should include it in your report. If it isn't material, then more often than not you can leave it out. Of course, there are some non-negotiable items - trustee benefits, for example, are always relevant and must always be reported on.
The importance of trustee confidence and responsibility has been underlined by the Charity Commission's strategic review. It revealed the need for trustees to become more self-reliant and to gain confidence in their ability to make the right decisions on behalf of their charities. For our part, the Sorp committee is currently considering how we can better explain what materiality means, so that trustees feel empowered to employ their common sense.
After all, annual reports are acts of accountability - summaries of the good and the not so good that have occurred in the course of a year. So perhaps charity annual report writers should think of their products less as kitchen sinks and more as notice boards that display the most important information. Or the material, as accountants would have it.
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