A group of City investors is demanding a shake-up of financial reporting rules to enable them to have more confidence in companies.
In a paper seen by City A.M., Legal and General Investment Management, Columbia Threadneedle Investments and Hermes Investment Management are calling for companies to be required to report how much of their profits are unrealised.
“Financial stability depends on investors being confident that they are not putting good money after bad,” they said. “Investors need to know what portion of a company’s profit has been realised, and what portion has not. Understanding the level of unrealised profits is important to judging the reliability of a business’s income stream.”
The paper, calling for a shake-up of the International Financial Reporting Standards regime, has been led by Natasha Landell-Mills, of asset manager Sarasin and Partners, and has also been signed by representatives of the Local Authority Pension Fund Forum, GO Investment Partners and the UK Shareholders’ Association.
Landell-Mills told City A.M. the paper will be sent to individuals from the Financial Reporting Council, Department for Business, Energy and Industrial Strategy, the Bank of England and the Institute of Chartered Accountants in England and Wales (ICAEW), among other organisations.
Landell-Mills said a “coalition of investors” has been concerned with financial reporting rules for more than five years and is fighting to keep the issue in the public eye.
“It seems really surprising to us, and this is many years after the financial crisis, that one of the key contributing factors, the accounting standards, [has not been addressed],” she told City A.M.
“It’s almost like the plumbing failing. It’s hidden behind the wall, nobody sees it, but if it goes wrong it has enormous impacts for everybody’s welfare. But nobody really wants to get their hands dirty.
“That’s because it’s very technical. It’s perceived as just a slightly technical issue that we can leave to the technicians. That couldn't be further from the truth: it is an issue that is absolutely vital to the public interest.”