Why Non-Compliance with the ESEF Could Cost the Company Secretary
Organisations throughout Europe are busy addressing how the European Single Electronic Format (ESEF) will change the way they prepare and present their annual reports. These changes affect more than the reporting teams—they reach all the way to the board and the company secretary.
A company secretary is often seen as the guardian of proper compliance with both the law and best practice. Critically, the company secretary is the person the board looks to for clarity on their responsibilities. Additionally, the company secretary is the arbiter between finance and corporate reporting.
Therefore, the company secretary has to be up to date with new legislation, such as the ESEF. If not, the fallout from non-compliance, including the embarrassment and restatement, may land squarely at their feet.
ESEF—What we know
Some aspects of the European Securities and Markets Authority (ESMA) mandate are made very clear:
- For financial years starting on or after 1 Jan 2020, issuers on EU regulated markets must now file in XHTML and not in PDF, the filing format which has been used for years.
- Issuers with group accounts will need to tag the main financial statements with XBRL® tags within the XHTML report that contains the management commentary—the report that most commonly contains both these elements is the annual report.
- This requirement is additional to any iXBRL® submitted because they are dual listed or they file in XBRL for a current statutory requirement.
Some aspects are less clear:
- The role of audit for the ESEF mandate has remained unclear for some time, but the recently published Guidelines on auditors’ involvement on financial statements in ESEF by the CEAOB is helpful in addressing the role of the audit, workflow and risk.
- It is also not clear what impact the timing of Brexit will have, but there appears to be no scenario where the UK is out of Europe on 1 Jan 2020.
However, the point to remember is that the taxonomies are different from the ones organisations are dealing with today. Additionally, with the ESEF, the XHTML file with the XBRL tags must be made publicly available and ready for all to consume.
What does this mean?
In short, all this means greater scrutiny.
XHTML and iXBRL are going to change how your annual report is consumed by investors and stakeholders. At present, the consumption of annual financial information is protected by a format not built for comparison: the PDF. The PDF is designed for print, not for web pages, and financial analysis with a PDF is almost impossible.
Aggregators try to compare data, but this is often manually extracted from the PDF, which inevitably leads to inconsistencies. Companies are almost protected by the amount of misinformation out there.
At the XBRL: Digital Financial Reporting event in London, Mike Willis of the U.S. Securities and Exchange Commission (SEC) called out this rampant misinformation with a real example using the 2018 financials of a public company. The financial statement on the left is the actual statement from the company, while the right shows a statement from an aggregator. The boxes on the right in green show data that was pulled correctly, yellow boxes indicate data that was pulled across incorrectly and purple show numbers that were extrapolated or outright wrong.
XHTML is an open digital format, and iXBRL is machine-readable. With the publication of the 2020 annual reports in XHTML, investors will be able to analyse the narrative and the financial data at incredible speed, either directly from a website or correctly from aggregators.
Scrutiny is not going to be just from the regulators, but from any stakeholder or pressure group. Willis stated that at the SEC, iXBRL files are the most commonly downloaded file format, with the majority of the requests coming from computers requesting multiple reports.
If my annual report is changing into a compliance document, does that mean I cannot have a well-designed annual report?
With the right solution, the new XHTML and iXBRL file formats can work alongside the printed document. The guidance from both the regulators and key voices from the audit and advisory firms are that tagging should be addressed early.
Has the ESEF changed the role of the company secretary?
Yes, in some important ways, ESEF will add new layers to the role of the company secretary. The company secretary reports to the board and makes sure they fulfill their role. The ESEF mandate brings new accountability for the board, and the company secretary will need to walk the board through this.
The board now has the added responsibilities for the tags chosen, the use of extensions and for signing both the XHTML and iXBRL in a digital format of the final annual report.
To ensure accuracy of the tagging and the data, the board needs to understand the requirement of the ESMA mandate, the taxonomy and where they fit into the picture. In an ideal world, the board would take on this responsibility, but we all know that the company secretary, the trusted individual, is the one that often signs on their behalf.
What are the risks?
Any mistakes in the annual report will show up instantly. This will lead to embarrassment in the best case. In the worst case, it could mean restatement of the annual report and, possibly, fines.
Since the company secretary will likely take on the responsibility, any negative outcome would internally fall to them. Externally, it would still be the board.
Company secretaries work hard all year to collate the content of this report, and their companies work tirelessly on revenue, cash flow, dividend and sustainability. It would be unfortunate if this new transparency of data negatively affected the brand of an organisation and the standing of the company secretary.
What should the company secretary do now?
At our recent ESEF roadshows in Paris and Amsterdam, we polled the senior finance managers in attendance, and 64% of respondents said that their boards were not fully educated on what is required of them for the ESEF. Therefore, there are several things the company secretary should do now to ensure the board is educated on their responsibilities and their organisation is prepared:
- The company secretary should bring up the ESEF at the next board meeting and start advising the board of their duties.
- The new mandate will have an impact on the formation of the report as no extra time has been given regarding the filing deadline. It is likely that the choice of tags and giving assurance to the board will fall to the financial reporting team. Make sure they are given a voice in the decision so they have a tool that allows them to do this alongside their current process and not leave it to the end. This new addition to the workflow should be discussed to try to stop last-minute changes by the board.
- Reach out to peers from dual-listed companies who faced similar challenges following the SEC XBRL implementation for their advice.
- Public scrutiny should be discussed, and new stakeholders should be investigated. The audience for company information has grown rapidly, far beyond the interest of just the shareholders of the company. For example, ethical consumers are often interested in waste management or sustainable living of employees, and this influences where they shop.
- Political or social events and influences should be monitored throughout the year, so any sensitive hotspots can be examined.
- With so many other unknowns, it is recommended to work with a connected reporting and compliance platform that the company secretary can rely on to instill trust in the new process. The vendor should be backed by industry experts, have years of experience helping foreign private issuers (FPIs) use XBRL tags in their SEC filings and provide superior tagging advisors. In addition, their platform should offer validation controls to ensure the accuracy of the financials and related narrative.
- If a company chooses to work with one of the new tagging companies that are popping up all the time, it is important to understand what they will actually deliver, when they will deliver it and the legal counsel if they fail to deliver.
Ultimately, a new era of financial reporting is upon us. It is time to look at how you are going to introduce the new digital formats of XHTML and iXBRL to a process built solely around a PDF. It is time to discuss the impact of the new responsibilities and the impact the new open formats could have on how you engage more directly with your stakeholders.
The report format is designed to increase transparency. Now is the time to gain an understanding of both the obvious and unintended consequences and embrace the ESEF mandate, as it will improve accessibility, comparability and analysis.
Reach out to Workiva to learn more about how to get ready for the new format or get in touch with us for a demonstration.
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