Accountancy Europe publishes cogito paper on rethinking company categorisation

A cogito paper has been published by Accountancy Europe on rethinking company categorisation. The document was based on the work of an independent task force which included ICAS’ Head of Sustainability & Reporting, Anne Adrain.

The paper challenges the current basis of company categorisation, which, under EU legislation, determines a company’s size by reference to certain criteria, namely turnover; balance sheet total; and number of employees. That same approach is then found in the Companies Act 2006 and is used to determine the corporate and financial reporting requirements of a company as well as whether its financial statements require to be audited.

In the changing world in which we live, the paper challenges whether the use of such a quantitative criteria approach to setting regulatory requirements remains fit for purpose. The paper highlights that this ‘one size fits all’ approach that uses size-based requirements does not reflect the fact that the risks to society associated with smaller companies can be high and vice versa.

Instead, the paper proposes the use of a qualitative risk-based approach to company categorisation.

The cogito paper proposes the use of a risk mapping scorecard as a means by which a qualitative risk-based approach could be applied in practice. The paper suggests that this could be achieved by a scorecard that has two axes: (i) the horizontal axis representing an entity’s profile through key criteria; and (ii) the vertical axis listing areas of risk.

The paper includes an example as to how this scorecard approach would work in practice.

This risk-based approach could enable a shift to a more proportionate and flexible basis for the categorisation of companies that gives a better indication of the impact of an entity’s activities upon society, the economy and the environment, for the benefit of all key stakeholders.

Accountancy Europe are seeking comments on the paper. These  should be sent to iryna@accountancyeurope.eu by the deadline of 2 June 2020.