The spat was a timely reminder that corporate reporting long ago burst out of the straight-jacket of profit and loss accounting and balance sheets. Now employees, customers and communities as well as the investors want to know more. Transparency and accountability are the order of the day.
Broader corporate reporting has grown in many companies in a haphazard way without much strategic direction. In recent years, for example, there has been the EU Accounting Directive 2013, which develops country-by-country reporting among other issues. The EU Non-Financial Reporting Directive makes larger companies report on a whole range of issues from human rights to bribery. UK gender pay gap regulations force larger companies to publish details of the gap between men’s and women’s pay. The UK Modern Slavery Act 2015 means larger firms must show they have checked their supply chains are free from trafficking and slavery.
So the ICAEW Financial Reporting Faculty’s new report, What’s Next for Corporate Reporting: Time to Decide?, comes at a good time. It takes a bird’s-eye view of where corporate reporting is now and looks at the issues CAs need to address. The report shows the work already done by the International Integrated Reporting Council, but sets out a new agenda of issues that companies both large and small will need to grapple with. The team behind the FRF’s report spoke to CAs and stakeholders about their perceptions and need for reporting in the future.
Nigel Sleigh-Johnson and Alison Dundjerovic, respectively head of the Financial Reporting Faculty and technical manager for financial reporting thought leadership, at ICAEW, say the issue that dominated conversations was the rise in corporate information for a diverse range of stakeholders other than investors. In a world in which access to information is almost instantaneous, via websites and social media, the demand for more diverse reporting is only set to increase. But that raises questions about who the primary users of the corporate report are.
“Until those questions are addressed definitively, it will be difficult to resolve many of the other
challenges faced in advancing corporate reporting – such as how much information to provide, where and how to provide it and, crucially, how best to take advantage of technological advancements,” they say.
If more stakeholders need more information, what is the best way to provide it? Adding more and more pages to the annual report is unlikely to please anyone. But as the breadth of information grows, it’s important not to lose the primary purpose of the report, argues Mark O’Sullivan, PwC’s head of corporate reporting.
He says the annual report is produced for the benefit of members of the company and judgments about what should be in it need to be made through that lens. But he points out that the oft-mentioned section 172 of the 2006 Companies Act established the “enlightened shareholder value” model of governance, which most big company annual reports now reflect.
O’Sullivan adds: “Providing more information on stakeholder relationships or their strategic relevance to business success will build investor confidence in the quality and sustainability of corporate performance and will undoubtedly meet some of the information stakeholders need.” But he acknowledges it won’t provide everything they want.
A practical issue is how to provide a wide range of additional information without turning already hefty annual reports into behemoths. “Our current thinking is that information not aimed at investors could be provided online in supplementary reports, with links provided in the annual report and safeguards around accessibility, consistency and assurance,” say Sleigh-Johnson and Dundjerovic. “The use of such online, separate reports is, in fact, an emerging trend in the UK.”
Facts to trust
As firms seek to expand the range of reported information, they face another challenge – making sure the information is reliable and credible so it is trusted by users. Vincent Papa, director of financial reporting at the CFA Institute, believes a key problem in some current non-financial reporting is the failure to link the information to its financial impact.
He also points to problems such as difficulty in comparing across time periods, inconsistent information, a tendency to present information in an overly-positive light, and a lack of assurance about its reliability. These problems could be resolved if there was more input from investors when companies develop their non-financial information reporting, Papa argues.
O’Sullivan agrees that comparability across non-financial information is essential as this helps both investors and managers make rational resource allocation decisions. But, he says: “If we’re to improve the credibility of non-financial information, companies must provide evidence of where the information came from and how it was gathered. What systems were used and who reviewed it should be described, and also the robustness of the control environment.”
Then there is the vexed question of to what extent intangibles should be included on the balance sheet. Sleigh-Johnson and Dundjerovic point out that opinion on this is more divided than on other corporate reporting topics. Perhaps the answer to the intangibles conundrum lies in better “front half” reporting, they say.
Some argue the gap between net assets and market cap is evidence that more should be done to improve the depth, breadth and quality of reporting, says O’Sullivan. “What if the gap is based on the fact the net assets don’t reflect an arbitrary valuation of the intangibles that generate value and are so critical to corporate success in the 21st century?” he asks. “Do we close the gap by bringing these intangibles onto the balance sheet or focus more on the quality of the narrative that supports the financials?”
Regulation and technology will drive changes in corporate reporting in the next few years, say Sleigh-Johnson and Dundjerovic. The focus has moved from paper-based reporting to online information. That shift will accelerate under the influence of emerging technologies such as blockchain. As reporting moves from paper to online, it will change the information reported and how it is used by stakeholders. It will also raise challenges about accessibility and reliability and, above all, about the security of data.
On the other hand, one of the big bugbears of current reporting is trying to stuff a mass of indigestible data into a long printed report. If more information is reported online, it could become more accessible and potentially provide deeper insights.
But O’Sullivan says this will put a fresh emphasis on the quality of the “search engine” used to retrieve corporate data. “The speed at which machines can analyse data is continuously increasing,” he notes. “The more we feed data into an algorithm, the more the algorithm’s analytical abilities increase, and so it will be able to spot patterns and make connections we currently can’t as humans. In the future, questions over the frequency of reporting will be irrelevant as machines will simply go to the source and analyse transactional data on a real-time basis.”
But will this unleash an information free-for-all in corporate reporting in which users determine which information they access and when? “In future, information used to assess corporate performance may include data from a number of external sources – not just company accounts – analysed together to give investors and other stakeholders a truly balanced view of a company and greater insight,” O’Sullivan predicts.
“Organisations will no longer control the message,” he says, “and their reporting will simply be part of a wider dialogue. We may end up with a crowd-sourced perspective of performance, perhaps alongside a completely tailored view determined by each stakeholder. And the challenge for organisations will be how they can make themselves heard and ensure one version of the truth of their performance, impact and prospects in the public domain.”