The world’s corporate reporting system is at risk

Friday, 3 June 2011 00:08 -     - {{hitsCtrl.values.hits}}

The future of corporate reporting is at a critical point – its ability to evolve and meet business and society’s changing needs will be essential if the threat of future systemic risk is to be minimised.

These are the conclusions of a new report from the Chartered Institute of Management Accountants (CIMA), PwC, and think tank Tomorrow’s Company.

Unless reporting evolves to meet the changing demands and opportunities of business, financial capital will be misallocated, business decisions will be sub-optimal, and society will struggle to understand the critical contribution business has to play in meeting the challenges of the 21st century, the study, ‘Tomorrow’s Corporate Reporting: A Critical System at Risk,’ warns.

The risk of leaving a reporting framework – founded during the Industrial Revolution – largely unchanged means that while financial accounting will survive, the whole system may become stressed and increasingly reliant on information outside the mainstream report, the organisations said ahead of their joint paper’s launch on 19 May.

Tony Manwaring, CEO of Tomorrow’s Company, said: “We have come to terms with the short-term thinking and silo decision-making which did so much to cause the financial crisis. Corporate reporting must also come to terms with these challenges, to make the step-change needed so that it is fit for purpose during the global recovery and beyond.”

“To be effective, reporting must not only provide an integrated account of what is material, drawing on financial and non-financial data – tomorrow’s corporate reporting must fully reflect the needs of the whole system of which it is part, and all the key players and institutions who bring the system to life,” he added.

David Phillips, Senior Corporate Reporting Partner, PwC said: “Today there is insufficient agreement around the role of corporate reporting and its direction of travel and it appears due to historic institutional structures and the behaviours of those involved in the system, that the system is itself a barrier to change.”

“It is clear that corporate reporting objectives differ around the world and are in a constant state of flux. And because of the way reporting has evolved, it is rare for any one regulator to have oversight of the whole reporting system in a particular territory. People tend to see particular pieces of the reporting jigsaw, but rarely see it as a ‘system’ at all,” he added.

Charles Tilley, CIMA Chief Executive, said: “There is a vital need for companies, investors, standard setters and other stakeholders to understand and address the challenges the corporate reporting system faces.”

“We need to create a reporting framework that is responsive to the changing business environment and which adequately accounts for long-term value creation. If not, the system may be left behind as the commercial world takes its next evolutionary turn. It is critical that we have a system which is better positioned to spot the warning signs of another financial crisis,” Tilley said.

Barriers to change

Uniquely, the study has looked at the whole reporting system (people, organisations, rules and processes) rather than just the reporting model (specific requirements) or the design and content of the ‘ideal’ report.

The key barriers identified in today’s system include:

=Stakeholders tending to see pieces of a jigsaw, rather than the whole system

=A focus on data, rather than people, culture and behaviours

=An acceptance that it’s easier to add more disclosures as new requirements bolted onto the old model, than to recast the model on the basis of what’s material

=Complexity, but there is inertia on changes which might increase liability

Roadmap for change

Looking to the future, the research sets out a roadmap for consensus building and change. Central to this are a series of critical questions that need to be addressed by those who oversee the reporting agenda, particularly its health, relevance and ability to explain business performance in a world constrained not just by financial capital, but also by human, social and physical capital. The questions include:

1.What is the objective of corporate reporting and is global convergence a worthwhile goal?

2.Does anyone have oversight of the entire system?

3.Is the current reporting system itself a barrier to change?

What are the implications of integrated reporting for the structure and governance of standard setters like the International Accounting Standards Board (IASB)?

The case for a new reporting model will be made imminently when the International Integrated Reporting Committee (IIRC) publishes its long awaited discussion paper on integrated reporting. This discussion paper will be open to consultation.

The stark reality is that global agreement is difficult. No new model will emerge overnight and rushing to a new end game will be counter-productive. In this context, the efforts of the IIRC are central to reaching a robust solution which will put companies in pole position to do business and reassure their investors that best practice is being observed.

For any new initiative to succeed there must be a global debate to assess the need for action on the reporting system and to develop a platform for its development.

For all those considering what action is required to ensure that the reporting system is fit for business today and tomorrow (and that includes companies, auditors, shareholders, investors, standards setters, regulators), this study provides a framework for that global conversation and some important insights into the critical ingredients for any plan to effect system change.