A new report from CIMA, PwC and think tank Tomorrow’s Company suggests that corporate reporting is at a critical point. CIMA’s reporting specialist Nick Topazio explains more.
The ability of corporate reporting to evolve and meet business and society’s changing needs is an essential part of minimising the threat of future systemic risk. Recently released report ‘Tomorrow’s corporate reporting – a critical system at risk’ is a result of a global study exploring the barriers to the effective development of corporate reporting.
The current corporate reporting framework was largely established during the Industrial Revolution. In particular, it was a result of the need for stewardship reporting to the providers of the capital raised to finance the spectacular growth in the railways. Subsequent changes to the reporting framework have been largely appended rather than integrated into a system that is now increasingly stressed and reliant on information provided outside of the mainstream report.
Since the golden age of steam, the environment in which the corporate reporting system operates has changed beyond all recognition, with the pace of change now increasing at a phenomenal rate. Globalisation, unprecedented population growth and giant leaps forward in technology present a whole new series of challenges to a fragmented reporting system. Some would say this system is already failing to serve one of its primary purposes – the efficient allocation of capital.
Better reporting equals better decisions
In my view the target for the efficient allocation of capital is long term value creation, and this requires well managed organisations. The corporate reporting system provides a window onto the internal decision making capabilities of an organisation.
If an entity’s external reports fail to engage or communicate meaningfully, I believe it is a reflection of poor internal management information. The most likely consequence is suboptimal decision making. In short, poor external reporting is an indicator of a badly run organisation. Effective reporting is founded on a robust management information system that, in turn, is more likely to lead to better decision making.
Directing scarce resources towards those organisations that are well managed and therefore likely to optimise their use requires an effective corporate reporting system. The link between the efficient allocation of scarce resources and the corporate system demonstrates why society should be concerned that the system is effective.
CIMA has been interested in this topic for a number of years. We have supported the key principles of narrative reporting (including the operating and financial review), been involved in the report leadership initiative and participated in the tomorrow’s corporate reporting project.
The reporting road ahead
This report helps to address concerns about the future of corporate reporting by setting out an agenda for debate and a roadmap for change. The agenda for debate is framed around six key principles.
In order to design a corporate reporting system fit for the future, a systematic, holistic and collaborative approach building on the strengths of the current system is required. It should:
- Encourage innovation and change through collaboration to maintain and build trust in the system and between participants. The system should be organised and structured so that it can anticipate and respond effectively to shifts in the business environment.
- Balance judgement and compliance by creating a system that encourages companies and professions to go beyond mere compliance with regulatory requirements. It should give them the flexibility to exercise and then explain their judgement without compromising accountability.
- Support company decision making through a focus on the key drivers of long term value and their associated risks and opportunities. There should be better alignment between management reporting and external reporting.
- Make reporting accessible, timely and relevant, encouraging companies to communicate what is material to their present and future success through a clear, factual narrative picture of their performance, principles and strategy.
- Support shareholder and investor decision making by enabling them to compare the prospects and performance of companies. This should include assessing their long term sustainability and value creating capabilities, and thus focusing the financial system as a whole on long term value creation.
- Recognise the importance of those who have responsibility for the oversight of the system and who are tasked with providing the checks and balances over its effective operation.
The roadmap for change identifies a series of critical questions that need to be addressed by those who oversee the reporting agenda. The questions include:
- what is the objective of corporate reporting and is global convergence a worthwhile goal?
- does anyone have oversight of the entire system?
- is the current reporting system itself a barrier to change?
There is a vital need for companies, investors, standard setters and other stakeholders to understand and address the challenges facing the corporate reporting system. 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.
We would welcome your contribution to this debate, so please visit the dedicated discussion group on CIMAsphere.
Links
Report: Tomorrow’s corporate reporting – a critical system at risk
Nick Topazio’s blog on the report’s launch
Tomorrow's corporate reporting group on CIMAsphere
Mastercourse: corporate governance – keeping up to date