Corporate Reporting
Author:
Ronan Murphy
Looking to the future of corporate reporting, Ronan Murphy calls for more accountability and transparency on all sides.
As we know the corporate and investing worlds have been recently bombarded by sensational headlines concerning, financial fraud, accounting irregularities, and business failures. Despite exhaustive news coverage and investigations, it will probably be years before the full stories are known. Even then, new interpretations of these watershed events are sure to appear.
The consequences have been enormous in jobs and money lost, comfortable retirements in jeopardy, and sullied reputations of many innocent people who did nothing wrong except to work for the companies involved. Not surprisingly, accusations have been made, legal actions taken, and proposals for new regulations and laws are under review in many countries.
The challenge now is to institute balanced reforms to ensure that public trust does not disappear. The foundation for those reforms lies in corporate reporting.
Public Trust and the Corporate Reporting Supply Chain
The Corporate Reporting Supply Chain - the interconnected organisations and individuals that participate in reporting publicly on corporate performance - begins with company executives, who prepare the financial statements that are reported to investors and other stakeholders. These financial statements are approved by the board of directors, attested to by an independent auditing firm, reviewed by market analysts, and broadcast by information distributors, including the news media. Investors and other stakeholders then make their decisions.
The time has come to re-examine how the corporate reporting supply chain works and how it can be improved from a transparency and accountability point of view. This can only be done by stepping back from the crises of the moment. Business failure will always exist in free capital markets - even the best corporate reporting will not make this go away. Improved reporting can, however, reduce the number and consequences of business failures as it enables management, the board, and the market to respond more quickly.
Three Key Elements to Building Confidence in Corporate Governance and Corporate Reporting
The aftermath of these failures should serve to sharpen our collective focus on the key elements that create public trust in markets and, therefore, allow those markets to allocate capital efficiently.
1. Spirit of transparency
The first element is a spirit of transparency. Companies have an obligation to provide willingly to shareholders the information needed to make decisions. This responsibility ultimately rests with the board of directors who have to determine the level of transparency which they consider appropriate.
For a variety of reasons, many managements and boards do not make available information that they know investors need. Sometimes the lack of transparency is simply a result of management's failure to understand the information needs of its stakeholders. However, too often, this failure is based on the belief that playing "the earnings game" - managing and beating the market's expectations of earnings - will increase shareholder value. Today, shareholders and other stakeholders are demanding a much higher level of transparency. Recognising that transparency is necessary to create and protect value, they will no longer accept being left in the dark.
2. Culture of accountability
The second key element is a culture of accountability. Providing information is not enough. It must be accompanied by a firm commitment to accountability among direct participants in the corporate reporting supply chain and those who define how it should work.
This accountability is collective: every member of the corporate reporting supply chain must commit to collaborating with all others. This chain is only as strong as its weakest link. Management must hold itself accountable for using shareholders' money to make decisions that will create value for those shareholders.
Accounting firms are responsible for providing assurance on certain of the information that management produces and reports. In addition, accounting firms are responsible for never forgetting that their work serves the interests of shareholders, not just the company that writes the cheque.
Analysts are responsible for using the reported information to produce high-quality research that investors can use to inform their decisions. Further, analysts are responsible for providing research that is free from any bias due to economic conflicts of interest.
Standard setters are responsible for establishing principles and rules for making this information useful and reliable. Regulators are responsible for ensuring that all of these groups fulfil their roles. Information distributors are responsible for making sure that information they cite or analyse from corporate reporting sources is delivered without distortion to the public.
Finally, investors must bear the ultimate responsibility for obtaining, understanding, and analysing the information they use as they make personal judgements about risk and return and invest accordingly. Today, investors and other stakeholders are demanding greater accountability from those on whom they depend for information. Yet they must hold themselves ultimately accountable for their decisions and avoid investments where full information is unavailable or their understanding of available information has gaps.
3. People of integrity
But even transparency and accountability are not enough to restore public confidence. In the end, both depend on people of integrity. Rules, regulations, laws, concepts, structures, processes, best practices, and the most progressive use of technology cannot ensure transparency and accountability. This can only come about when individuals of integrity are trying to "do the right thing", not what is expedient or even necessarily what is permissible. What matters in the end are the actions of people, not simply their words. Without personal integrity as the foundation for reported information, there can be no public trust.
A New Reporting Era
The transparent future of corporate reporting will become a reality only if all participants in the corporate reporting supply chain recognise their individual responsibilities, act with integrity and work together across organisational, industry and geographic boundaries.
Investors and other stakeholders must also take individual responsibility for the analysis of the information they receive and for the outcomes of the decisions they make. They will do this far more readily when they know their decisions are based on information prepared, approved and audited with transparency, accountability and integrity. This is the future of corporate reporting and the foundation of re-building confidence and public trust in the corporate reporting process.