Diluting the complexity of corporate reporting
December 2017 | FEATURE | FINANCE & ACCOUNTING
Financier Worldwide Magazine
December 2017 Issue
Corporate reporting is a complex endeavour for many companies – a process requiring the collation of insightful information, both financial and non-financial, that can meet the expectations and withstand the scrutiny of an audience of key stakeholders.
Moreover, many believe that corporate reporting is more complex than it needs to be. Accountancy Europe, in its 2015 ‘The Future of Corporate Reporting: creating the dynamics for change’ report, makes its position clear: “corporate reporting needs to be flexible and able to adapt to changes in technology which affect the way people interact with an entity and which significantly affect the delivery of information”.
Such is the complex nature of today’s reporting environment, disrupted by changes in social expectations and technological advancements, among other developments, companies are seeking out smarter ways of managing their corporate reporting obligations while attempting to dilute the complexity of the process.
Uptick in demand
“Companies are facing demands for information from many quarters,” says Veronica Poole, global international financial reporting standards (IFRS) leader and UK head of corporate reporting at Deloitte. “This brings complexity as a result of the wide range of information required. And some of the information requirements overlap. Complexity also comes with scale. The bigger and more diverse a business, the more complex its reporting will be.”
One example of the demanding nature of the current corporate reporting environment is the EU’s Non-Financial Reporting (NFR) Directive, which requires companies to divulge a wide range of non-financial information, including that pertaining to business models, environmental and social policies, anti-bribery, anti-corruption and anti-slavery matters.
For Jonathan Labrey, chief strategy officer at the International Integrated Reporting Council (IIRC), the demand for information – and the more transparent the better – has turned a business’s reporting process into a compliance exercise, essentially box-ticking. “Reports have become so long and data driven that investors are no longer using them to ascertain the potential of a business,” he suggests. “The World Business Council for Sustainable Development (WBCSD) estimates there are 2000 initiatives in the non-financial reporting space alone.”
In a bid to tackle corporate reporting complexity, the IIRC has launched an initiative – the Corporate Reporting Dialogue – which is designed to respond to market calls for greater coherence, consistency and comparability between corporate reporting frameworks, standards and related requirements.
“Businesses have little support in understanding which reporting frameworks to use and how it all comes together,” continues Mr Labrey. “This is why integrated reporting exists – to challenge this compliance mindset and bring greater meaning to reporting, so that report users can understand what drives value in the modern business environment.”
Given today’s more demanding corporate reporting environment, companies are under pressure to effectively and convincingly communicate their current position, as well as their future strategies, to stakeholders.
“There is greater awareness of the need for companies to demonstrate that they are acting responsibly,” confirms Ms Poole. “Also, investors are using a wider set of data when making investment decisions than they were a few years ago. There is more use of non-financial measures.”
A recent study by Investors Research Lab and EY suggests that non-financial information ‘frequently’ or ‘occasionally’ played a pivotal role in 68 percent of investment decision making, an increase of 16 percent over the previous year.
That said, diluting the complexity of corporate reporting remains an issue. “Companies should only include information in their report that is material to their value creation story,” suggests Mr Labrey. “It should be strategic and forward looking, so that anyone reading it can understand the priorities of management and the business model of the organisation. Extra information can be provided elsewhere online or in specific reports.”
Going forward, many believe that summary reports, such as an integrated report, will become an increasingly important mechanism for providing a digestible overview of a company’s activities.
“Summary reports will need to be underpinned by robust information,” explains Ms Poole. “The use of technology will increasingly be a driver in how this information is provided. This in turn will place even greater emphasis on the internal controls over the financial and non-financial reporting environment, which goes to integrity. Trust, the flip side of integrity, will be determined by a company’s governance, ethics and reliability.”
Also important is for departments across a company to work together so that corporate reporting is integrated and coherent, essentially breaking down silos so that businesses have a better understanding of their purpose and how they create value. “We are also seeing technology companies developing new ways of collating Big Data and making sense of it,” affirms Mr Labrey. “The benefit of a report that is concise and understandable is clear. I am confident that through integrated reporting we can put the purpose back into corporate reporting.”
Ultimately, while the process remains complex, corporate reporting does provide companies with the opportunity to tell their stories using information that is both useful and relevant – stories that deliver the information stakeholders want and need.
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