The financial reporting supply chain refers to the peopleand processes involved in the preparation, approval, audit, analysis and use of financial reports. The cycle both starts and ends with the investors and other stakeholders, who want to make informed economic decisions about a company and, therefore, require financial information to do so. The chain includes management, the board of directors, auditors, and regulators – and each have their part to play.
In recent years, there have been numerous efforts, particularly in the USA, to change and improve financial reporting. But to what end? Have the reporting processes become better or worse? Have financial reports become more or less relevant, reliable, and understandable? What needs to be done? These are questions that the International Federation of Accountants (IFAC) attempted to answer in a recent survey (administered in June and July of last year) that was summarized in a Current Perspectives and Directions piece released in March of this year.
The reported summarized results on the issues of corporate governance, the financial reporting process, the audit of financial reports, and the usefulness of financial reports. The results included positives, areas of concern, and improvements that are needed. But per haps the most important result of the study is that while corporate governance, the process of preparing financial reports, and the audit of such reports has clearly improved in the last five years, the financial reports themselves have not become more useful.
Considering the huge financial burden placed on companies to prepare these reports, especially since the introduction of Sarbanes-Oxley, this is troublesome. The reports should be useful to the target user groups, they should address the relevant concerns that shareholders have with respect to corporate governance and auditability, and they should enable the supply chain, not detract from it.
So what can be done? The “areas of concern” identified in the report give some clues:
- Reduced usefulness due to complexity
In other words, the reporting requirements need to be simplified.
- Focus on compliance instead of on the essence of the business
You comply with laws in the execution of your business, you do not execute your business just to comply with laws.
- Regulatory Disclosure Overload
Too much information is required.
- Use of Fair Value
What exactly is fair value?
- Difficult and often changing financial reporting standards.
Financial reporting standards need to be steady.
- Lack of forward looking information.
Companies need to move forward as well as looking back.
However, regulatory changes take significant amounts of time, and in the interim, you need to continue to produce complex reports to meet an ever increasing dizzying area of regulation. So what can you do? the doctor recommends that you:
Automate. Centralize (a copy of) all of the relevant financial data in a central database / data warehouse and acquire applications that automate the production of as many regulatory reports as possible.
Simplify. Use whatever leeway you have in report preparation to design reports that are as clear and easy to read as possible. Consider producing different summaries for different groups to simplify message communication. Extrapolate forward based on past and current performance and paint a full, realistic, picture for the stakeholders.
It won’t solve all of your problems, but it’s a start.