Last week, several people asked my views on the reporting overhaul proposed by the Big 4 as prefaced by the FT (paywall):
Their ideas, if adopted, would effectively consign 20th century accounting to the dustbin, and free Lord Browne and others from the anachronistic task of presenting static results in line with the cycles of the Gregorian calendar.
The nub of the proposals:
- Quarterly and annual reporting should be superseded by real-time, internet-based reporting, enabling investors to get whatever information they want whenever they want it.
- Shift corporate reporting away from purely financial data toward wider information that could provide insight into a company’s performance and prospects.
Predictably, Richard Murphy questions the veracity of these proposals:
Hang on guys! Where are the other stakeholders? No doubt for investors you mean banks and pensions funds. What about the ordinary people? Those public you put in your title? What about the people who aspire to ownership but cannot afford it – the vast majority of the people in the world in other words? Where’s the worlds regulators? And tax authorities? What about governments? Why don’t they get a look in?
FT correspondent Richard Price expresses what I suspect is the view of many corporate executives:
I suppose it was rather predictable that, having spawned a very lucrative source of fees in the shape of international financial reporting standards, the Big Four accountancy firms would look around for another source of consultancy revenues to keep themselves in the manner to which they have become accustomed.
This is a difficult issue on which to render a snappy view. And I won’t pretend my thinking is anything like fully formed. Big hint: any insights very welcome. Here goes.
I don’t agree that IFRS is ‘broken,’ as KPMG’s Mike Rake puts it. It’s not a train wreck that needs abandoning. If it is then the Big 4 are as equally accountable as Sir David Tweedie’s IASB. Senior accounting professionals have had years to negotiate IFRS into a workable system. What have they done? Very little. I find very little evidence (except re: IR39 where it was pretty obvious the terms under which it was written showed zero insight into derivative trading) that senior professionals have had much of an impact on decisions around the workings of IFRS.
Instead, they’ve waited for prominent company chairpersons to complain about the impact on reported numbers, waited again before taking a fresh position. Or they’ve merely pointed out the differences without commentary. That’s not to say Sir David should be left out. Time and again he has failed to appreciate the impact IFRS was likely to have on reporting systems as well as the impact on balance sheet valuations. I talked about this as far back as 1992-3 when PWC reported on the dramatic changes IFRS made to VW’s 2001 accounts. Without commentary or fanfare.
Lord Browne, chairman of BP was foaming at IFRS impact in February this year:
What IFRS actually does is to make our results more difficult to understand.
Yet in July, Barney Jopson (paywall) reported that investors were broadly satisfied with the new regime even though corporate managers clearly resent the regime. According to a poll by PwC. So what’s the big deal?
I find it incredulous that the Big 4 should proclaim they’ve been working on this for a year without a hint or peep beforehand. Search the FT for IFRS – you’ll see what I mean. KPMGs Mike Rake is usually quick onto the PR stump. So what’s held them up? No-one can convince me they’ve had to reach consensus before going public. Back to the reporting issues.
There is little doubt that historic cost accounting as a basis for measuring performance is outdated. We no longer live in an industrial society but one where service forms an integral part of business value. IFRS is an attempt to solve the ‘value’ problem without returning to the horrors of current cost accounting. IFRS ain’t perfect but it’s a start.
I suspect that those managers who bemoan its impact are failing to think beyond short term stock price movements rather than understanding the need for greater transparency in their own reporting. But in talking about real-time reporting that includes non-financial measures, the BIg 4 are mixing up issues that are more likely to cause than deflect confusion.
If investors want a system (have they been consulted?) that allows them to make better informed decisions then I’m all for that. The best I can come up with is a survey from Rick Telburg. Salient points:
87% of finance and accounting professionals say most members of the American public believe that, in general, American corporations still fail to comprehend their post-Enron expectations for integrity in business.
And 72% of finance and accounting professionals agree with the public’s viewpoint.
A sizeable number of finance and accounting professionals find fatal flaws in the governance of most major corporations.
So we’ve got to get the basics right. Agreed? If Rick is correct then issues around transparency and integrity will not get resolved by brute force. Sarbanes-Oxley has had its fair share of publicity but where are the real teeth? Where are the benefits? But let’s assume these issues are readily fixed (snigger.) What then?
The inclusion of non-financial information, which I welcome, is a minefield. I’m sure Thomas Otter will have something helpful to add but my current take is we’re nowhere near ready as a profession or as businesses to understand the kinds of measure that genuinely help us understand the real business performance drivers. We’re looking through the glass darkly. Transparency? Hmmm…sort of.
We know that performance is tied to the value people bring to business and there are some interesting attempts at measuring what this means. Paul Strassmann has a model for measuring employee worth that holds promise. But again, it is only a start.
We know there is a wealth of intellectual value tied up in systems and in people’s heads. We’ve yet to develop ways of capturing that value in ways which make sense or which are capable of representation in a framework that stakeholders can understand. I wonder for instance whether we will need multiple levels and types of reconcilable reporting, depending on the audience’s degree of sophistication. Rod Boothby might enjoy thinking about this.
There is a cost to treading the valhalla road proposed by the Big 4. Who will bear it? Will it be shared? Will the proposers suggest an incremental pathway to adoption that works or will a de facto system of disclosure emerge through the blogs of CFOs/CEOs. Jonathan Schwartz Sun’s CEO has already suggested that financial results should be delivered through blogs. I see no problem with this delivery mechanism. I’d welcome it as a useful addition to the reporting media.
It seems to me the biggest issues will come from reconciling short term to long term ‘issues’ such that excessive market volatility is avoided. That’s the big fear with IFRS. Again, we don’t have the systems that allow CFOs to interpret and extrapolate real-time events in a manner where management can reach a quickly and sensible consensus. We do – but in pieces right now. Instead, we have the straight jacket aka Sarbanes-Oxley.
The second big issue will surely be around who owns the new metrics. I suspect it will be within the purview of HR/HCM professionals and not accountants. I hope so. But I also hope to see a real partnership between finance and HR. I see a natural affinity between HR and finance yet to date, it’s a relationship that has not been explored in the blogs or among the academic literature. | recently conversed with a financial controller who understands how financial metrics are important to HR professionals who are helping sales people figure out travel management packages on behalf of clients.
These financial measures which are dervied from figures that form part of the public accounting, are driving all sorts of business decisions. How cool is that? Sounds like close alignment between operations and outcomes. Maybe we need think about the things we feel comfortable measuring that have a qualitative flavour as we ease gently into the narrative, non-financial measures?
You might have gathered by now that I don’t have any pat answers and that what I do think isn’t exactly crystal clear. I remain uneasy at the prospects for success. I am equally concerned about additional administrative burdens being placed on business. But change is necessary. The clamour for more information I see on a daily basis tells me that stakeholders have an appetite for depth and clarity. How can we work this out for the benefit of all stakeholders and not just the interests of professionals?
