IFRS update October 2005 - Non-execs

The role of the non-executive director has changed drastically in 2005. Ever since the introduction of international financial reporting standards on 1 January, NEDs have been under pressure to re-examine their position on the board, how they should adapt and what role they should play alongside the other directors in ensuring that compliance and convergence don’t become a burden, but instead benefit the company’s bottom line and satisfy hungry investors.

Link: Access IFRS - PwC's IFRS resource centre

NEDs are more important than ever. Indeed there is plenty of anecdotal evidence around to suggest that NEDs now play a key role in ensuring that IFRS projects are properly controlled and that they are able to communicate a company’s restated results back to front.

Despite companies reacting in different ways due to varying year ends, the issues of concern at the top of the NED radar revealed some common themes. For example, 82% of NEDs felt they needed an external communication plan reflecting the changing perceptions of their company and the sector in which it operates.

Over 80% wanted to see common management information systems to support IFRS detail ­ including budgets and forecasts ­ while 69% said there was a need for greater contextual information in annual reports.

Philip Wright, chairman of the NED programme at PwC, says these answers point to a trio of areas that corporates and their NEDs were not facing to such an extent nine months ago ­ increased communication, increased complexity and automation in how companies report and more detailed reporting and transparency.’

‘Overall there has been a huge desire for knowledge of IFRS. Most NEDs believe their companies have prepared well for the changes. They have also recognised that there needs to be changes in the way they communicate their re sults with a need for greater contextual information and added detail, as well as how to explain more obscure accounting movements such as deferred tax’, says Wright.

But NEDs may also have more work to do. For example, the PwC research has found that 69% still don’t have a plan in place to manage subsidiary company conversion, 67% are still without a plan to ensure there is sufficient skilled resource within their business units, only 40% have considered measures of performance or remuneration policies and only 35% have planned changes to their management information systems.

These figures lend a more worrying tone to how NEDs have reacted to the new dawn of IFRS. If an Ernst & Young survey of board members carried out earlier in the year is correct, this could be set to continue with over 40% of respondents suggesting they had become sceptical about rising to the ranks of non-exec status because a larger proportion of their time was spent examining compliance issues compared to a year ago.

Steven Brice, head of IFRS at Mazars, says that NEDs need to be thoroughly versed in the rules, have a clear communication strategy to ensure external announcements are correctly expressed and should be kept firmly in the loop.

‘They are at the top of the chain as a vital link. They must be kept informed of the situation and be fully integrated in the process ensuring good corporate governance and internal controls.’

Brice also believes NEDs are now ‘putting in more hours’ than normal due to the changes in accounting rules. ‘Some may have seen this as an easy number but many are having to work harder to keep up to speed.

‘It is a big responsibility and has come with unprecedented importance and complexity and with NEDs now exposed to new risks from IFRS it has pushed their role further up the chart,’ he adds.

Will Rainey, head of financial reporting advisory at E&Y, says that NEDs will face new challenges on top of IFRS, such as the operating & financial review that brings with it added disclosure of future targets for companies.

‘The new OFR legislation will bite for companies that have a year end of March 2006 but some of the disclosures involved in IFRS will overlap with the OFR and non-execs need to be very aware of this.

‘But throughout this year, NEDs have been very good at assessing the new detail that has emerged and they have scheduled specific meetings to deal with the changes.’

Related article: The view of the Non-Executive community. Visit Access IFRS – PwC’s IFRS resource centre