What are the weaknesses with the reporting model?
Richard Mallet, Director, Technical Development CIMA
This goes to the core of management accounting, which is for organisations to
have a consensus understanding of the business model and therefore what the
drivers of value are and what the KPIs are.
Then in an ideal world the top slice of that management information will be
provided to the external world and that has a beneficial effect to the extent
that external observers, analysts, journalists and credit rating agencies will
see that management understands its business, how it is running it and the risks
involved, and where it’s taking the business.
We are very supportive of narrative reporting. Analysis of the Fortune 500
showed 20 years ago that about 80% of the value of a company was on the balance
sheet and 20% was intangibles and not captured.
Nowadays it’s the other way around: 20% is on the balance sheet, 80% isn’t.
The only way that management can sensibly relate those intangibles to the
investor audience is through narrative reporting.
In terms of the auditing we lost out when the statutory operating financial
review was abolished by Gordon Brown. Companies had to put out what their
definitions were of their KPIs and that might over time have enabled a more
robust process behind it.
We’ve also done a little bit of re-thinking of the financial, but we could
add some information that investors find useful.
How will a switch to a new model affect auditors’ work?
David Phillips, Corporate Reporting Partner, PwC
Where I would like the debate to go is really re-costing the audit model. If
analysts are not using intangible information because they find it pretty
irrelevant, let’s spend our time doing other things. We should have the debate
that if there are KPIs which are being published, then let’s quantify that
information and audit it.
We would need different skills but the point about standardisation is
important. I think auditors could report this information against the
information set that is used by management.
You could even go so far as to say where does this sit in the context of best
practice, which is constantly evolving. I think we could re-think the model and
that’s what I would like to do because at the moment the reporting model is not
as relevant as it could be and I don’t think the audit that we do at the moment
is as relevant as it could be.
The reason I’m very passionate about non-financial metrics is because they
tend to be lead indicators. It’s no good having boards of directors looking at
financial information which is two months out of date when they look at it, when
they could be looking at a different information set which would give them a
better handle on what’s happening.
What types of businesses are looking at real time reporting?
Dr Giles Nelson, director, Technology Progress Software
There are a number of organisations that are looking at this. The financial
sector in particular, and within that, areas within capital markets have for a
long time had a requirement to gain real time insight into the information
flowing around their business.
A number of benefits come through being able to do that in a more effective
way. For example, if a equity brokerage organisation wants to look at financial
information coming from a stock market, then being able to do that and look for
movements in particular stocks has real advantage if you can do that quicker
than other participants.
Other areas within the same sector are perhaps around risk management. If you
are making a lot of decisions over the course of the day, which effect the way
that your business or your customers’ business works, then you need to
understand the impact of those decisions upon the limits that you may have
within a particular equity portfolio.
If we look elsewhere into the area of wholesale and retail banking, you’ve
got initiatives which are coming up in that area over the next few years. The
Single European Payments Area initiative is going to open up into a competition
to other participants in the market who are looking at handling payments more
effectively and will hopefully introduce that broader market for them.
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