Michael Fraser: Firms raising the bar on finance reporting

Some work needs to be done regarding the length and complexity of some annual reports and prospectuses. Photo / Thinkstock

Opinion

Quality financial reporting is of central importance to those who invest their funds, their time and their loyalty into a company.

Last week's Financial Markets Authority (FMA) sponsored conference Beyond IFRS - Quality Company Reporting attracted the full gamut of financial reporting stakeholders and gave rise to discussion about what constitutes good reporting practice and conversely, what does not.

In a wide ranging discussion it is easy to buy into reporting myths and it is important to dispel these to ensure that we know when and what to change to ensure investors are safeguarded.

The first myth is that finance company collapses were the result of failures in International Financial Reporting Standards (IFRS). This is the equivalent of saying that all traffic accidents are a direct result of the traffic regulations. Accounting issues were not the cause of the finance company collapses. There were many other contributing factors.

Some were related to the inherent riskiness of the finance company's role, while others were stemmed from broader macroeconomic factors like the downturn in the property market. Largely though, the failures were due to the interplay of poor corporate governance, criminal misconduct on the part of management and an inadequate supervisory framework.

The second myth is that there is only one true figure in accounting that matters. I whole heartedly support the idea for profit to be reported in accordance with the standards to facilitate comparison. However, other types of profit reporting are also appropriate where they add value and investors need to upskill themselves in order to make good decisions on what is often very useful data.

The practice of adjusting accounting profits is common across all the world's major markets and does not point directly to concerns with the accounting standards. Any assertion that there are no guidelines regarding these non-IFRS figures is not accurate. There is, in fact, a principles based Guidance Note produced by the FMA concerning the use of financial information that is not directly derived by accounting standards.

A third myth is that all accountants are equal and subject to the same standards. There will always be those out there who abuse this mechanism that enables New Zealand corporates to tell their financial story through alternative measures.

This kind of questionable behaviour might be true for some accountants, but Chartered Accountants are subject to rigorous professional requirements, a breach of which can result in serious consequences. This should serve as a warning that not all those calling themselves accountants are Chartered Accountants.

Some work needs to be done regarding the length and complexity of some annual reports and prospectuses. One purpose of financial statements is to communicate with investors. We simply cannot communicate if one party doesn't understand what the other has said. Increasingly complex financial markets, enhanced directors' responsibilities and the litigious environment in which auditors now operate have all resulted in an 'if in doubt then disclose mentality'.

I'm pleased there are a number of initiatives such as last week's FMA conference making contributions to this important topic. There have recently been a number of corporate initiatives in this area, including several from our part of the world.

One of the examples showcased at the conference featured New Zealand's largest telecommunications infrastructure company, Chorus, who have streamlined their annual report by removing unnecessary disclosures, reordering content into logical sections, highlighting key information, including only relevant and necessary management commentary and replacing jargon with plain English.

A representative from the Australian Securities and Investments Commission cited Wesfarmers, Stockland, the Flight Centre and Aveo as significant Australian companies that have pared back their financial reporting this season. These entities have embraced a new mind-set, with a focus on what they think their investors need to know.

It is worth noting that other successful economies have multiple and at times complex accounting standards. The key to making them work is interaction with regulation, a clear code for Chartered Accountants and investor education as these challenges will not be solved by one stakeholder alone.

Chartered Accountants Australia and New Zealand is well placed to respond to these issues. Our organisation has drawn upon such discussions and published an international thought piece in partnership with our Scottish counterparts called Losing the Excess Baggage with recommendations we can see impacting the profession today.

It is doing so through consultation with a broader stakeholder group which will result in the production of another thought leadership piece next year entitled Noise, Numbers and Cut-Through. It's part of a broader campaign to represent business in an increasingly complex international environment.

Dr Michael Fraser CA is the Reporting Policy Leader at Chartered Accountants Australia and New Zealand.