Innovation can build trust in reporting

Many companies would say that surviving the economic downturn is their primary focus right now.  That may be true, but the better the capital markets and your stakeholders are informed through clear, relevant reporting, the more likely it is that your company will trusted. More and more companies are looking at innovation to help them communicate effectively.

Our series of short videos, chaired by Charles Bowman, corporate reporting partner, explore what's driving innovation in corporate reporting, the benefits of  telling the whole story, and the advantages of being one step ahead of regulation.

Why current market conditions shouldn't be a time for conservatism in reporting

Peter Holgate, head of accounting consulting services, shares his views on why current market conditions shouldn't be a time for conservatism in reporting. Instead, there's competitive advantage to be gained from more forward looking and open reporting that "tells it how it is".

 

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Charles:
Welcome everyone. To follow on from our successful webcast in February and as a consequence of popular demand, we’re running a series of short videos on the broad theme of innovation in corporate reporting. I’m lucky to be joined by Peter Holgate, Mark O’Sullivan and Jessica Freize. And in the first instance, a big welcome to Peter Holgate, who is senior technical partner of our UK firm and who has many years of experience in corporate reporting. Welcome, Peter. Peter, there’s a lot of talk at the moment about developments in narrative reporting and indeed integrated reporting, and I suppose I am keen to ask from you, is this a good time, an obvious time to be considering these issues?

Peter:
You know in many ways it is not an obvious time I think, if you look, historically there has been a lot of innovation in you know arts and sciences in many fields at a time of strong economy that could support those things.  Well of course you do not need me to tell you that the economy is not strong at the moment, there is many many difficulties ranging from low growth, high unemployment, banking and financial crisis generally, the Euro Zone right at the moment so it is not an obvious time given that all of those problems collectively are putting a big burden on the banking system but also very much on the corporate sector but that many corporate are struggling with surviving of course going concern issues with margins with lack of growth and these are not the conditions in which you would normally expect innovation. 

Charles:
My sense there under all that is there is a but.

Peter:
Yes and there is and I think there is a number of things that do lead to innovations at the moment.  If we look at what regulators are asking at the moment, yes they are asking questions about going concern assumptions they are asking awkward questions about goodwill impairment, has that been assessed properly?  Things like that that are very much associated with a downturn.  They are also asking related to the downturn but with a forward looking angle if you like.  They are asking about risk reporting, narrative reporting, the front half generally is quite an area of interest and emphasis for regulators as it is for uses of accounts so they are very much together in wanting to expand this front half the narrative reporting that in a way that it gets companies to tell the full story so that is quite a big push towards innovation despite the difficult economy that is there as a backdrop.

Charles:
And notwithstanding as you say the historic trend this economic backdrop and all that goes with it which not a great stimulus to innovations.  Are there any other market drivers that you see pushing for innovation?

Peter:
Well I think the technology is another one where certainly the user community know and the companies acknowledge that they can have a more frequent more like a real time dialogue.  There are various versions of interim reporting happening in different countries of course but there is certainly the facility and some demand in the larger companies area for more frequent trading updates and so on, so technology allows that to happen much more easily so that is one factor and I think companies are wanting to satisfy investors and users as much as they can, having said that there is a natural reticence but it is something companies I think are well advised to try to overcome if they can because a better informed market is really in their interests very much as its in the wider interest.

Charles:
That is very helpful, and given your many many years of experience what would be your advice to the corporate community?

Peter:
I think it is not to resist those trends, yes things are very difficult and finance departments are not exactly over staffed with people wanting to think about their next innovation but at the same time you know to be too narrow or too inwardly focused or too much too reticent to tell a full story is really not a good strategy at the moment, really to be open and to be descriptive and to acknowledge that things are difficult and not to try to portray something that is a difficult situation as if it was all rosy I think is realistic and will be a well received message.

Charles:
OK so in summary history might not support in the environment innovation at this time.  Clear sense from you that we should continue to encourage innovation and many market drivers for it.  Any other nuggets given your years of experience in corporate reporting?

Peter:
Well I think there is a lot of reasons to be encouraged. I mean partly it’s what coming our way anyway. For example in the UK, the government is bringing forward changes in the way the front half is structured and the content of that. So I think that will happen. But I don’t think that’s anything to be resisted and whether you’re subject to that particular regulation or not. Nonetheless, it’s a good time to be thinking about the whole story that’s been told, the combined picture, the intergrated report, if you like.

Charles:
Fantastic, Peter thank you very much.


What trends are emerging from those companies that are going the extra mile in their reporting

Charles Bowman, corporate reporting partner, interviews Mark O'Sullivan, a leader in the corporate reporting team, to find out what trends are emerging from those companies that are going the extra mile in their reporting.

 

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Welcome and we are continuing our theme on innovation in corporate reporting, and I am delighted that I am joined today by Mark O’Sullivan a leader in our corporate reporting team here within the UK.  Mark has a specific focus on building some of the evidence that supports our building public trust series.  Mark what are the trends that you are seeing this year in the reporting cycle?

Mark:  Well we are a significant way through our review of the narrative reporting practices of the FTSE 350 and I would say that at the moment we are going through a period of very little change in regulation and that has allowed a lot of companies to take a step back and challenge the content that they are already reporting.  So we are seeing a significant amount of evolution in reporting.  Far more of a focus on clarity around strategy that we’ve seen in the past and then building on that to sort and try and provide a little bit more of alignment of reporting throughout the report and by that I mean a clear alignment of strategy to KPI’s clear alignment of just the strategic themes through the reporting.  A clear alignment of risk, risk has always sat in isolation to the report and I suppose with the press that we are seeing around remuneration a greater challenge to align strategy KPIs and remuneration to tell a clearer narrative story. 

Thank you Mark, we have heard that given the current economic conditions and given other factors it might not be a priority for companies and corporates to innovate but are there any examples of real innovations that companies might like to think about.

Mark:  Well it is interesting because this quiet time has allowed a lot of companies to challenge the content.  It has also allowed the leading companies to really innovate in their reporting and I would sort of highlight three sort of examples in particular, (1) risk reporting which has really reached a sort of plateau where most companies are quite comfortable with the risk they disclose and how they talk about how they mitigate them and it really has shown improvement over a number of years.  Now companies are challenging that information to say, well, actually how do we bring it to life?  How do we talk about how the risks have changed during the year, how do we more clearly align those risks to the sort of discussion we are providing elsewhere in the report and so we are seeing companies promote their risk profile, a sort of relative probability to impact and how that profile has changed during the year.  Similarly the spotlight on governance that we have seen over the past couple of years has seen real innovation in companies trying to explain more about what has actually happened during the year.  I am not the only person to admit it is the last place you go to in an annual report to understand how well governed a company is, but companies are really trying to sort of get across that message. And finally I suppose, the last area that we have really ever seen innovation is at the back end of the report, the sort of financial numbers, but again, companies are trying to reduce the clutter.  Trying to provide a clearer flow to the information so we are seeing notes being grouped around particular things, or accounting policies merged with the notes themselves, or indeed a focus on the more material notes at the front of the report, front of the financial section and then sort of relegating the less material information to the back.  To those that are not accountants it does not sound too radical, but for those that are, it really is a period of innovation in financial reporting.

Very helpful Mark, one major change in the UK has been the requirement for companies to report on the business model, what impact has this had?

Mark:  Well it has been quite a fascinating one really because the requirement was signposted quite a significant time before companies actually had to comply, so a year ago we saw a number of companies taking advantage and reporting more on business models. In fact 33% of the FTSE 350 last year actually reported something on business model but what was noticeable was no one really understood what a business model was, so you had a huge variety of responses from those that just rebadged a description of their segments or rebadged a description of their strategy to those that try to talk about their business model in terms of where they were in the value chain.  And really what we were seeing was the business model almost being dropped into an annual report and splendid isolation.  Continuing the theme of evolution those that reported last year have started to try and embed that business model in the report.  But interestingly the business models are changing which suggests to me that those companies that started to think about it actually it is leading to a lot more debate internally about what the business model actually is.

That is a very very good point.  And looking more broadly here within the UK certainly there is much consultation through BIS and various other bodies, what do you see the future holding for narrative reporting?

Mark:  Well I mean the responses to the BIS consultation showed unanimous support for challenge and change to the narrative reporting framework so there is no doubt that we will see innovation happening.  We are seeing it here in the UK around really questioning the sort of structure of reporting.  Can companies produce more concise and readable and integrated reports that focus on strategy, focus on risk, focus on governance whilst placing a lot of the regulatory requirements the standing data online so taking advantage of the online reporting. So I think that will be one change that we will start to see, well see companies being more timely in their reporting, maybe speeding up the reporting process, reporting at the time of the prelims, and there is no doubt with the rise of integrated reporting that there be a greater focus on companies’ broader impact, the impact across the value chain so I am quite excited there will be quite a bit of innovation coming down the pipeline. 

Very clearly and very useful trends Mark this has been extremely helpful.  Standing back from this all and perhaps focusing for this year and beyond given all your experience, what advice would you give to the corporate today?

Mark:  I think that the main thing really is it should not be the tail wagging the dog.  Companies should not drive change in their reporting without fundamentally taking a step back and reflecting on it internally so I think my advice would be for companies to be aware of what is happening out there, to be aware of the trends but to place more time and effort internally on challenging the reporting framework that they apply and the content they need because change will happen and they will have to respond.

Looked at in another way continue the drive for innovation.

Mark:  Absolutely.

Thank you Mark that has been extremely helpful, some very useful trends and again the encouragement for continued innovation. 

Mark:  Thank you.

Much appreciated.

Mark:  Thank you.

What are the international developments and how are companies using integrated reporting for competitive advantage?, click here to see the interview with Jessica Fries