CFOs want responsibility, not more rules, in narrative reports: ACCA/Deloitte report

The growing complexity of rules and standards is at risk of seriously limiting the usefulness of narrative reporting, warns a report by the UK-based Association of Chartered Certified Accountants (ACCA) and Deloitte.

ACCA, a global body for professional accountants, and Deloitte, a leading professional services firm, co-hosted a seminar to introduce the ‘Hitting the notes, but what’s the tune?’ report in Ho Chi Minh City on April 22.

The report is based on telephone interviews with 231 chief financial officers (CFO), group finance directors or equivalent within public accountable entities in Australia, China, Kenya, Malaysia, Singapore, Switzerland, the UAE, the UK and the US, said Reza Ali, ACCA Head of Emerging Markets – Asia.

Reza Ali of ACCA introduces the report at the seminar in Ho Chi Minh City on April 22, 2011 (Photo: Tuong Thuy)

The guest speaker added that the telephone interviews were conducted from April to June 2010.

The report found that the divergent needs of shareholders and regulators were leading to overly complicated and compliance orientated reports.

Another finding was meeting legal and regulatory requirements was the most popular driver (83%) for narrative disclosures. Shareholders’ needs came marginally (82%) behind this.

According to the report, 71% of respondents consider the top critical challenges in producing a narrative report to be the number of requirements placed on preparers, and the cost and time involved in preparing the report.

The survey said the interviewees saw the five most important disclosures for shareholders to be: explanation of financial results and financial position (identified as of high importance by 87%); identifying the most important risks and their management (67%); an outline of future plans and prospects (64%); a description of the business model (60%); and a description of Key Performance Indicators (KPIs) (58%).
In the aftermath of the global financial crisis, 78% of preparers consider that the discussion of risks and their management is of greater interest, according to the report.

Looking at improving future narrative reporting, 65% of interviewees said that they would like a reporting environment with more discretion and less regulation, 58% cite the inclusion of external auditor opinion, 57% believe there should be more emphasis on forward-looking information and 51% ask for International Accounting Standards Board (IASB) guidance, the report said.

According to Professor Isobel Sharp, Deloitte Audit partner, companies are trying to serve two masters at the same time.

“They want to inform shareholders of what is happening in the business. They need to satisfy regulators by meeting all the disclosure rules. To achieve succinctly and simultaneously both outcomes in the same report is a major challenge,” she added in her message to the Ho Chi Minh City seminar.

The message by Helen Brand, ACCA’s chief executive, writes, “Even before the global financial crisis, questions were being raised about the validity of current corporate reporting. As our report finds, increasingly voluminous and complex regulatory requirements are seeing the story of business performance drowned out by a mountain of detail.”

Professor Isobel Sharp added: “We need to debate the future direction of narrative reporting. Do we give preparers’ more responsibility, or, do we let the relevant authorities issue more rules for preparers to obey? Less data may provide for better information.”

Helen Brand concluded: “Today’s reporting is meeting the data requirements but is it information? Our results suggest not. Preparers seek more discretion and less regulation.”

According to Ms. Le Thi Hong Len, Head of ACCA Vietnam, this survey is especially timely for Vietnam, as improving the quality of narrative reporting will enable shareholders and other users of corporate reports to be more informed about the indicators and aspects of risks of the companies.

Ms. Ha Thi Thu Thanh, Managing Partner of Deloitte Vietnam, said, “The most critical is the availability and training of specialists who in principle are able to prepare the narrative reporting.”

ACCA and Deloitte co-hosted a similar seminar in Hanoi on April 21.

Quotes from interviewees in the report

US: Quote from Ron Dissinger, chief financial officer, Kellogg Company
Setting out how the Kellogg business has performed is, Dissinger feels, the main thing investors look for from the narrative within the company’s annual reports.
“They want to know about the state of the business,’ he says. ‘They can read and interpret our financial statements. What they want set out in the narrative are clear statements on the state of the business and drivers of performance.”

UK: Quote from Eric Hutchinson FCCA, chief financial officer, Spirent Communications Plc
Eric Hutchinson is a fellow of ACCA and he believes in the need for greater clarity in explaining companies’ business models.
“The most valuable part of the narrative report for users is the business review. They want to know what the company does, how it generates income and who its customers are – plus, are those customers going to come back next year, and are they going to buy more or less? With all the complexities of language that tend to sit around the business review and reporting, it can be quite difficult to penetrate. I think that a lot of readers of accounts do find it very difficult, with any company, to really understand what its business is. I would like to see, in the annual reporting at least, a clear statement of what the company does in plain English, followed by a clear explanation of how it generates income.”

Singapore: Quote from Amos Ng FCCA, chief financial officer, Straco Corporation
Compliance has not been set up in opposition to users’ needs, says Amos Ng, but to reinforce them: ‘Things like the code of corporate governance and directors’ remuneration are pretty important disclosures, whether you are shareholder or staff. At the end of day, regulators are there to serve the needs of stakeholders and this is the perspective from which they start.
 “Achieving compliance with the laws and rules governing narrative reporting lends credibility and reliability to your annual reports. If things were left entirely to the preparer, this would lead to varying standards.”

By Tuong Thuy

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