In today’s knowledge age, a corporation’s stock market value is driven by the expectation of future cash flows. As a result, having accurate, forward-looking information about strategy, anticipated revenues, and anticipated costs is essential. That’s why the accounting profession is advocating for Integrated Reporting standards, which requires corporations to provide forward-looking information about items such as:
- Expected challenges and implications for the business
- Performance expectations
- Risks and opportunities
- Organization/business model
- Strategic objectives
Value for Corporations…TBD
If such Integrated Reporting standards become the norm, to what degree will corporations be held responsible for the reliability and completeness of such disclosures, particularly when they rely on conjecture in highly dynamic and uncertain environments?
I posed that question to Bob Herz, former Chairman of the US Financial Accounting Standards Board (FASB), last month when he presented to senior finance executives at a CFO Alliance Canada luncheon in Toronto. Bob is a member of the boards of Fannie Mae, Morgan Stanley and other corporations, as well as a number of standard-setting bodies. I have known Bob since I was President and CEO of IMA.
Bob suggested that information provided by corporations would be voluntary and that there would be the possibility of an ‘audit assessment’. That raises the issue for corporate executives of ensuring that every ‘disclosure’ has sufficient legal disclaimers – in which case, one has to consider the usefulness of such management assertions.
I agree with Bob that corporate executives are quite comfortable with reporting the status quo, and that the additional demands as suggested by the Integrated Reporting standards would increase disclosure overload, costs/effort, and corporate exposure.
Value for Investors…TBD
Integrated Reporting standards identify the primary drivers of corporate value creation and therefore of wealth creation for investors. This is appealing for investors, who as a group, are concerned with realizing significant cash returns.
Certainly, financial reporting provides investors with assurances that accounting and compliance requirements have been met. In addition, compliance reporting provides comfort to investors that the corporations have achieved what they had expected. But, in truth, today’s compliance reporting is flawed because by the time such reports are issued the value of the information for investors is uncertain.
When it comes to making informed choices about future cash flow, investors should be turning to forward-looking financial reporting as opposed to depending on reporting methods that are limited to reflecting historical performance. And this is where Integrated Reporting standards could be a significant improvement. However, as it stands, the information referred to in these proposed new standards continues to leave investors unsure about such matters.
I am confident that the role of forward-looking data will continue to evolve rapidly as it relates to how finance professionals and corporations gather, report on, and leverage it to increase value.