International

Project on Business Reporting

Federation of

August 2010

Accountants

Business Reporting Through the Lens

of the Investor

BusinessReportingThroughtheLensoftheInvestor
Forthethirdpartinitsseriesonbusinessreporting(seealsoIFACprojectonbusinessreporting),IFAC
interviewedsixspecialistswithclosetiestotheinvestmentcommunitytogettheirrecommendationson
howtoimprovebusinessreporting.
Fromtheirdifferentperspectives,thesixintervieweesprovidedtheirinsightsintoanumberof
significantbusinessreportingissues,suchascomplexity,informationoverload,fairvalueaccounting,
operationalperformance,convergenceofaccountingstandards,realtimereporting,management
commentary,andsustainabilityreporting.AccordingtoTanyaBranwhite,executivedirector,strategy
researchatMacquarieSecurities,allthesereportingissuesindicatethatthereisanurgentneedfor
userstogetmoreinvolvedinthediscussionsanddecisionsaboutthepresentationoffinancial
accounts.Sheaddstothat:Wecantbecriticaloftheaccountingstandardsettingprocessunlesswe
getinvolvedandtrytoputforwardsolutionstosomeoftheissues.

Fromtheinvestorsperspective
Theinvestorsagreedthatfinancialstatementsmustservetheneedsofabroadrangeofstakeholders.
Shareownersareentitledtoinformationaboutthecompanytheyown.Anditisonlywiththat
informationthattheycaneffectivelyengagewiththecompany,saysMichaelMcKersie,assistant
director,capitalmarketsattheAssociationofBritishInsurers(ABI),thelargestsinglegroupofinvestors
intheUK.MatthewWaldron,directoroftheFinancialReportingPolicyGroupatUSbasedCFAInstitute,
quotesthefirstprincipleinhisinstitutesComprehensiveBusinessReportingModel(2007):Theprimary
financialstatementsmustprovidetheinformationneededbyequityinvestors,creditors,andother
suppliersofriskcapital.
Accordingtothoseinterviewed,directorsandmanagementmaynotrealizehowcriticallyimportant
theirfinancialreportsaretoinvestorconfidenceanddecisionmaking,andtheoverallstabilityand
growthoftheirbusiness.Seniorexecutivesandboardmembersneedtorecognizethat,essentially,
theyareworkingforthebenefitoftheshareowners,accordingtoJamesAllen,directorofcapital
marketspolicyforCFAInstitute.Companiesandboardsneedtohavetheirfeetheldtothefirebothby
shareowners(andbyregulators)tomakesurethattheyaregoverningthemselvesthewaythatthey
saidtheywould.HongKongbasedinvestorandshareholderactivistDavidWebbadds,Itisthejobof
directorstotellthetruth,toprovidetheinformationthatinvestorsneedtomakeinformeddecisions.
Manydirectorsrealizethatthelargestpartoftheircompanysintangiblevalueistheconfidence
investorshaveinthemanagementteam,saysCarlosMadrazo,headofinvestorrelationsatMexico
basedGrupoTelevisa.Unfortunately,saysMs.Branwhite,thewayfinancialreportinghasdeveloped
hasbeenmorefromtheaccountingperspectivethantheuserperspective.

IFACProjectonBusinessReporting
Inresponsetothereport,FinancialReportingSupplyChain:CurrentPerspectivesandDirections
(March2008),IFACestablishedaprojectgroup*tostudyprogressintheareasofgovernance,
financialreporting,andauditing.DevelopmentsintheFinancialReportingSupplyChainResultsfrom
aGlobalStudyamongIFACMemberBodieswasissuedinFebruary2009.Thisstudyindicatedthat,
althoughprogresshadbeenmade,severalunresolved issuesremain.Inthefinalphaseofthis
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BusinessReportingThroughtheLensoftheInvestor

IFACProjectonBusinessReporting
project,theprojectgrouphasinterviewed25keyleadersfromaroundtheglobeonwhatshouldbe
donetoimprovetheseareas.
Overthenextmonths,theinterviews,includingoverviewsoftherecommendations,willbeavailable
ontheIFACwebsite,groupedinthefollowingthemes:

Goodgovernanceandsustainabilityfundamentalforimprovedbusinessreporting(issuedin
June2010)

Businessreportingbeyondthecrisis:howtomakesurethatwedonttumbleintoanother
blackhole(issuedinJuly2010)

Businessreportingthroughthelensoftheinvestor(issuedinAugust2010)

Agloballanguageforbusinessreporting

Towardsabroaderviewofbusinessreporting

Subsequently,theprojectgroupwilldevelopanactionplan,basedontherecommendationsofthe
intervieweesandtakingintoaccountthereaderresponse.
* TheprojectgroupconsistsofCharlesTilley(ChiefExecutiveOfficerofCIMAandProjectChair),GrahamWard(SeniorPartnerat
PricewaterhouseCoopersandpastIFACPresident),NormanLyle(retiredGroupFinanceDirectorofJardineMathesonHoldingsLimited
andChairofIFACspreviousFinancialReportingSupplyChainProject),andAlAnderson(ManagingPrincipalAccountingandAssurance
ServicesofLarsonAllenandChairoftheAssuranceServicesExecutiveCommitteeoftheAICPA).ThesteeringgroupisassistedbyStathis
GouldandVincentTophoff(bothIFAC),andAmyPawlicki(AICPA).

Premiseoffinancialreporting
Ifyouarereportingonabusiness,youneedconsensusbetweenthecorporationandtheinvestor
communitytodeterminewhatisrelevantandwhatisnot,saysMr.Madrazo.Ms.Branwhitemakesa
start:Inmyview,theverybasicpremiseoffinancialreportingistoprovideanunbiased,complete,and
wellinformedviewofthefinancialperformanceofabusiness,basedonawelldefinedsetofstandards,
whichareusedconsistentlyacrossawholerangeofcompanies.AccordingtoMr.Waldron,disclosures
arerelevanttofinancialstatements,emphasizingthattheyshouldbepreparedinahighquality
manner.

Complexityoffinancialreporting
RespondentstoIFACspreviousstudiesfromMarch2008identifiedcomplexityasoneofthemain
difficultiesinfinancialreporting.Accordingtointerviewees,complexitycontinuestoposeachallenge.
Ms.Branwhitesays,Thingslikeoffbalancesheetaccounting,warehousingoffinancialinstruments,
marktomarketvaluation,andallthoseotherissuesthatmadefinancialinformationsoopaquehave
increasedthecomplexityoffinancialaccountssuchthatithasbecomedifficultformanyinvestorsto
tracethefinancialperformanceofabusiness.Shewarnsthatiffinancialaccountsarenotprepared
withtheusersinmind,thenweriskawholeareaofunauditedshadowreportingbeingprovided
directlytoinvestorsthatdoesntgothroughtherigorousfinancialaccountingprocess.Mr.McKersie
adds,Ifcomplexityismaskingrealissues,however,thatisarealconcernbecausethatmightresultin
lessconfidence.Therefore,hesays,companiesshouldgenuinelytrytoproducefinancialaccountsthat
areinformative.Inouropinion,thisisabetterwayforwardthanintroducingnewregulations.
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BusinessReportingThroughtheLensoftheInvestor

Informationoverload
Investorsdontnecessarilythinkbulkinessisanissueaslongascantheycanfindwhattheyneed,says
Mr.McKersie.Ms.Branwhiteconcurs,indicatingthatreportsarelongbynecessity:Astheaccounting
standardsthemselveshavegottenmorecomplex,analystshaveneededmoreinformationto
understandthenumbersthattheyarelookingat.Hence,youthenendupwithabout400pagesin
financialreporting,sothatanalystsareabletopeelbackthatinformation.Mr.Waldronadds:Wehear
frequentlyfrompreparerswhosaythattheexpandeddisclosuresarentusedbyinvestors.Yetwhenwe
gotoroundtablesorinotherforums,investorsfrequentlyaskformorequantitativeandqualitative
disclosures.
Theintervieweesrealizethoughthatanoverloadofdetailedinformationprovidesaproblemforretail
investors,manyofwhomlackthefinancialexpertiseorthetimeforproperanalysis.Onesolutionmight
betoengagethirdparties.Weworkwithbanksthatmarkettoretailinvestorsviatheirbranches
throughoutthecountry.Theseretailbrokersreceiveexactlythesamepresentationasdolarger,
institutionalinvestors,saysMr.Madrazo.Ms.Branwhiteexplains,Partofourjobistohelpthewider
investorbasetobetterunderstandwhatishappening.

Fairvalue
Fairvalueaccountingisveryimportant,saysMr.Webb,certainlyonthefixedassetsside,becausewe
needcomparabilitybetweencompaniesinasector,betweencompaniesinamarket,andbetween
companiesindifferentmarkets.Mr.Waldronalsostronglyfavorsfairvalue.Infact,hebelievesthatit
isthemostdecisionusefulmeasurementbasisforinvestors.Mr.McKersienotesthatfairvalueis
withoutdoubtofinterestforinvestors,butthatthereliabilityofthesefairvaluemeasurementsis
importantforinvestorstoconsider.AccordingtoMr.Waldron,however,Investorsfeelthatrelevance
hasprimacyoverreliability,socombininghighqualitydisclosureswiththefairvaluespresentedinthe
financialstatementspresentsmoredecisionusefulinformation.

Directcashflowmethod
Accordingtotheinterviewees,thedirectcashflowmethodmighthelp(retail)investorsbetter
understandtheperformanceofacompany.Mr.Madrazorecommendsthatstandardsettersand
regulatorsbetterdistinguishtheimpactonearningsthatresultsfromchangesinfairvalue,versus
thosechangesthatweseefromthedaytodayrunningofthebusiness.Thereismerittotheuseofa
directcashflowstatement,accordingtoMs.Branwhite,becausethewiderinvestorcommunitywillbe
abletoseemoreclearlytheoperatingperformanceofthebusiness,theinvestingdecisionsbeingmade
bythebusiness,aswellashowthebusinessisbeingfinancedandanychangesinthevalueoftheassets
andliabilities.AccordingtoCFAInstitutesComprehensiveBusinessReportingModel,Thecashflow
statementprovidesinformationessentialtotheanalysisofacompany.

Internationalconvergenceofaccountingstandards
Internationalconvergenceofaccountingstandardsisvaluableanddesirablebecauseitincreases
internationalcomparability,saysMr.McKersie.Mr.Waldronagrees:Webelievethattheglobalcapital
marketswouldbebestservedifaccountingstandardsinjurisdictionsaroundtheworldevolvedtoa
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BusinessReportingThroughtheLensoftheInvestor
pointwheretherewasonesetofhighquality,understandablereportingstandards.Thiswouldenhance
comparabilityandanalysisofinvestmentopportunitiesglobally.Internationalconvergencetooneset
ofaccountingstandardswouldalsobenefitmultinationalcorporations,asMr.Madrazomakesclear:
LikeanyotherLatinAmericancompanylistedintheUS,Televisamustcomplynotonlywithourown
localrulesbutalsowithUSrules.Thisisaverytimeconsumingtask.
Althoughconvergenceisadmirable,itshouldnotbeattainedattheexpenseofthequality.Thepriority
ofboththeUSFinancialAccountingStandardsBoard(FASB)andtheInternationalAccountingStandards
Board(IASB)shouldbetomaketheinformationintheaccountsmorerelevant,reliable,transparent,
andconsistent,saysMs.Branwhite.Ifconvergenceisnottheoutcomeyet,wehavenotlosttoomuch
aslongasthoseotherqualitycriteriaaremet.

Managementcommentary
Additionaldisclosure,forexample,intheformofmanagementcommentary,isdesirablebutstillhasa
waystogoaccordingtotheinterviewees.Mr.McKersiesaysinvestorslikedirectorstotalkingoodfaith
onhowtheyseemattersinordertomakebetterqualityinvestmentdecisions.Preparationofuseful
managementcommentaryisanopportunityfortheboardtoconfirmthatitisontopofwhatitisdoing
andthedirectionitisgoing.Mr.Webbagrees,buthassomereservations:Ifwehadanindependent
electionsystemforindependentdirectors,thentheywouldhavemoreauthority.Inthatcase,Iwould
favorgivingthemtheirownsectionoftheannualreportandanobligationtoreportanyissuesthatthey
areconcernedabout,andanyissuesonwhichtheyhavedisagreedwiththerestoftheboard.
Mr.Waldronseesgapsinthequantityversusthequalityofinformationprovided:Whencompanies
includemodels,estimates,assumptions,principlesapplied,sensitivityanalysis,andaggregated
disclosures,theyneedtomakesurethatallofthequalitativefactors,suchasunderstandability,
completeness,relevance,andcomparabilityareconsidered.Ms.Branwhiterecommendstheuseofkey
performanceindicators(KPIs):KnowingwhatmanagementhassetasitsKPIsiscriticalinformation,as
itprovidesaninsightastohowalignedthecompanyslongtermperformanceobjectivesarewiththose
ofitsshareholders.

Sustainabilityreporting
Theintervieweesheldmixedviewsontheusefulnessofsustainabilityreporting.AccordingtoMr.
Madrazo,Investorsareincreasinglyseekinginformationonacompanysenvironmental,social,and
governanceperformancebecausetheyseetheseasindicatorsofgoodoverallcorporatemanagement
andoftensuperiorperformance.Mr.Webbdisagrees,saying,Sustainabilityreportingisofnoreal
valuetoinvestors.Weshouldntexpectcompaniestotrytomaketheworldabetterplaceatthe
expenseoftheirshareholders.Instead,Mr.Webbseesaroleforgovernments:Ifeverybodyis
requiredtocleanuptheirwaste,companieswilleconomicallypriceitintotheirproducts.Ms.
Branwhitepointsoutthatastherearegoingtobeveryclearfinancialimplicationsonsocialand
environmentalaspects,theyshouldbecomeintegratedintomainstreamfinancialreporting.
IFACsupportstheintegrationofsustainabilityreporting.IFACsCEOIanBallwillcochairthenewly
formedInternationalIntegratedReportingCommittee(IIRC),whoseobjectiveistocreateaglobally

BusinessReportingThroughtheLensoftheInvestor
acceptedintegratedreportingframework,bringingtogetherfinancial,environmental,social,and
governanceinformation.
Toreadthecompleteinterviewtranscripts,includingsummariesofintervieweesrecommendations,see
theIFACwebsiteatwww.ifac.org/frsc.Readersareencouragedtorespondtotherecommendationsof
theintervieweesbycompletingabriefsurveyfoundattheconclusionofeachinterviewtranscript.For
moreinformationaboutIFACsbusinessreportingproject,pleasecontactVincentTophoffat
VincentTophoff@IFAC.org.