Why High Quality Corporate Reporting
HIGH quality corporate reporting contributes to well functioning economic and financial systems in a country. This leads to growth through attraction of foreign direct investment, small and medium-sized entities (SMEs) and micro entities increased access to finance through the formal banking sector with reduced insistence on collateral, assist investors make informed decisions, and assist economies in being integrated into the global financial and capital markets. High quality corporate reporting should therefore be part of a country’s investment attraction and development agenda. It reduces the likelihood of fraud and mismanagement, promotes good governance and transparency. It also forms part of market based monitoring of company, board and management performance in the private sector. In the government sector it is used to assess performance, accountability and transparency in the use of public resources.
High quality corporate reporting is also useful in fostering discipline in parastatals. These have no capital market monitoring mechanisms. Government as the only shareholder relies on high quality corporate reporting to hold paraststal boards accountable. Improved compliance arising from high quality corporate reporting can also benefit government by contributing to high tax compliance and collection without increased costs incurred by the tax authorities.
High quality corporate reporting is applicable to all accounting reporting frameworks built on International Financial Reporting Standards (IFRS) (including IFRS for SMEs and International Public Sector Accounting Standards (IPSAS)).
The benefits of high quality corporate reporting therefore cut across all the sectors of an economy.
In preparing high quality corporate reports, preparers must report information in a manner that is simple and consistent with the applicable reporting framework and supported by transparent disclosures that are specific to the entity. Information reported to external users should flow from relevant internal management information with minimum changes. This means internal management information must be high quality as well.
Preparers should integrate financial and non-financial information and report the corporate information without clutter or not “boiler-plate”. This means key matters in the report are not obscured by immaterial and irrelevant disclosures.
Financial information usually focuses on short-term results while non-financial information is required for longer-term issues like the company’s strategy, markets, customers, innovation, sustainability, corporate social responsibility, and environmental impacts.
High quality corporate reporting is underpinned by three pillars necessary for effective adoption, successful implementation and enforcement of financial reporting requirements. The three pillars reinforce each other in supporting high quality corporate reporting, pretty much like legs of a three legged pot support each other. All the three pillars require significant financial and technical resources and are generally weak in most developing countries. The three pillars are; requirements, capacity, and enforcement.
Appropriate laws and regulations together with rigorous accounting & auditing standards and codes should set adequate requirements to be met to support high quality financial reporting. The requirements should be proportionate and allow differential reporting consistent with the level of public interest in an entity to avoid overburdening small, medium sized and micro-entities with reporting requirements that may not be necessary for their situations and circumstances. The cost of compliance must be seen by entities as a normal cost of doing business and not as a burden. The moment it becomes a burden, it contributes to non-compliance and can force entities to resort to informal operations, with negative impact on tax collections by the government.
Statutory and regulatory requirements are the laws and regulations supporting financial reporting. They must be consistent, comprehensive, and up to date, supporting an efficient and timely endorsement mechanism for adopting international standards and codes, ensuring national requirements remain current when compared with international standards and good practice. In most developing countries, the statutory requirements are fragmented and spread over various laws, most of them outdated.
Accounting standards requirements underpin an accounting framework built on the adoption and successful implementation of high quality accounting standards like IFRS (including IFRS for SMEs and International Public Sector Accounting Standards (IPSAS)).
Auditing standards requirements together with a strong independent and effectively regulated audit regime are required to support the accounting framework. Most countries that adopt and implement IFRS (Zimbabwe included) require the financial statements to be audited in accordance with International Standards on Auditing (ISA) issued by the International Auditing and Assurance Board (IAASB). This is because ISA can be an effective tool in enforcing the proper implementation of IFRS.
Requirement to reporting on non-financial matters is an evolving area in corporate reporting and is at different stages of development in different countries, largely driven through optional soft law persuasion of good practice rather than through mandatory statutory hard law. It provides useful information to a wide range of users of the reports. Such users include; government, investors, regulators, business partners, employees, local communities, among others. The reporting covers a range of useful non – financial information on environment, sustainability, corporate social responsibility, and governance issues
Adoption and implementation of international standards is important for high quality corporate reporting. Adoption is concerned with the decision that international standards are appropriate for use in a country and involves the whole process of participating in comments to exposure drafts on new standards and changes to existing standards, promulgation of final standards and incorporating them into the law. Implementation includes a process of building awareness of the adopted standards, provide relevant education and training, disseminate implementation guidance, and other activities that promote a better understanding and successful implementation of the standards. Adoption and implementation require significant resources, including buy-in and endorsement from government for the necessary statutory support.
Capacity to comply with the requirements for producing high quality corporate reports needs a robust accounting education system, skilled accountants and a system to maintain and upgrade accounting skills on a continuous basis. All these need to be supported by strong well resourced in – country professional accountancy organisation(s) and internationally recognised country professional accountancy qualification(s).
Enforcement, covering oversight, monitoring and sanction is critical in the successful implementation of corporate standards and codes. Various regulators play an important role in enforcing financial reporting requirements. In most developing countries the various regulators are weak in technical resources and rely on the accountancy profession for regulatory compliance relating to financial reporting. The accountancy profession regulator thus plays a significant role in contributing to the quality of corporate reporting. The accountancy profession regulatory bodies take different forms in different countries. Preferably they should be formed by government, and be independent of the practicing members of the accountancy profession, and have strong representation of the various sector regulators like regulators of banks and non banking financial institutions, stock exchange, securities commission, Ministry of Finance, Ministry responsible for State Enterprises and Parastatals, representatives of accountancy academics, among others.
As indicated earlier, the pillars supporting corporate reporting are generally weak in developing countries, requiring improvement in many areas including;
Legal reforms are necessary in updating the laws that set requirements for corporate reporting, realising of course that changing the law in a lot of these countries is a long process.
Accounting profession al organisations need strengthening in a number of areas for them to play an effective role in helping compliance with the requirements. These include using best endeavours to enhance the quality of accountancy education, increasing the number of qualified professional accountants, running and supporting continuing professional development (CPD) programs and enforcing compliance with CPD requirements, facilitating access to international standards, codes, implementation guides and practice manuals by preparers of financial statements.
Most developing countries do not have effective audit practice reviews and some do not have the reviews done in their jurisdictions. Monitoring of compliance with international standards and codes in the preparation of financial reports is thus weak or nonexistent and so is sanction for non compliance.
All these factors impact negatively on the quality of financial reporting in these countries.
High quality financial reporting and auditing standards will continue to be the focus of the accountancy profession. This is reflected by the busy schedules the international accounting and auditing standards setters have on their calendars. The need for high quality, transparent corporate reporting is evolving from being a luxury embraced by a few progressive entities to a necessity for business survival. It is increasingly no longer good enough to comply with minimum regulatory reporting requirements. Successful entities of the future are rethinking the set of useful information that they need (without clutter) to underpin their corporate reputation and to further improve the quality of their reports. In years to come, companies may be required to report on even broader issues than is currently the case. What constitutes high quality corporate reporting will continue to evolve; driven by market forces and smart management that pride in being market leaders.
Sonny Mabheju is an international independent consultant in financial management, reporting and governance. He has consulted for various organisations including the World Bank in Africa, Caribbean and South Asia regions. He can be contacted on firstname.lastname@example.org
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