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Despite the wealth of publicly available information on company performance, stakeholders still struggle to see the bigger picture of how well businesses are performing, a new report for Ernst & Young has found.
“The financial communication challenge”, a report produced by Tapestry Networks for E&Y, found that financial stakeholders are increasingly relying on non-audited sources of information to get a better picture of company performance, begging the question of whether audit committees should expand their review of these kinds of communications.
“Financial stakeholders now want a complete overview of company performance,” said Pascal Macioce, Ernst & Young’s head of assurance for Europe, Middle East, India and Africa. “Audited financial statements remain highly important but this latest research demonstrates the need for businesses to implement a new level of communication if trust is to be restored in financial statements. This could help to bridge the mistrust created by the financial crisis.”
Added complexities
Added financial reporting complexities and a continuing volatile economy means that stakeholders are turning to managements’ analysis of company performance and forecasts in addition to key operational performance metrics to help them better understand company performances.
Stakeholders want to see improvements in both corporate governance and risk management reporting. Many respondents to the survey viewed governance disclosures as a work in progress in many European countries, with significant differences existing across borders. They also wanted to see a more robust, prioritised list of key risks from the company to aid their understanding of the business.
Too much info?
Despite being retrospective in their nature, stakeholders regard audited financial statements as core to their decision-making. However, respondents had mixed opinions about the length and amount of information that companies were producing. Some commented that the comparability of financial statements had improved, while others were concerned that changes to financial reporting standards had made comparability – albeit in the short term – difficult between companies and from one financial period to the next. Analysts in particular highlighted that financial statements had become increasingly voluminous and complex throughout the last decade making it difficult for them to turn around quick market comments.
“It is clear that people using financial reports want quality, clear, concise, relevant and readily available information to aid decision making,” added Macioce. “The financial crisis put companies under real pressure to be transparent on decision making and this resulted in more commentary around fair value, financial instruments, valuations and pensions accounting.”
“Following the most volatile financial reporting season in years, companies are still under pressure from stakeholders who want to compare financial periods and better chart how businesses are performing. Management and audit committees must listen to the concerns of investors and analysts when reporting financial information and ensure that they are providing the right amount and level of information to ensure that investors, analysts and the wider public are given the broadest financial picture possible,” he added.
One respondent in the interviews said: “Gone is the time for managing the message. Instead, full disclosure is a better approach.”
