Ask a member of the public – or indeed many investment professionals – why companies should prepare an annual report and they’ll tell you about the importance of having a reliable earnings number as a basis for assessing business value and how it has been managed. Ask an accountant, and you’ll get a different answer. They’re more likely to focus on the essential role that the annual report plays in helping shareholders assess management’s stewardship of business assets by summarising the results of huge volumes of transactions.
Society needs business reporting to address both these perspectives. This means acknowledging the role that business reports play in investors’ buy/sell/hold decision making – alongside the essential role they play in shareholder assessments of stewardship. To achieve this we need to look beyond refinements to our established financial reporting frameworks. Historical financial information provides a solid foundation from which to build an assessment of value but we need a broader perspective to help investors take their assessments beyond current year earnings.
I believe that we need to broaden the debate on the future of business reporting to encompass areas beyond the financial statements. We need to ask ourselves how well the reporting package (including both the annual report and investor presentations) as a whole aligns with the information needs of investors. At the moment we have lots of information on the capacity of the business to generate earnings tomorrow but much less to support a view on how this might change in the medium term or how the long term prospects of the business might be affected by potentially game-changing issues.
I hear from executives that they are frustrated by apparent investor short-termism. Yet better business reporting could provide investors with the objective information they need to take a longer view. In the UK at least, I hope that the FRC’s guidance on the Strategic Report can provide a catalyst for change.
These ideas are explored further in the KPMG Survey of Business Reporting.
David Matthews is a Partner at KPMG in the UK, and a member of the International Integrated Reporting Council’s Working Group