Non-financial disclosures in the annual report The Second Asian Roundtable on Corporate Governance (June 2000, Hong Kong) Roger Adams Head of Technical Services and Research Association of Chartered Certified Accountants
Presentation overview • Aspects of non-financial disclosure • Why should non-financial disclosures matter? • The Turnbull Report on Internal Control (UK - 1999) • New approaches to stakeholder recognition in the UK • Risk, internal control and the Operating & Financial Review • EU recommendation on environmental disclosure • Parallel initiatives - the Global Reporting Initiative (GRI) • How are these changes being reflected in the education and training of accountants?
Aspects of non-financial disclosure • Mainstream corporate governance disclosures • Turnbull / internal control / risk related disclosures • Other aspects: • environmental • social • economic • human rights • fraud and corruption (ethical)
Why should non-financial disclosures matter? 1 “Leading companies are beginning to build stakeholder trust and simultaneously improve their business performance by measuring and reporting on both financial and non-financial indicators related to such issues as environmental management, worker relations and social responsibility. In fact, they are creating a new kind of competitive advantage by linking value and values, to position themselves as the companies of choice among customers, employees, investors, suppliers, business partners and local communities”. KPMG “Beyond the Numbers”
Why should non-financial disclosures matter? 2 • risk can be controlled but not easily financially quantified • mainstream corporate governance issues (board structure / auditor independence / voting rights) • social issues (labour policies / human rights) • ethical issues (bribery and corruption / money laundering / codes of conduct) • environmental issues (global warming / GMO’s / contaminated land) • all exposed in our CNN / goldfish bowl world • trend is towards fuller coverage of above issues
The Turnbull Report on Internal Control (UK - 1999) • Are the significant internal and external operational, financial, compliance and other risks identified and assessed on an ongoing basis? • Does the company communicate to its employees what is expected of them and the scope of their freedom to act? • Are there established channels of communication for individuals to report suspected breaches of laws or regulations or other improprieties?
The Turnbull Report on Internal Control (UK - 1999) • Are there specific arrangements for management monitoring and reporting to the board on risk and control matters of particular importance? • Compliance with Turnbull requires a board to consider all the above issues and more. • Significant risks may include market, credit, liquidity, technological, legal, health, safety, environmental, reputation, and business probity issues.
The Turnbull Report on Internal Control (UK - 1999) • Accreditation mechanisms such as • ISO 14000, • SA 8000 and • AA 1000 have a significant role to play in enabling boards to fulfil their newly enlarged responsibilities under the Combined Code
New approaches to stakeholder recognition in the United Kingdom • Company Law Review: 1999 - 2002 • new responsibilities for directors? pluralism vs. enlightened self-interest • enhanced disclosures in Operating and Financial Review (= US MD&A) • Other initiatives • integrated reporting approaches (The Centre for Tomorrows Company) • new regulations for pensions fund trustees dealing with explicit recognition of social and environmental issues
Risk, internal control and the Operating & Financial Review • What is the appropriate vehicle for these new types of disclosure? - a separate report? • the unaudited section of the annual report and accounts pack? • the audited financials themselves? • The Management Discussion & Analysis / MD&A section ( UK = the Operating and Financial Review/OFR) - this seems to be the most recommended (though least used?) route open
The OFR now “A framework for the directors to discuss and analyse the business’s performance and the factors underlying its results and financial position, in order to assist users to assess for themselves the future potential of the business” (UK ASB 1993)
The OFR now • operating review: results for the period, dynamics of the business, investment for the future, profit for the year, total recognised gains and losses and shareholders’ perspective • financial review: capital structure and treasury policy, taxation, funds from operating activities and other sources of cash, current liquidity, going concern, balance sheet value (inc.. intangibles)
The OFR in the future - 1 i.A fair review of the development of the company’s / group’s business over the year and position at the end of it, including material post year end events, operating performance and material changes ii. The company’s purpose, strategy and principal drivers of performance iii. An account of the company’s key relationships, with employees, customers, suppliers and others, on which its success depends. iv. Corporate governance - values and structures
The OFR in the future - 2 v. Dynamics of the business: known events, trends, uncertainties and other factors which may substantially affect future performance vi. Environmental policies and performance, including compliance with relevant laws and regulations vii. Policies and performance on community, social, ethical and reputational issues viii. Receipts from, and returns to shareholders “Modern Company Law for a Competitive Economy” UK Company law Review Steering Group.
EU recommendation on disclosing environmental issues in the annual report • Commission Recommendation “On the recognition, measurement and disclosure of environmental issues in the annual accounts and annual reports of companies” - in draft from June 2000 • Covers mainstream (IAS 37 / FRS 12) recognition and measurement issues • proposes new disclosure requirements to cover environmental policies, improvements, resource use and emissions, expenditure to P&L and B/S • A common core of social indicators may follow in 1 - 2 years
Parallel initiatives - the Global Reporting Initiative (GRI) • Global guidelines for reporting on economic, social and environmental aspects of corporate activity (i.e. sustainability or the triple bottom line - see handout) • ACCA + US CERES / Tellus Institute + CICA + UNEP + other European, North American, Japanese, Indian and South American organisations • ED issued 3/99 - revised guidelines due June / July 2000. Permanent body from 2001.
How are these changes being reflected in the education / training of accountants? • base accounting and auditing examinations on international standards • set out to “green” the examination syllabus • develop new programs: e.g. international diploma in corporate governance • deliver on all these issues regularly through corporate communications channels: web-site, members journal etc • sponsor research and influence standard setters • in the case of the GRI, become a standard setter
Conclusions - 1 • Greater accountability & transparency • More evidence of stakeholder dialogue • Growth of integrated or triple bottom line reporting • More emphasis on values based reporting and reporting of values • Expanding the role of the OFR/MD&A • Growth in volume of socially responsible investment • Accountants: best placed act as corporate governance referees? • Accountants:implications for their education and training?
“Companies are recognising that failure in many non-financial areas can heavily damage the bottom line, perhaps irreparably” “Because most general business risks derive from non-financial factors, organisations have found that how they manage those business risks can influence their financial success”. Conclusions - 2(from “Beyond the Numbers” - KPMG 2000)
References • “Beyond the numbers” KPMG • “Risk in the Boardroom” Canadian Institute of CAs • “Making Values Count” ACCA • “CACG Guidelines - principles for corporate governance in the Commonwealth”Commonwealth Association for Corporate Governance • “Reporting Guidelines” Global Reporting Initiative • “The Corporate Reporting Jigsaw” Centre for Tomorrow’s Company • UK Company Law Review
References • www.acca.org.uk/resources (for T&R) • www.acca.org.hk • IASC: www.iasc.org.uk • Global Reporting Initiative (GRI): www.globalreporting.org