A time for radical innovation

There is a growing feeling among a few opinion formers and business watchers that the next few years may herald a period of extraordinary innovation across the business world. This is considered likely as a response to a dramatic downturn in activity forcing a level of radical thinking the like of which we have not seen. One could also see it as a natural response to the NICE decade when growth was relatively easy.

In this vein, I thought I should do my bit for this agenda and use the opportunity of the credit crunch and all it has entailed to pose a very simple question - is the current reporting model capable of delivering the needs of society in the 21st century? Is there a better mouse trap out there that can help an understanding of systemic and business risk?  I hold a strong view that this issue has been overlooked each time we have faced some economic disaster over the past two decades. It may be in the difficult box but that isn't a good enough excuse any more. I hope I'm not alone in thinking the unthinkable and was particularly pleased that the FT (11 December 08) considered it worthwhile to publish an article I recently sent them entitled "Time to rethink our model of corporate reporting".

I was also interested to see the findings of a survey what is described as "the first major scientific business survey about corporate financial reporting and the financial reporting standards developed by the IASB". The survey was conducted among approximately 800 CFOs across a number of territories. The findings are interesting if not surprising for those who have made a career out of reporting and provide another angle on issues that need to be considered as we chart a new post credit crunch path.

Let me know what you think and where there is the appetite for change that I think is needed.

David

Comments

[Chris Dreyer CFA]

I would tend to agree with the need to rethink business reporting. But I think that the financial part with its mixed attribute model is broken enough to warrant most of our focus. A lot of work has gone into the CFA Institute's Comprehensive Business Reporting Model.

You suggest to apply the same rigour to the front half of the report as is applied to the back half. I'm all for rigour, but when it comes to narratives about the "market dynamic and the market position of a business", this has limits. Usually, an operational understanding of these dynamics is impossible without a set of assumptions about future developments. But there is no objective way to verify these, so a wide array of concurrent positions are justifiable. Which one of those is correct is for the financial markets to decide at any one point in time, because we are in the domain of forecasts and expectations. Reporting on the other hand needs to be verifiable and auditable.

Finally, about the survey you refer to: It's interesting, but incomplete. No assessment of the IASB can be complete without taking the positions of users of financial statements into consideration. CFOs as preparers have a vested interest in the matter that is not always congruent with that of investors. But financial reporting is made for investors.