Corporate Reporting blog

Innovation in reporting webcast

Many companies say that surviving the economic downturn is a primary focus right now. So it is more important than ever that the capital markets and your stakeholders are well informed through clear, relevant and balanced reporting. Not only does this help build trust, it also supports more measured responses to news that isn't all good.

The latest in our series of corporate reporting webcasts looks at how innovation can build trust in reporting.

The short videos (which I had the pleasure of chairing) explore what's driving innovation in corporate reporting, the benefits of telling the whole story, and the advantages of being one step ahead of regulation.

Video 1: Peter Holgate, head of accounting consulting services, shares his views on why current market conditions shouldn't be a time for conservatism in reporting. Instead, there's competitive advantage to be gained from more forward looking and open reporting that "tells it how it is".

Video 2: Mark O'Sullivan, a leader in the corporate reporting team, describes the innovations emerging from some companies' reporting this year, including on risk, governance and business models. And he recommends where to focus going forward.

Video 3: Jessica Fries, PwC director and deputy chair of the International Integrated Reporting Council's board, explains how companies are using integrated reporting for competitive advantage and how reporting is likely to look in the future.

Do please keep in touch - I really value your responses to this blog.

BFN

Charles

Increasing disclosure over tax

With the financial crisis, the need to repair public finances and concern about whether companies are paying ‘the right amount of tax’, there has probably never been greater public interest in how much tax is paid by companies.

You might have read in the news about companies not paying their ‘fair share of tax’.  Some companies have been targeted by Civil Society Organisations (CSOs) to explain the tax they pay and with this increased attention, a new reputational risk is emerging.  Traditionally tax was viewed as a private financial matter, a cost to be managed or a question of compliance.  But this is no longer the case.  Tax is now becoming a corporate responsibility issue, of interest to a variety of stakeholders including investors, governments, media, CSOs as well as the Board, finance department, and employees.  Are you informed on the issues and do you have an awareness of current developments in tax reporting?

In recent years, a number of proposals for increased financial reporting by companies have emerged.  These are under discussion by regulators and legislators and have the potential to have a significant impact on the disclosure requirements of companies in the near future.  In the US, the Dodd-Frank Act includes provisions requiring SEC registered extractive companies to report on all payments made to US Federal and foreign governments.  In 2011, the EU introduced a proposal for an amendment to the existing Transparency Directive to introduce new reporting requirements for listed and non-listed large companies active in the extractive industry and the logging of primary forests.  The Extractive Industries Transparency Initiative, although voluntary, has been adopted by 14 countries to ensure that extractive companies publish what they pay and governments disclose what they receive.

The main proponents of these proposals are the CSOs who see this as an important element of their campaign to ease the plight of the poor in developing countries. There are two distinct aspects. The first is the need to hold governments of developing nations to account for the revenue they collect. The second element is the issue of helping developing nations collect the “right” amount of tax from international businesses.  Although currently focused on extractive industries, certain CSOs are campaigning for a wider application of country by country reporting requirements for all MNCs.  Their primary focus is on tax planning and transfer pricing policies and a call for them to publish very detailed financial information for each country in which they operate.

It is clear therefore that there is pressure on businesses to improve transparency around the taxes they pay to government in the individual countries in which they operate.  So how are companies responding?  Some, mainly from the extractive industry, have been leading the way in tax reporting.  The focus from CSOs is on corporate income tax but companies pay and collect a wide range of taxes which are not always fully recorded in financial accounts or recognised.  A number of companies such as Rio Tinto are reporting their tax payments using this Total Tax Contribution approach.

A few companies are going further to assess their wider economic impact, taking into consideration macroeconomic impacts, tax contributions, socio-economic and environmental impacts, for example British Land.  The aim is towards greater transparency and for better engagement with key stakeholders. 

Whether for corporate responsibility purposes or to address a reputational issue, greater disclosure in tax reporting is high on the agenda in the current climate.  Corporates should keep up to date with the latest trends and developments in tax reporting and consider whether there is a business case for increasing disclosure over tax.

Do please keep in touch - I really value your responses to this blog.

Is the opportunity to use sustainability to drive competitive advantage over?

Companies have shown that the return on investment from focusing on sustainability can be impressive.  So why aren’t all companies following suit and reaping the same benefits?

Household names like M&S with its Plan A, Unilever with its Sustainable Living Plan and GE with Ecomagination have used sustainability to drive competitive advantage.  Schemes such as these go further than clever marketing and deliver real value to the business.  M&S’s Plan A delivered a net benefit to the bottom line of £70m in its last financial year and GE’s Ecomagination products generated $85billion from an investment of $1.8bn in R&D.

The question has led some quarters to consider increasing the pressure on businesses to act on sustainability.  This June world leaders, governments, the private sector, NGOs and other groups, will come together at Rio+20, the UN Conference on Sustainable Development , to shape how we create a sustainable future on an ever more crowded planet.  Paragraph 24 of the Rio+20 zero draft is getting a lot of attention at the moment.

It states:

“We call for a global policy framework requiring all listed and large private companies to consider sustainability issues and to integrate sustainability information within the reporting cycle.”

For some, this does not go far enough.  A group of institutional investors lead by Aviva with $2 trillion under management is calling for an international commitment from Rio+20 to develop national regulations which mandate the integration of material sustainability issues in the Annual Report & Accounts on a ‘comply or explain’ basis.  Also, the WBCSD (a CEO-led organisation of forward thinking companies) and the IUCN (the world’s oldest and largest global environmental organisation) have sent an open letter to the Heads of Delegations attending Rio+20 urging governments to strengthen paragraph 24 by including the explicit requirement for companies to adopt standardised, rules-based sustainability reporting.

If the UK Government’s consultation on mandating carbon reporting is anything to go by, it seems that business is not averse to a more prescriptive approach to reporting.  WWF-UK claims unreleased submissions to the government’s consultation, obtained through freedom of information requests, show that some 61 per cent of organisations are in favour of full mandatory carbon reporting for all large companies.

The delay announced recently by the UK Government to the decision on mandating carbon reporting may be more about its commitment to a ‘one in one out’ approach to business regulation and wanting to look at what to do with the Carbon Reduction Commitment and businesses desire for this policy to be simplified.  But if the benefits from sustainability reporting are so great, as evidenced by the GE and M&S stories, why has a more prescriptive approach to reporting not already happened?

One argument is that a prescriptive approach stifles innovation and moves everyone towards the lowest common denominator.  If we are to respond to the threats posed by sustainability then we need more innovation not less.

What is the best way forward? More companies doing a little, driven by ‘comply or explain’ type regulation?  Or is it a case of some businesses breaking new ground because they see the commercial benefits and, in the words of Richard Branson, “screw business as usual”?   The answer is not as straightforward as it might at first appear, but one thing seems clear – sustainability reporting is going to continue to rise up the political and business agenda.

Do please keep in touch - I really value your responses to this blog.

BFN

Charles

BIS consultation: a more strategic and flexible framework

Changes to the narrative reporting framework are needed and there’s growing momentum for action – that’s the consensus view revealed in the summary of responses to the UK government consultation on a new reporting framework. 

As the summary says, “Preparers and users want it to be easier to draw out strategic company information from the increasing volume of published company data.”

On the face of it, the proposed changes by the Department of Business Innovation and Skills seem little more than a ‘shuffling of the deck’. But scratch below the surface and leading reporters are recognising its potential to:

• Move the focus of attention from compliance to communication
• Reduce clutter and create a more dynamic narrative that focuses on what matters strategically and what’s changed during the year
• Leverage the on-line space better – eg, for standing data and other statutory information
• Speed up the reporting process – eg, release the Strategy Report with the preliminary results
• Challenge the quality and availability of information for internal decision-making

The direction of travel for reporting is clearly towards a more flexible reporting framework that allows companies to tell an integrated story that’s grounded in their business model and strategy.  Boilerplate disclosures can then be reported separately and not allowed to cloud the key messages. 

There’s no doubt that presenting a clear, concise and strategically-focused picture of a business is a challenge. You only have to look at the evidence in our review of companies’ narrative reporting practices – From compliance to competitive edge. But, as you may have gathered already, I am a firm believer this is the way reporting needs to go if it is to remain relevant.

The detail of the proposals for a strategic report will be developed with stakeholders, including PwC, over the coming months. New legislation is likely to be published in October this year and is expected to come into effect in April 2013.

So what’s the first step?  BIS is hosting some workshops, which we are pleased to be contributing to, along with preparers, users of reporting and other key stakeholders. The aim is to help clarify the detail of the strategic report and establish the breadth of information that should go into the Annual Directors’ Statement.

We’re now in a period of challenge and change that has the potential to transform corporate reporting over the next decade. The BIS consultation is just one of many important initiatives and I look forward to keeping you posted on developments as they arise.

BFN

Charles

‘Quick fix’ for FX and hedging disclosures

At first glance, the subject of foreign exchange and hedging might not seem to make a particularly interesting blog. But bear with me.

I am always keen to challenge the vision of reporting, to advocate a wholesale review of its structure, but I also realise that ‘Rome wasn’t built in a day’.  We need to bear in mind the long-term gains that come from a more integrated reporting model, but we shouldn’t pass up the opportunity to make relatively simple and valuable steps along that path today.

As I think about the journey to really effective reporting, the first – and often neglected – step that I encourage companies to consider is a focus on the financial statements themselves. Investors tell us that there are a number of relatively simple ‘quick fixes’ that management can make to turn sometimes impenetrable financial disclosures into a useful source of insight into company performance.

One of those ‘quick fixes’ involves the disclosures that management makes about FX and hedging activity.  In the latest edition of ‘Investor views’, you will find some practical examples of the sorts of disclosure that investors tell us would transform today’s typical FX and hedging note into something that gives genuine insight.

The suggestions made by the investors we interviewed are not complicated. For example, a simple introduction to a hedging note that lays out what has – and what has not – been hedged. Are there additional economic hedges in place that have not met the requirements of hedge accounting?  What underpins the single FX number reported in the income statement?

Does this mean that we are accepting the inevitability of financial disclosures growing ad infinitum? Far from it.  However, to figure out what can be deleted from the back end of a report, we first have to help investors to understand the economics behind the numbers currently presented. Investors tell us about companies that present 10 pages of hedging disclosure but fail to  provide the context for those 10 pages  − notably, what is being hedged, at what price, for how long,  the percentage of the exposure being hedged and why.  By putting the note in a clear business context, we will be in a stronger position to determine which of those 10 pages are actually necessary to understand the company’s hedges – and which might be cut.

Do please keep in touch - I really value your responses to this blog.

BFN

Charles

Trust: a critical asset

As we continue to debate whether the UK economy is about to turn the corner, one of the things that remains clear is that trust is the lifeblood of any organisation.  Trust is a critical asset in ensuring a business’s long-term survival and success and is even more relevant in these challenging times.  Later this year PwC will mark 10 years of its Building Public Trust annual awards. As part of this programme Ian Powell, PwC’s UK Chairman, will also be hosting a series of debates to stimulate a discussion on the responsibility of leaders in society today.

I was reminded of a paper written by PwC which focuses attention on the need for a new settlement between business and society; one that requires business to embed the right culture and behaviours based on sound principles of honesty and integrity that can deliver both public trust and business success.  Clearly, the business community and its leaders have a critical role to play in building and sustaining trust, and progress towards this goal will require genuine and forthright debate.

In this year’s Edelman Trust Barometer, Richard Edelman highlights one aspect of this debate: “It makes good business sense for business to broaden its definition of leadership. They must now earn their “license to lead.” It cannot be seen as acting solely in self interest, but rather executing on the fundamentals of profit and societal good. In other words: profit needs to be joined with purpose.”

An example of this from the corporate reporting environment is perhaps PUMA’s Environmental P&L (E P&L), which is a means of placing monetary value on the environmental impacts along the entire supply chain – from raw materials through to the retail transactions.  PUMA’s first step will help other companies consider how they can apply similar analysis in their own organisations.   Assigning economic values to the environmental impact of a company’s operations enables a business to tackle vital questions, not just about environmental impacts but also about business risk, cost savings and finding new ways to become more effective. 

As business’s long-term survival and success depends on its ability to build and sustain trust, I look forward to further engaging on this topic and sharing with you the output from this year’s Building Public Trust analysis.

Do please keep in touch - I really value your responses to this blog.

BFN

Charles

What is on the minds of boards, investors and management teams as they finalise their reporting

Thank you to those who joined our first live webcast last week on corporate reporting matters.  For those unable to join - the webcast was focused on business reporting challenges, the bigger issues on the minds of boards, investors and management teams as they finalise their reporting for calendar year 2011.  I was joined by Richard Sexton, board member for Reputation and Policy; Peter Hogarth, a leader of our Accounting Consulting Services; and Mark O'Sullivan, a director in our Corporate Reporting team.  I would encourage those who haven't seen the webcast to do so.  It was interesting to hear our experts speak of today's fundamental reporting challenges: namely Executive Remuneration, reporting of risk and going concern/liquidity.

I also wanted to draw your attention to PwC's Annual Global CEO survey launched recently at Davos.  The document is a good insight to what is on the CEO's mind.  The survey not surprisingly highlights that building the trust needed for the business of tomorrow and the focus on corporate reputation is still very much at the forefront.

I hope you join the reporting debate. Please let me know of your comments.

BFN

Business reporting in this economic environment – communication is critical

On Thursday 9 February I will be hosting a webcast to share our insights on reporting and accounting in today’s tough environment, explain what investors want to see in the annual report, and look ahead at what’s likely to change. We’ll also take a look at some of the critical issues that both audit committees and we, as auditors, are focusing on before we sign off annual reports.

Headline-grabbing economic concerns in Europe are shaking market confidence. And the current after-shocks make it all the more critical that companies communicate clearly to their stakeholders about the impact events are having on their business. 

Looking on the bright side (and as I’ve mentioned in my previous postings), we’re seeing a positive response from investors and regulators to those companies that provide some additional, pertinent disclosures to help reassure the markets.  But that doesn’t mean adding ‘clutter’- far from it. It means demonstrating that the business critical issues, such as securing funding for borrowings, acquisitions or capital projects, are being effectively managed. It means inspiring confidence in your business model and its resilience in this environment. And it means building trust in the appropriate governance of your business.

The webcast starts at 09.00 GMT and you can access it here at:

http://www.pwcplayer.co.uk/webcasts/0212_corporate_reporting_webcast/

We’ll talk for about 20 minutes, after which we’ll be answering questions from the audience.

I hope this webcast will inspire you to join the reporting debate and look forward to hearing your comments, either on the live webcast or here on my blog.

BFN

Charles

Investors speak out on disclosure - Winning the competition for capital

I thought I would share with you the attached 'Investor view - Winning the competition for capital': as it makes for interesting reading.  The document outlines key areas that investors would like to see entities disclose and the frustrations they have with current reporting.

Our conversations with investment professionals tell us that entities that don’t make their cash and debt disclosures clear and accessible may find it more difficult to raise capital or borrow funds. But management teams can take simple steps to improve their chances of securing the right funding at the right price by making some simple voluntary disclosures.  You may also be interested in a series of short webcasts featuring investors from around the world talking about why this is so important.

Do please keep in touch - I really value your responses to this blog.

BFN

Charles

Streamlining the annual report – Losing the excess baggage

As we settle back into the reality of January and start to break those well intentioned New Year resolutions, what was planned to be significant change often resorts back to how life used to be.  Oh well there’s always next year!  Corporate reporting however, unlike many of our resolutions, is experiencing a period of significant change. The demand for change is being driven by various parties fed up with the loss of key messages in lengthy reports that are hard to navigate and that contain immaterial or repetitive disclosures. 

The FRC report “Cutting Clutter” hits the nail on the head - “....cutting clutter cannot be achieved just by taking a red pen to a late printer’s proof. Making a significant and permanent change has to be addressed at the planning stage for the next annual report through a clear idea of the desired outcome and how change will be achieved”. 

So at a time when companies are increasingly revisiting their annual reports to see how they can make improvements, I thought it was timely to draw your attention to a recent PwC practical guide looking into streamlining the annual report.  I hope you find the report helpful.

I also wanted to draw your attention to an opinion piece I recently co-authored for PwC’s World Watch magazine entitled “From compliance to competitive edge”. The article explores how taking a compliance-driven approach to corporate reporting is becoming the risky option.  It is time to take positive action so that reporting gives us a competitive edge.

Do please keep in touch - I really value your responses to this blog.

BFN

Charles