Tuesday, November 14, 2006

The Future Of Company Reporting Looks Bright!

Source: http://cpm-view.blogspot.com
Author: Rutger van den Berg (ravandenberg@deloitte.nl)

Last week at the Global Public Policy Symposium in Paris, the CEOs from the largest professional services firms presented a united vision proposal for the profession and the future of financial reporting.

The paper was developed in an effort to focus discussion on issues that directly affect the services provided by professional services firms. The symposium participants included the senior leadership from BDO International, Deloitte, Ernst & Young, Grant Thornton, KPMG, and PricewaterhouseCoopers, as well as an array of regulatory officials and investors from around the world.

As you might imagine, the vision paper and symposium attracted heavy media coverage. The CEOs signed an op-ed piece about their shared vision that appeared in the Wall Street Journal. All CEOs participated in media interviews for CNN International business, the Wall Street Journal, and the Financial Times. By working together, the CEOs are helping to shape public opinion about issues that will map the future of company reporting.

I think this is good news if you take Corporate Performance Management seriously. Why? Well first of all, because this will help to improve the quality and usefulness of company reporting. Thanks to Internet and digitization, information will become more of a commodity product, that stakeholders can customize and consume the way they want it. For example, some investors may want to know about the earnings, cash flows, and perhaps other variables for a company currently and over some past period. Others may want each of these variables compared to other companies in the same industry or a similar “peer group”, or compared to averages for the market as a whole (or some portion thereof).

Second, it is directed at improving the frequency of company reporting. Why, in a world where most public companies’ financial records are, or soon will be, in digitized form, should investors and other parties have to wait a full quarter to receive pertinent financial information? Technology allows far more frequent reporting, even daily, although with different levels of assurance about its accuracy than for financial statements that are subject to regular audits.

Last but not least, this vision is aimed at providing more qualitative and non-financial information that helps stakeholders to understand how businesses perform in the future. Yet financial statements are backward looking documents. They tell how a company has performed in some recent period. Perhaps some of the information contained in the financials is indicative of future performance, but much of it is not.

Instead, non-financial measures like innovative success, customer satisfaction, product or service defects or awards, and employee satisfaction would provide powerful incentives to corporate executives to manage their companies in ways that benefit not only their shareholders, but their employees, customers and the wider economies in which they conduct business. In particular, companies that look likely to prosper but in fact may be in trouble would have stronger incentives to take corrective action sooner than otherwise. Conversely, companies whose prospects are really brighter than current financial data may indicate may not be penalized by investors, and thus find it easier to borrow funds for expansion, to retain or expand their customer base, and to retain or recruit new employees.

In short, the new reporting model should be more useful to stakeholders, more frequent, and help in predicting future company performance. It will impact the way executives manage their businesses, lead to a convergence of internal management information and external reporting, and will leverage existing CPM systems and developing technologies like XBRL.

If the leaders of the big international audit networks succeed in bringing their vision to life, this might very well be the next wave after compliance and IFRS. And this time, it appears to be one that will really benefit both internal and external information producers and consumers. And I think that’s really good news!