Corporate governance: FDs need to concentrate efforts on narrative reporting

These are trying times for finance directors. There is a feeling among them that, though they are working at full stretch in trying to keep things stable as we move through the economic crisis, their true worth is still being trivialised. They are seen by audit committees and investor bodies as the bulwark. They are trying to hold everything together so there can be nothing that will frighten the horses. But all this effort is driving them into a space which is not where they want to be.

This is summed up by the cri de coeur heard over and over in conversations currently, in conference presentations and, between the lines, in comment letters: accounts and financial reporting are becoming compliance documents. Of course, they are compliance documents. Regulators, investors, creditors and a myriad of other interested people depend on them for precisely that reason. But they are also something else. They are part of the living dynamic that keeps the whole business of financial reporting and corporate governance moving forward.

If the perception is that they are only there for compliance purposes, the whole system starts to unravel. Compliance, however hard you try, is seen by others as a dull, almost clerical; a lining up of the ducks in a row. But the brightest and the best find no joy or challenge in doing dull. Why should the modern FD?

Financial reporting and corporate governance have always been changing worlds, depending on new developments, new ideas, efforts to improve, adapting to changing, sometimes sharply changing, circumstances. This is where some of the frustrations that FDs find with International Financial Reporting Standards derive. The more IFRS become a global and accepted system, the more it becomes a dictatorship to the FD in particular, some argue. Companies strive to fit their financial reporting into the IFRS system and so ensure that the global investor community can compare like-with-like across continents.

But at the same time they also know that the figures that the management of the company depend upon to run the place are very different.

So the credibility of FDs starts to be undermined. The rest of the corporate board are taking decisions based on one set of internal financial reporting, while also funding the production of this other set of figures, ostensibly for the outside world. The status and standing of the FD takes a knock. Their world is being pushed back to the sidelines. The much-vaunted step up to strategic levels becomes two steps back to a less interesting place within the hierarchy, after a year or two of being thrust into the spotlight by recession and financial crisis.

At the same time, the world in which all this exists is starting to show signs of fragmentation. The efforts to create a global language of financial reporting are starting to reveal stress fractures in the way it should work. IFRS may well be the overwhelming choice of the world’s economies, but both the US and the European arms of the network are proving less than satisfactory. The stubbornness of US politicians and chief financial officers in accepting that the game is up for their home-grown reporting rules, if the rest of the world is using IFRS, is proving durable.

Likewise continental Europe. The difficulties with the US provoke hopes that the dream of financial reporting standards being a European-dominated system can be revived. Globally it makes no sense and goes against the entire principle; after all, they aren’t called international standards for nothing. But if you are, say, a French bank with vaults full of toxic assets which you would prefer to keep quiet about, it does.

These squabbles will keep the financial reporting world arguing for years, hindering the standardisation process as it goes. But none of that helps the FD. Where they need to open up a new front which will make them indispensable and at the heart of affairs again is in the oldest principle of corporate governance. Companies need to explain themselves clearly to the investment community and, particularly in times of crisis, to the widening circles of other interested parties out there as well.

They could do worse than form an alliance with Ian Wright, director of corporate reporting at the Financial Reporting Council. So far this year, he has pushed out two revolutionary documents based on the idea of making these explanations both clearer and less complex. The most recent, which appeared at the end of October, should become the FDs’ manifesto for the coming months. Entitled Rising to the Challenge, it is a short review of narrative reporting in the UK and one of its opening statements says everything FDs need to know; “Preparing a good quality annual report that communicates effectively all the important information is a major intellectual and logistical challenge”.

That is where FDs need to concentrate their efforts.

Read about the Accounting Standards Board and Financial Reporting Council report on narrative reporting here

Robert Bruce is a leading commentator on accountancy issues