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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

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