FSN: Why we need creative accountants not creative accounting.

Why we need creative accountants not creative accounting.

30th May 2005
Getting the corporate message across in the Annual Report and Accounts has never been easy. It is probably one of the reasons why the annual statements produced by most public companies can run to more that one hundred pages of high gloss paper. The mandatory OFR (Operating and Financial Review) which came into effect recently is going to heap even more pressure on Boards as they attempt to explain their performance to an ever growing and diversifying list of stakeholders.

By Neil Copeland, Senior Writer, FSN

One of the fascinating features of published reports and accounts has been the growing list of readers and potential readers of these statements. Although strictly speaking the accounts are prepared by the directors for the benefit of the shareholders we seem to have moved a long way from this concept. It's difficult to pinpoint exactly who bothers to read the whole of these annual statements but the potential list stretches from shareholders at one end to potential investors, analysts, environmentalists, trade associations, unions and every kind of special interest group in between.

Whilst the legal requirement is limited to shareholders, most companies recognise the need to address a broader audience and the annual accounts have turned into a curious mixture of mandatory financial disclosures, self congratulatory statements and marketing messages. It is unlikely that many readers of these statements look at the whole document and so it is quite common for the pdf versions available on the web to be broken into separate segments so that users can choose the elements that they want to download.

One of the challenges of the OFR is that the information required to be disclosed in this narrative statement is presently scattered all over the published accounts, even where the company currently prepares a voluntary OFR. A cursory glance through the published accounts of almost any publicly quoted company reveals OFR type disclosures in the "Financial Highlights" or "Chairman's Statement" or "CEO's Statement" or "Corporate Social Responsibility and Environmental" section and so on. According to PriceWaterhouseCoopers it is as though the annual reports have been written by five different people with different viewpoints of the business.

The mandatory OFR should bring together these various strands in one place but it is going to take significant planning and resources if the final output is going to be readable and useful. It is not the sort of activity that can be rushed out shortly after the year end and several commentators inside the accounting profession are already recommending that board members go back to first principles to decide what should go into the OFR and what should be left out.

The OFR is all about disclosure of corporate strategy and performance so that shareholders can assess the prospects for the company. Therefore managing the content of the OFR is less of a challenge than managing the way in which performance is explained. This is especially true bearing in mind the wide audience that might read the OFR which is intended to provide the best overview of the company's performance in one place.

Getting the essential messages across in a readily understood way is going to call on all of the creative skills of the management team, particularly the financial team who are the main custodians of the information that has to be supplied. New KPI's will have to be described and explained in detail, together with notable trends and factors that have affected or are likely to affect performance.

Naturally boards of directors will turn to communications professionals to help them but they are going to have to assemble the information and insights in the first place. Finance professionals will need to examine new and more adventurous ways of displaying information both internally and for external consumption. Given that the OFR is intended to put the members of the company in the same position as the directors, i.e to see performance "through the eyes of the directors" then it seems inevitable that internal management reporting processes will have to emulate the way in which the company's performance is described externally. This suggests far more use of imaginative graphical presentation using executive dashboarding and visualisation techniques.

There is also a far more pragmatic reason for keeping internal and external reporting completely synchronised. In the high pressure and high stress period around the year end it is vital that information disclosed publicly does not become uncoupled from information disclosed internally. It is important that late changes are reflected accurately in both published statements and internal reports. There are significant penalties for reckless or incorrect statements in the OFR which all directors will wish to avoid. Joined up systems and processes will help avoid embarrassing and costly errors.

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