Investors and analysts
increasingly view financial reports
as incomprehensible compliance documents.
Wise companies will start now to transform
mandated reports into cohesive narratives
that enable investors and analysts
to make forecasts with confidence.
In helping clients meet an ever-increasing calendar of reporting requirements, I find myself more and more concerned about the tension between compliance and communication. In our efforts to satisfy a host of complex obligations and ensure investors, analysts, regulators, the media and other key parties know everything, we – companies, audit firms and independent consultants – produce voluminous report after voluminous report. We’re compliant. But are we communicating?
There’s a growing consensus in our industry that we’re not. Despite the avalanche of data we regularly release, target constituencies say they’re not getting what they need – a full, sharp picture of a company’s performance, financial state and outlook from which they can develop evaluations. There’s a growing perception among investors and analysts that financial statements have become strictly compliance documents overflowing with boilerplate in insider language. The reports may check all the boxes, but they often fail to connect key points or convey risks clearly. By their own admission, investors and analysts often don’t understand what they’re reading. Multiply by the number of companies professional investors and analysts typically cover and you have a lot of incomprehensible data out there.
The result is increased calls worldwide to reform corporate reports. In this newsletter, I’ll summarize the best thinking of what such reform needs to encompass and how companies can stay ahead of the curve amid all the other challenges they must deal with.
One point bears stating at the outset. Financial statements are and will remain the foundation of all corporate reporting. Global markets can’t operate without them. But, 21st century reporting requires transparency and disclosures beyond business results and boilerplate.
What must a 21st century financial report look like?
For starters, it must tell a compelling, cohesive story of a company’s performance in plain English. Obvious as it seems, readers of financial reports should be able to figure out easily how the business is doing, the key drivers, and the company’s prospects over the short and long term.
That means we – the professionals inside and outside the company who develop, analyze, document and audit the data – need to move from scorekeepers to storytellers. Abandoning boilerplate, the management discussion and analysis section needs to provide clear linkage from the business results to the business model/strategy as well as to the tangible and intangible drivers. With a forward-looking bent, there needs to be a clear exploration of risks versus the competition, the other organizations with which the company engages and how the company is addressing changes in the marketplace. The extent to which the narrative can align management information with the various external data that stakeholders can easily access is a welcome bonus.
To be sure, U.S. GAAP will remain the standard for communicating financial results (until convergence of GAAP and IFRS takes effect). That said, investors and analysts need context for the numbers. The rehabilitated management discussion and analysis section plus the array of external resources available – such as competitive information, market research reports, trade magazines, analysts’ briefings, conference calls, etc. – will provide that context.
In short, the more corporate reports enable investment professionals to assess a company’s viability with confidence, the more the reports will engender positive forecasts. Investors themselves substantiate this, reporting in a PricewaterhouseCoopers survey that they apply bigger discounts to companies whose reports they don’t understand.
Admittedly, this is a tall order – especially given responses from corporate executives in our recent survey regarding heavy demands on their time. The good news is there are incremental steps companies can start to implement now – with help from partners – to be in the vanguard of this movement.
- Keep current with changing rules and regulations. There’s no getting around the fact that we’re in an age of increased regulation and disclosure so look to trusted advisors and audit firms to keep you and your staff up-to-date. Clarity and context will be for naught if the report is not compliant.
- Implement enterprise management software. By aligning data collection and consolidation, companies can improve the integrity of both financial and non-financial information. See my March 2011 newsletter on how automated processes can upgrade accounting and finance competency while saving time and costs in the long run.
- Leverage your corporate communications function. As the professional storytellers in your organization, they can provide invaluable help in crafting a strong, compelling company narrative. Involve them from the beginning for greatest benefit. These folks have a pulse on trends for enhancing brand equity such as the growing importance of governance, sustainability and social issues in corporate reports. They’re also in the forefront of repurposing information across multiple platforms to accommodate user preferences. If your company doesn’t have a corporate communications function, see if your consulting partners can provide this service or consider engaging a third-party expert. It’s that important.
- Increase your social media presence. The ubiquity of mobile devices and the growing number of people inside and outside your company for whom electronic documents are second nature and integrated applications are king are in the ascendant. It’s only a matter of time before this group effects their own reporting revolution. Satisfied as we may be with our investor relations Web sites, they are essentially electronic versions of paper documents. Companies need to start thinking now how to repurpose mandated reports into interactive applications across multiple platforms complete with tools that help users connect internal data with external resources. Many companies have a cadre of these folks – dubbed the “mobile elite” – on their IT staffs right now. Embrace and encourage them to help transform your corporate reports into innovative, customer-centric applications that can drive growth.
At Blythe Global, we’re committed to helping companies meet all their accounting and financial requirements efficiently, accurately and on time with reports that tell the story of their company’s strategy and potential in a clear, compelling manner. We’d be honored to help you tell your story.
If you would like to discuss anything in this or any of my newsletters, please contact me. I’d be delighted to talk with you.
To discuss this important topic further
or if you’re looking for general accounting advice and counsel,
- Assisted a venture capital-backed company with a carve-out of historical financial results, preparation and support of the external audit process, and a reverse merger into a public company shell.
- Assisted a foreign real estate investment company establish its initial U.S. presence and acquisition of a $360 million property.
- Assisting a 700-location restaurant industry franchisor/licensor prepare for a first-time, three-year audit by a national CPA firm, as well as a potential IPO.
- Performing financial due diligence, quality of earnings analysis and integration assistance for a public technology company.
- Helping various companies currently backed by private equity and venture capital firms with technical accounting analysis, including preparation of accounting white papers to support the financial statement audit.
- Providing on-going, part-time CFO and controller services as well as SEC reporting services to smaller public and private enterprises.