King 3, financial crisis drive a new regime in reporting

With the ever changing corporate landscape, the requirements for companies looking to produce outstanding annual reports constantly shift; in 2009, South African companies must get to grips with the introduction of the King 3 recommendations for corporate governance as well as a world forever changed by the ravages of the global financial crisis. These two factors are chief influencers on how annual reports should be structured and presented as the concept of ‘integrated reporting’ gains currency among investors and other stakeholders.

This is according to Jayne Mammatt, associate director for Climate Change and Sustainability Services at Ernst & Young, who notes that companies must provide transparent, accurate and extensive disclosure of performance, operations and sustainability to assure investors.

“Where the preceding iterations of the King Report focused on ‘traditional’ good governance principles, King 3 introduces a new theme of the integration of the inextricably linked concepts of governance, strategy and sustainability,” says Mammatt. “Furthermore, the latest iteration seeks to improve trust and confidence in business through confirmation of the legitimacy of operations and improved stakeholder engagement through effective communication.”

Delving into what is meant by ‘integrated reporting’, she explains that integrated reporting should cover both positives and challenges; it should evaluate all areas of performance including economic, social and environmental issues, in addition forward-looking information also should be dealt with. “Reports should be transparent, relevant and material; it is not sufficient to provide wordy platitudes and vague estimates,” Mammatt states.

King 3 comes in the wake of yet more high-profile, international corporate failures, including those associated with the meltdown of the financial services sectors in the United States and the United Kingdom. At the root of these troubles is the inability for shareholders to accurately assess and understand complex – and possibly flawed - business models, particularly in times of severe and unexpected economic conditions.

Mammatt says King 3 therefore recommends that all companies should prepare an integrated report in terms of which each organisation can demonstrate and affirm that it is a responsible corporate citizen.

“Rather, shareholders need accurate figures and measurement.”

Her colleague and national director of accounting at Ernst & Young Garth Coppin, notes that since the ravages of the financial crisis – which has impacted on nearly every industry and rippled around the world – there are more interested parties than ever before in trying to influence accounting standards. “Where sound reporting is concerned, it is not just the IASB which is involved. Other interested parties include governments, the Securities and Exchange Commission –and a number of new bodies, such as the Financial Stability Forum and the Financial Crisis Advisory Group,” he explains.

Even the powerful Group of 20 Nations summit turned its attention to reporting, notably indicating that accounting standards boards should enhance guidance for the valuation of complex, illiquid products.

Mammatt notes that the King 3 proposals, which are yet to be finalised, are just months old; “The notion of what constitutes an integrated report is not yet clearly understood by most company directors. Globally, we have found that out of over 3000 sustainability reports, only a handful of these are integrated.”

As a result, she says, more guidance is required from the King Report or the Global Reporting Initiative, which pioneered the development of a widely used sustainability reporting framework, as to how to prepare and structure integrated reports.

Her advice is that the audit committee will play a key role in achieving integrated reporting. “Company directors should consider external assurance; sustainability reporting and disclosure in particular should have independent assurance, while – of course – the board of directors remains responsible for the accuracy and completeness of the annual report.”