Standard Bank claims top spot

Takes over the helm from Sasol as winner of Excellence in Corporate Reporting Award

Standard Bank has taken top honours in 2009 Ernst & Young Excellence in Corporate Reporting Survey, beating out Sasol which had taken first place since 2005. Standard Bank was ranked 8th in 2008.

Sasol was placed second with Nedbank in third place and Group Five, a new entry into the top 10, coming in in 4th place.

The adjudication process ranks the companies into excellent (which includes the top ten positions), good, adequate and perfunctory. A ‘Perfunctory’ ranking implies that the company is doing little more than the bare minimum that they need to do to satisfy the requirement to comply with GAAP statements and other listing requirements. Perfunctory should not be interpreted as meaning that companies have failed to meet minimum requirements. An adequate ranking means that the company has given an appropriate amount of optional additional disclosure for a large company. Good and Excellent are awarded to companies that give progressively higher levels of meaningful disclosure in their annual reports.

The adjudicators of the survey, lecturers and professors from the University of Cape Town, awarded Standard Bank first place highlighting the explanation that the report gave of the implementation of Basel II and the reconciliation to the GAAP requirements in IFRS 7.

“The explanation of complex accounting issues as well as a strong risk report and a clear analysis of the impact of a major acquisition concluded during the period set this apart from the rest,” says Garth Coppin, national director of accounting at Ernst & Young.

The Top 10 companies within the Excellent category in ranking order are Standard Bank, Sasol, Nedbank Group, Group Five, Apexhi Properties, ABSA Group, Truworths International, Barloworld, Massmart Holdings and Gold Fields.

“For the second year now we have included state-owned entities as a separate category in the awards with Transnet and Eskom falling into the Excellent category. Reporting in state-owned enterprises is driven by a different set of criteria to those of publically-owned companies making comparisons between the two difficult,” adds Coppin.

The adjudicators identified improvements in the quality of sustainability reporting and in specific areas of statutory financial reporting, leading to a marginal improvement in the overall level of results.

However, they mentioned that one area where reporting could be improved was the impact of business combinations, specifically the impact of current year profit and theoretical profit.

“We are still disappointed with the overall quality of forward looking information. While making predictions in this economic climate is difficult a greater level of disclosure of factors likely to influence future profitability would have been appreciated,” concludes Alexandra Watson, associate professor at the University of Cape Town and an adjudicator of the survey.

---

 

Motivation for rankings of top 10 listed companies

1. Standard Bank
Standard Bank produced a financial report of an exceptional all round quality. Outstanding aspects were the explanation of the implementation of Basel II and the reconciliation to the GAAP requirements in IFRS 7. A good risk report, clear identification of the impact of a major acquisition during the period and the analysis of the profit and volume were all positively reviewed. The abridged sustainability report together with the detailed information available on-line are of a high quality. The statutory financial statements are of an exceptional quality, in particular the formulation of accounting policies and the excellent disclosures in relation to segment reporting and financial instruments were noted by the adjudicators.

2. Sasol
The finance director’s report still ranks as one of the most useful extracts of the financial reports that we look at; it is well structured, rich in information and easily understandable. The financial report has an appropriate emphasis towards issues of particular relevance to the group and the information is particularly accessible as a result of good structure and layout combined with a variety of different forms of graphic presentation. Early adoption of some new IFRS was also commended.

3. Nedbank Group
This financial report includes an impressive risk and capital management report. Detailed information is provided in an accessible format, partly as a result of the extensive use of diagrams, tables and graphs. Disclosure of the requirements of Basel II was well handled, including a useful linkage to the requirements of IAS 39 and comparison with the requirements of Basel I. Appropriate emphasis was placed on the impact on the performance over a longer period than is the norm in order to highlight the impact of a turnaround strategy implemented in 2004.

4. Group Five
This 60 page financial report is a good illustration of what we consider to be the way forward for financial reporting. The financial report includes all the key information, presented in a variety of appropriate graphic and other formats. The financial report is backed by the inclusion of a disk containing more detailed information, making the summarised and detailed information very accessible. This company made particularly good disclosure of its long term strategy, strategic risks and financial goals. Another positive factor was the linking of the 2008 disclosures to the risks identified in the 2007 financial statements. It was probably one of the best with forward looking information, although we acknowledge that this may be relatively easier given the long term nature of its product cycle.

5. Apexhi Properties
Probably a surprise inclusion in the rankings is a financial report that is innovative and informative. Though not directly relevant in the ranking the humour, art and references to music of different eras are worth mentioning. The ranking is awarded as we all felt that this is a company which explained a particularly complex capital structure exceptionally well. The simplicity of their business, the high level of disclosure of the factors driving the gross margins, a relatively simple type of business with a great deal of disclosure of the factors driving the gross margins, coupled with meaningful forward looking information all contributed to their top 5 Ranking.

6. ABSA Group
We liked the graphic presentation of the key financial and strategic objectives presenting the actual results of 5 years together with targets and meaningful benchmarks e.g. return on equity compared to cost of equity. This is a lengthy (412 page) but well structured report that would have been even longer had the bulk of the sustainability report been included in the report. This is a good example of the inclusion of key information in the report, with more detailed information available in the notes, particularly with respect to employment equity and other employee related issues. The accounting policies are particularly detailed and clear. This and a more detailed segment report contributed to the ranking of ABSA.

7. Truworths International
This financial report provides meaningful information on the factors that are particularly relevant to its key risks, including bad debts, inventory turnover, write downs and margins. The disclosure in relation to the management of the risk and cost of credit is particularly good and is of particular relevance given the economic climate. The format of the risk report, including clear identification of risk status, is a useful.

8. Barloworld
The Barloworld report contains good segmented disclosure and includes particularly well structured and comprehensive disclosure in relation to accounting policies. The financial report is well structured and includes much detailed information. The sustainability report includes more quantitative information than most and in many cases includes comparative information.

9. Massmart Holdings
The information in this financial report is particularly accessible, partly as a result of useful indexing per category of stakeholder and the emphasis placed on the particularly relevant information. We especially liked the financial directors’ report in this annual report; it covers the key issues relating to the performance of the group and is cleverly cross referenced to the relevant detail in the group financial statements. The reporting on the underlying business, factors driving movements in gross profit and the impact of the economic climate was particularly well handled.

10. Gold Fields
We particularly liked the detailed information available in the sustainability report; so many of those reports contain general comments that lack substance, but that certainly does not apply to Gold Fields. Disclosure includes a clearly identified and detailed account of objectives, achievements and future targets in relation to key sustainability issues. The inclusion of a useful management discussion and analysis at the introduction of the financial statement section of the annual report provides useful insight into the reported figures, particularly as it includes relevant extracts from the financial statements.

---

This year’s mark plan comprised 5 categories as follows:

Presentation (approximate weighting 8%)

This represents the smallest category on the mark plan and marks are awarded for the timely release of the annual report as well as overall impressions as to the layout and accessibility of information and innovation shown in presenting the annual report.

Performance review (approximate weighting 28%)

This section deals with the non-statutory section of the annual report and awards marks for a review of operating performance, commentary on the business environment and trends and the quality of segmental information, particularly where companies have divisions with significantly different risk profiles. More credit is given to information that is relevant and presented in a manner that is understandable.

Financial disclosure (approximate weighting 18%)

The emphasis in this category is not on compliance with Generally Accepted Accounting Practice (GAAP) and International Financial Reporting Standards (IFRS) as this is assumed. The mark plan focuses on the clarity, relevance and understandability of the accounting policies that are being applied, the accounting disclosures that are useful taking into account the nature of the business, disclosures of areas where judgments and estimates have been applied and early adoption of or discussions on the impact of accounting standards that are not yet effective.

Companies are penalised where key accounting policies, estimates and disclosures are omitted.

Governance and sustainability issues (approximate weighting 28%)

This category looks at corporate governance issues, with particular emphasis on the remuneration of directors. In addition, key issues in this section are employment equity, black economic empowerment, health and safety and effective use of natural resources.

Forward-looking information (approximate weighting 18%)

Forward-looking information is important to users of the annual report. This is often an area where very little detail is provided. In this category marks are awarded for disclosures of the business strategy and objectives, financial targets and the risks that the company faces.

Finally, the adjudicators would be the first to acknowledge that others would produce a different mark plan that would doubtlessly yield different results. They do, however, believe that this process clearly differentiates between those companies that exhibit a high level of corporate reporting and those that do not. They therefore hope that this process has resulted in a ranking that gives credit to those that are doing well and encourages those that do not, to improve.