Corporate reporting to come under scrutiny

If South African companies want to avoid the type of criticism that has followed the current financial crisis internationally they will need to reassess the information they provide to their shareholders.

Corporate reporting could undergo major changes if shareholders begin to demand greater access about the financial health of the companies that they invest in, explains Garth Coppin national director of accounting at Ernst & Young.

“In the past companies have relied on the their annual reports to provide information to the market and while the annual report still has a place it is not able to provide investors with all the information they need in a constantly changing market,” he comments.

“We have seen companies that were in seemingly robust health fall into financial difficulty in just a few weeks or even months and for shareholders the frustration is that waiting for a report that only comes out once a year to get a detailed picture of the company’s health is considered too long,” he says.

“While listed companies in South Africa report every six months there could be a call for such companies to move to a quarterly reporting schedule as occurs in some overseas markets. This is something that the gold miners have been doing for many years and it would allow for a more transparent reporting system for all listed companies,” he adds.

Coppin says that one of the traits that some companies indulge in is to apply a different approach when reporting depending on the strength of the market.

“In a strong economic climate such companies might focus their reporting on the successes on the internal strengths of the company, but when the market shifts these companies might focus on external factors instead,” he says.

With accounting becoming ever more complex and the higher levels of specialisation needed to prepare annual reports, Coppin notes that it is becoming more costly to ensure annual reports comply with accounting standards. This is happening at the same time as regulators around the world are taking a closer look at requiring companies, especially banks, to set aside more of their profits for capital adequacy purposes.

The one area that is likely to come in for special scrutiny is the issue of remuneration. This is especially clear given the massive backlash from politicians and the public at large to the bonuses given to some business leaders who were at the heart of the crisis and companies that had received substantial bailouts. Much of this outcry was simply as a result of the lack of transparency regarding the criteria used to determine bonus payments.

“The simple issue is that much of the information that the market is looking for is already reported internally and it would simply be an issue of exposing some of that financial information to the markets in a controlled way.”

The global economic crisis has already triggered off a new wave of activism from regulators, shareholders and governments and those responsible for the reporting function will need to be ready for this.