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Non-financial disclosures in the annual report

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KPMG Beyond the Numbers Why should non-financial disclosures matter? 2 risk can be controlled but not easily financially quantified mainstream corporate ... – PowerPoint PPT presentation

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Title: Non-financial disclosures in the annual report


1
Non-financial disclosures in the annual report
  • The Second Asian Roundtable on Corporate
    Governance
  • (June 2000, Hong Kong)
  • Roger Adams
  • Head of Technical Services and Research
    Association of Chartered Certified Accountants

2
Presentation overview
  • Aspects of non-financial disclosure
  • Why should non-financial disclosures matter?
  • The Turnbull Report on Internal Control (UK -
    1999)
  • New approaches to stakeholder recognition in the
    UK
  • Risk, internal control and the Operating
    Financial Review
  • EU recommendation on environmental disclosure
  • Parallel initiatives - the Global Reporting
    Initiative (GRI)
  • How are these changes being reflected in the
    education and training of accountants?

3
Aspects of non-financial disclosure
  • Mainstream corporate governance disclosures
  • Turnbull / internal control / risk related
    disclosures
  • Other aspects
  • environmental
  • social
  • economic
  • human rights
  • fraud and corruption (ethical)

4
Why should non-financial disclosures matter? 1
  • Leading companies are beginning to build
    stakeholder trust and simultaneously improve
    their business performance by measuring and
    reporting on both financial and non-financial
    indicators related to such issues as
    environmental management, worker relations and
    social responsibility. In fact, they are creating
    a new kind of competitive advantage by linking
    value and values, to position themselves as the
    companies of choice among customers, employees,
    investors, suppliers, business partners and local
    communities.
  • KPMG Beyond
    the Numbers

5
Why should non-financial disclosures matter? 2
  • risk can be controlled but not easily
    financially quantified
  • mainstream corporate governance issues (board
    structure / auditor independence / voting rights)
  • social issues (labour policies / human rights)
  • ethical issues (bribery and corruption / money
    laundering / codes of conduct)
  • environmental issues (global warming / GMOs /
    contaminated land)
  • all exposed in our CNN / goldfish bowl world
  • trend is towards fuller coverage of above issues

6
The Turnbull Report on Internal Control (UK -
1999)
  • Are the significant internal and external
    operational, financial, compliance and other
    risks identified and assessed on an ongoing
    basis?
  • Does the company communicate to its employees
    what is expected of them and the scope of their
    freedom to act?
  • Are there established channels of communication
    for individuals to report suspected breaches of
    laws or regulations or other improprieties?

7
The Turnbull Report on Internal Control (UK -
1999)
  • Are there specific arrangements for management
    monitoring and reporting to the board on risk and
    control matters of particular importance?
  • Compliance with Turnbull requires a board to
    consider all the above issues and more.
  • Significant risks may include market, credit,
    liquidity, technological, legal, health, safety,
    environmental, reputation, and business probity
    issues.

8
The Turnbull Report on Internal Control (UK -
1999)
  • Accreditation mechanisms such as
  • ISO 14000,
  • SA 8000 and
  • AA 1000
  • have a significant role to play in enabling
    boards to fulfil their newly enlarged
    responsibilities under the Combined Code

9
New approaches to stakeholder recognition in the
United Kingdom
  • Company Law Review 1999 - 2002
  • new responsibilities for directors? pluralism vs.
    enlightened self-interest
  • enhanced disclosures in Operating and Financial
    Review ( US MDA)
  • Other initiatives
  • integrated reporting approaches (The Centre for
    Tomorrows Company)
  • new regulations for pensions fund trustees
    dealing with explicit recognition of social and
    environmental issues

10
Risk, internal control and the Operating
Financial Review
  • What is the appropriate vehicle for these new
    types of disclosure?
  • - a separate report?
  • the unaudited section of the annual report and
    accounts pack?
  • the audited financials themselves?
  • The Management Discussion Analysis / MDA
    section ( UK the Operating and Financial
    Review/OFR) - this seems to be the most
    recommended (though least used?) route open

11
The OFR now
  • A framework for the directors to discuss and
    analyse the businesss performance and the
    factors underlying its results and financial
    position, in order to assist users to assess for
    themselves the future potential of the business
  • (UK ASB 1993)

12
The OFR now
  • operating review results for the period,
    dynamics of the business, investment for the
    future, profit for the year, total recognised
    gains and losses and shareholders perspective
  • financial review capital structure and treasury
    policy, taxation, funds from operating activities
    and other sources of cash, current liquidity,
    going concern, balance sheet value (inc..
    intangibles)

13
The OFR in the future - 1
  • i. A fair review of the development of the
    companys / groups business over the year and
    position at the end of it, including material
    post year end events, operating performance and
    material changes
  • ii. The companys purpose, strategy and
    principal drivers of performance
  • iii. An account of the companys key
    relationships, with employees, customers,
    suppliers and others, on which its success
    depends.
  • iv. Corporate governance - values and structures

14
The OFR in the future - 2
  • v. Dynamics of the business known events,
    trends, uncertainties and other factors which may
    substantially affect future performance
  • vi. Environmental policies and performance,
    including compliance with relevant laws and
    regulations
  • vii. Policies and performance on community,
    social, ethical and reputational issues
  • viii. Receipts from, and returns to shareholders
  • Modern Company Law for a Competitive Economy UK
    Company law Review Steering Group.

15
EU recommendation on disclosing environmental
issues in the annual report
  • Commission Recommendation On the recognition,
    measurement and disclosure of environmental
    issues in the annual accounts and annual reports
    of companies - in draft from June 2000
  • Covers mainstream (IAS 37 / FRS 12) recognition
    and measurement issues
  • proposes new disclosure requirements to cover
    environmental policies, improvements, resource
    use and emissions, expenditure to PL and B/S
  • A common core of social indicators may follow in
    1 - 2 years

16
Parallel initiatives - the Global Reporting
Initiative (GRI)
  • Global guidelines for reporting on economic,
    social and environmental aspects of corporate
    activity (i.e. sustainability or the triple
    bottom line - see handout)
  • ACCA US CERES / Tellus Institute CICA UNEP
    other European, North American, Japanese,
    Indian and South American organisations
  • ED issued 3/99 - revised guidelines due June /
    July 2000. Permanent body from 2001.

17
How are these changes being reflected in the
education / training of accountants?
  • base accounting and auditing examinations on
    international standards
  • set out to green the examination syllabus
  • develop new programs e.g. international diploma
    in corporate governance
  • deliver on all these issues regularly through
    corporate communications channels web-site,
    members journal etc
  • sponsor research and influence standard setters
  • in the case of the GRI, become a standard setter

18
Conclusions - 1
  • Greater accountability transparency
  • More evidence of stakeholder dialogue
  • Growth of integrated or triple bottom line
    reporting
  • More emphasis on values based reporting and
    reporting of values
  • Expanding the role of the OFR/MDA
  • Growth in volume of socially responsible
    investment
  • Accountants best placed act as corporate
    governance referees?
  • Accountantsimplications for their education and
    training?

19
Conclusions - 2(from Beyond the Numbers - KPMG
2000)
  • Companies are recognising that failure in many
    non-financial areas can heavily damage the bottom
    line, perhaps irreparably
  • Because most general business risks derive from
    non-financial factors, organisations have found
    that how they manage those business risks can
    influence their financial success.

20
References
  • Beyond the numbers KPMG
  • Risk in the Boardroom Canadian Institute of CAs
  • Making Values Count ACCA
  • CACG Guidelines - principles for corporate
    governance in the CommonwealthCommonwealth
    Association for Corporate Governance
  • Reporting Guidelines Global Reporting
    Initiative
  • The Corporate Reporting Jigsaw Centre for
    Tomorrows Company
  • UK Company Law Review

21
References
  • www.acca.org.uk/resources (for TR)
  • www.acca.org.hk
  • IASC www.iasc.org.uk
  • Global Reporting Initiative (GRI)
    www.globalreporting.org
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