Title: Non-financial disclosures in the annual report
1Non-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
2Presentation 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?
3Aspects 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)
4Why 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
5Why 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
6The 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?
7The 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.
8The 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
9New 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
10Risk, 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
11The 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)
12The 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)
13The 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
14The 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.
15EU 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
16Parallel 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.
17How 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
18Conclusions - 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?
19Conclusions - 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.
20References
- 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
21References
- www.acca.org.uk/resources (for TR)
- www.acca.org.hk
- IASC www.iasc.org.uk
- Global Reporting Initiative (GRI)
www.globalreporting.org -