A new report, Financial Reporting Supply Chain: Current Perspectives and Directions, emphasizes that significant efforts to strengthen financial reporting in recent years have resulted in improvements in three key areas: corporate governance, the process of preparing financial reports, and the audit of financial reports. However, despite improvements to the financial reporting process, the report points out that the understandability of financial reports has not improved.
Commissioned by the International Federation of Accountants (IFAC), the report's findings are based on an independent global survey of participants in the financial reporting supply chain. The survey, conducted in 2007, sought to determine the extent to which the financial reporting process, and financial reports themselves, have improved and where there is need for further action to make them more relevant. More than 340 participants from all sectors of the financial reporting supply chain worldwide - including investors, preparers, company management and directors, auditors, standard setters, and regulators - took part in the survey. In addition, interviews were conducted with 25 high-level participants in the supply chain, including investors, company directors, CFOs, and regulators. The project was led by Norman Lyle, who recently retired as group finance director of Jardine Matheson Limited in Hong Kong.
Among the key findings, the survey found that corporate governance has improved, fueled by an increased focus on corporate governance and changes to company codes and standards. In commenting on improvements to the financial reporting process, survey participants indicated that convergence to international standards, enhanced regulations governing financial reporting, and improved internal control over financial reporting systems all contributed to enhancing the reliability and relevance of the reports. Improvements to audit standards and practices and strengthened independence rules were seen as having contributed to enhanced audit quality.
"Despite the strengthening of the financial reporting process and the many improvements made, there is still much to be done to meet the needs of investors and other stakeholders," points out Norman Lyle, Chair of the Financial Reporting Supply Chain Project. "Survey respondents raised concern about the reduced usefulness of financial reports due to complexity and the increased focus by companies on compliance instead of reporting on the essence of the business."
Recommendations for Action
To address the usefulness of financial reporting, survey participants recommended:
- Improving communications among participants in the financial reporting supply chain;
- Producing financial and business information that is relevant, reliable and understandable;
- Including more business-driven information in financial reports; and
- Promoting the use of technology to enable users to compile their own information.
"IFAC is already working to address these challenges," emphasizes Ian Ball, IFAC Chief Executive Officer. "At its meeting in New York City last month, the IFAC Board approved a new project that will analyze actions currently being taken to address the suitability of business reporting and identify areas for future development. This project will take the findings of the financial reporting supply chain report to the next stage and deliver specific recommendations for further action."
The full report, Financial Reporting Supply Chain: Current Perspectives and Directions, is available on the IFAC website.
About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 157 members and associates in 123 countries, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. Through its independent standard-setting boards, IFAC sets international standards on ethics, auditing and assurance, education, and public sector accounting. It also issues guidance to encourage high quality performance by professional accountants in business.