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)

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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)

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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)

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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

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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

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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.

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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

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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?

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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.

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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

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References

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