The Future of Corporate Reporting—Creating the Dynamics for Change
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Rapid changes in the broader business environment have increased concerns over whether corporate reporting continues to fulfill its objectives. Currently there is no common view on what the problems are, let alone how to adapt corporate reporting to fix them in order to achieve a better depiction of the economic position and performance of entities. The Federation of European Accountants (FEE) recently issued The Future of Corporate Reporting—Creating the Dynamics for Change, which aims to stimulate a broad discussion and all stakeholders are invited to participate.
The momentum for change towards better communication and improved accountability of companies is obvious from the increasing public debate on, and interest for, corporate reporting. Corporate reporting is an essential means by which companies communicate decision making information with stakeholders, as part of their accountability and stewardship obligations.
Corporate reporting, like other business activities, should keep pace with the developing economic reality and address the needs of a wide stakeholder audience.
Technology plays an important role in how corporate reporting evolves, as it both drives and enables change. Technology is already rapidly changing the business landscape, disrupting existing business models, and yet corporate reporting does not seem to be keeping up with these developments. Undoubtedly, technology will significantly change the way that corporate reporting is prepared and the way that it is delivered to its audience.
Changes in technology lead to an increased access to, and interest in, corporate affairs and as a result the audience for corporate reporting is continually growing. It is envisioned that at some point, corporate reporting needs to properly address the needs of this ever wider audience.
Building on the premise of a growing audience, the content of corporate reporting should expand to address the wider needs for corporate information, both regarding financial and non-financial matters with a short and long-term focus.
Financial information reporting seems to be partly losing its relevance among its intended users. Many argue that financial information reporting is not sufficiently timely and provides an overload of information. More flexibility in the latter might result in financial information reporting regaining its relevance.
Non-financial information reporting is at an early stage of development and, therefore, it faces challenges that derive from different standard setters providing a patchwork of guidance. Coordination among them, as well as international convergence and decisive leadership, are key to overcoming the main challenges for non-financial information reporting.
A new approach to corporate reporting is suggested in the FEE paper, whereby a company produces an executive summary of its corporate affairs, supported by more detailed information: CORE & MORE. It is envisaged to replace all corporate reports that exist today. The CORE would serve as the executive summary, where only the relevant and material matters would be presented. MORE reports could include additional information about the entity while some would support the information reflected in the CORE. The content would depend on the company’s assessment of its stakeholders’ information needs. Dynamic, periodic, and/or ad-hoc elements could be a way for updating the CORE & MORE where each part is updated independently without affecting the other parts.
As with the other aspects of corporate reporting in the future, technology will be critical. The CORE & MORE model would be heavily dependent on the use of technology, especially if it would support the proposal for the three distinct elements.
A prerequisite for a change in corporate reporting in the future is the support from all financial reporting constituents. One of the most important elements is the approach from policy makers and standard setters. They need to allow room for innovation and experimentation in corporate reporting. A comparison of the results from a ‘test group’, where innovation is allowed, to the results from the general population is one of the best approaches to assess the results of experimentation. Having said that, policy makers and standard setters need to ensure an adequate level of standardization to ensure a meaningful level of comparability. Seeking the balance between innovation and standardization is the most challenging aspect in developing the future of corporate reporting.
The FEE Cogito Paper aims to stimulate the debate among different constituents about the future of corporate reporting. As the process of communication and accountability has consequences for a broad range of constituents, the suggestions in this Paper should be of interest to a broad range of stakeholders. The FEE Cogito Paper asks questions inviting constituents to participate in the debate for the future of corporate reporting. The consultation period is open until June 30 2016 at http://bit.ly/15futurecorprep.