Accountancy currently finds itself in the eye of the hurricane. Financial scandals, changes in the form of Basel II and International Accounting Standards (IAS), and stock market turmoil are bringing about the most sweeping changes ever seen at the same time.
Such is the upheaval that accountancy now makes front-page headlines in national newspapers and on prime-time news. Who would have thought it?
Central to resolving these issues are a number of recurring factors: the imperative to report faster, more accurately, with real flexibility and with irrefutable clarity.
No surprise, then, that regulators and the EU itself are looking at the US-style quarterly reporting model as a way to increase market confidence, and to keep investors better informed on performance. But it’s a trend that is meeting with a great deal of resistance in some quarters – particularly from the FTSE 100 Group of FDs. With IAS to consider, they argue, quarterly reporting could be a step too far. There’s also an argument that the scandal surrounding the industry started across the Atlantic, so why move closer to US standards? Shouldn’t we be sticking to the tried-and-tested European route?
Reporting every quarter is nothing new to organisations with US listings – it’s an ongoing requirement for them – but others see it as a painful exercise, not only initially during the implementation, but each time the quarter-end approaches. And that’s not to mention the round of analyst meetings that reports inevitably bring with them. So rather than bringing about more faith, it could just be a case of more work.
That attitude is understandable. We all know the amount of time that half- and full-year reporting eats up, and the 16-hour working days that this can bring with it. Furthermore we are aware of the pressures of new corporate governance and IAS, and the resources that will be consumed. But that doesn’t mean that it should be dismissed out of hand. Many organisations are considering quarterly reporting out of choice rather than obligation, which suggests it is more than just a case of coming into line with US guidelines.
David Jones, associate partner in financial analytics at IBM Global Services aregues the positives of quarterly reporting outweigh the negatives: “On the whole, the issue is only really with those companies that don’t have listings in the US. For them, quarterly reporting can seem like extending the reporting nightmare throughout the year, rather than the two occasions where it currently happens. But I think it’s far more valuable to look at the experience of those who already have the US requirement – and they support it wholeheartedly, almost to a man.”
Once the routine is established, quarterly reporting adds real value by keeping all interested parties updated regularly, Jones says. To those who argue it encourages short-termism by forcing organisations to look only as far ahead as the next set of results, Jones replies: “Quarterly reporting should never shorten overall strategy and vision. It’s purely a way of fostering better communications. For example, those businesses that experience some degree of seasonality in their industry will have to communicate this to investors and the market so that they understand and will expect some short-term fluctuations. In my view that’s no bad thing, both for individual organisations and the investment community as a whole.”
Jones has a point. Quarterly reporting should reduce the element of surprise that often results from less frequent availability of information. It’s this factor that often brings unwelcome pressure to bear on management for instant fixes to problems.
Jones also doubts the validity of the objection to the extra effort required for quarterly reporting: “Of course, if the cost of this enhanced communication is deemed disproportionate to the time, money and pain which goes into setting up and maintaining a quarterly reporting model, it will never happen. But, in my view, it’s a case of perception being completely out of kilter with reality.”
By moving over to quarterly reporting, businesses will get faster at the whole process and catch more errors, leaving more time for the important value-added aspects of analysis, so businesses can really see the message behind the numbers.
Equally, adopting this model, and the consequent frequency of performing financial consolidation, will invariably instil even greater levels of discipline in finance departments, which creates more confidence on both sides of the corporate walls and means more open and transparent communication with all audiences.”
Another objection is that there’s already too much compulsory compliance work going on, so why add to the pressure by voluntarily doubling the number of reports that an organisation produces?
Looked at in this way it may seem crazy, but things are far from black and white. In fact, in many organisations there are parallel reporting processes for management information, which are needed at least every month, and also half-yearly external reporting. In order for the move to quarterly reporting to be a benefit, rather than a burden, organisations should consider unifying the processes.
For example, management reporting can benefit from the rigour of external reporting, which in turn, can take advantage of the efficient dataflows of management reporting requirements. Overall, it may even be possible to realise the three ultimate goals: cost savings, higher quality internal reporting and more frequent external reporting. Unifying these processes from an organisational viewpoint will be easier if the business has reporting technology in place which uses the same infrastructure and data repository for both types of reporting.
And let’s not forget the move to IAS. According to a recent PwC's report ‘2005 – Ready or Not’, 60% of those companies using national GAAP said that the move to IAS would encourage them to adopt new reporting models such as the collection of non-financial KPIs. If the right software and infrastructure are in place, then automation and integration will take much of the strain.
As the need to carry out quarterly reporting drives companies to automate financial data collection and validation, we should see not only an increase in the speed of the reporting process but also an increase in data quality and integrity.
It would appear that underlying systems are crucial if quarterly reporting is to become a positive move, rather than a great deal of work. Of course, this will take time to set up initially, but unifying reporting processes, automation, faster and easier consolidation and reconciliation will deliver enhanced consistency and accuracy of data. And that’s not to mention the increased transparency of audit trails, a major objective of every organisation in the current environment.
We have to accept that the world is moving towards this model; recent problems and scandals have just accelerated it. Isn’t it better to just accept the change in market and regulatory sentiment, implement the changes proactively and make the most of the benefits that can be realised?
John Taylor is the managing director at Cartesis