Saturday, May 28

‘Disconnect between business value and report content’

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KUCHING: There exists a disconnect between the key drivers of business value and the content of corporate reports such as annual reports and quarterly reports, saya KPMG Malaysia.

This follows Prime Minister Datuk Seri Najib Tun Razak’s keynote address at Invest Malaysia conference which touched on corporate reporting and the need to enhance the quality of information available to strengthen the capital market.

There have been a number of reporting initiatives in the wake of the global financial crisis aimed at finessing existing areas of financial reporting. There is no doubt that the quality of financial information is essential for effective investor decision making but a broader debate is required.

Looking at whether the current balance and focus of reporting is right for capital markets’ needs today, KPMG International examined 90 companies’ reports from around the world in the KPMG Survey of Business Reporting published recently.

The survey questions the historical focus of today’s annual reports and reveals a disconnect between the key drivers of business value and the content of reports.

“The extent of shareholder value creation is rarely visible in an annual report. As a result, investors have limited objective information with which to assess whether the longer term, value creating prospects of the business have been truly enhanced.

“The historical financial statements will tell you whether revenues are growing but they won’t necessarily tell you whether the customer base is getting stronger.

“Therefore, the financials may tell you how much money the company made, but not necessarily how the company makes money. And more importantly, whether the current year earnings provide a long term sustainable proposition for value creation,” noted Johan Idris, managing partner KPMG in Malaysia.

“Organisations may wish to tell its story through its eyes, using compliance disclosures as a foundation rather than an end point. There are many different public perceptions of integrated reporting and KPMG has been a long-time supporter of Integrated Reporting as a potential solution to better business reporting.

“A high level endorsement of Integrated Reporting as an approach to strengthen the capital markets by our Prime Minister recently gives a clear indication of the linkage between an organisation’s strategies, financial reporting, risk management and corporate governance with the environmental and social economic values in how it operates, as a critical holistic view in business reporting.

“With value generation and value sustainability as the underlying purpose and focus of the Integrated Reporting process it is clearly becoming a more investor centric report,” Johan saided.

While over half of audit committees consider customer focus to be one of their top three drivers of business value, only seven per cent of reports surveyed provided performance data on customer focus or satisfaction, the survey found.

Approximately 85 per cent of reports surveyed did not identify brand and reputation as a key risk. Meanwhile, 41 per cent of audit committees consider research and development as a top three value driver.

Notably, 15 per cent of companies provided objective measures of IP creation/capability.

While the average report in the survey was 165 pages long, it only provided an average of four operating performance measures; 21 per cent of reports surveyed did not provide any operating measures of performance.

According to KPMG, reports need to take a longer term view and provide a broader perspective to help investors take their assessments beyond current year earnings.