Embracing financial transparency: the new era for Financial Executives.
Companies that succumbed to scandal were awash in lethal brews of overly aggressive financial targets, coupled with a tone at the top that not reaching those targets was unforgivable.
How do we get the culture right? We make transparency the objective--not merely meeting analyst expectations. We foster intellectual honesty, allowing existing problems to be resolved with integrity and clarity--rather than deceit and obfuscation.
Improving the transparency of financial reporting means going beyond what is required, and disclosing what is meaningful. Vital to the rebuilding of investor confidence and protection of our capital markets, it could not be more important.
What steps should companies take to embrace transparency? Essentially, we need to provide the reader of our financial statements with information as though he or she were internal to our business.
Through the Eyes of Management
In its interpretive guidance on Management's Discussion and Analysis, the Securities and Exchange Commission (SEC) opines that MD & A should present a company's business as seen through the eyes of that business's managers, who should:
* Present the disclosure with the most important information the most prominently.
* Avoid unnecessary duplicative disclosure that can overwhelm readers.
* Start with an executive-level overview, providing context for the remainder of the discussion.
Financial reporting must always aim to shed light on all aspects of a business that contribute to its success or failure: competition, market position/share, operations, results, future prospects. Proper financial disclosure needs to be much more than simply the five-year data the SEC requires ... going beyond what is required to what is needed. While this guidance is meant to apply to SEC registrants, it is relevant to private companies who provide disclosure to stakeholders as well.
Transparent financial disclosure is relevant and timely information that lets users make informed decisions. It is an unbiased, reliable and verifiable representation of events, comparable to previous periods and other companies. It is understandable, presented in an organized manner, and without jargon. It has a powerful predictive value, enabling users to evaluate the likely levels of recurring earnings and assess relevant risk and opportunity. It is very potent, which is why the Enrons of the world stayed away from it!
Best practices for achieving transparency in your MD & A include; 1) give MD & A a user orientation; provide forward-looking information; 2) speak in plain English, in the first person; 3) inform your reader as though he/she were an internal part of your business; 4) distill the financial statements down to simple tables highlighting key data; 5) write a user-friendly overview providing perspective on your business model; 6) increase disclosures related to liquidity and capital resources; 7) provide online financials linking to in-depth discussions of key items; 8) analyze segment information; 9) discuss key performance indicators; and 10) establish a formal benchmarking process.
XBRL Provides Unique Discovery Capabilities
Today, we have a powerful new tool to aid us in effecting transparency: XBRL, or eXtensible Business Reporting Language. An international standard for defining financial terms consistently, XBRL enables simultaneous presentation of related financial statement and footnote information, reducing incentives for firms to choose footnote disclosure to minimize the impact of negative information and allowing for differences in financial statement presentation, disclosures and accounting.
XBRL-formatted reports give investors newfound discovery capabilities. They can compare the underlying financial realities with the click of a mouse--searching documents published online or filed with regulatory agencies to fully understand a company's disclosure history and compare companies based on common accounting practices. As a member of the International Accounting Standards Board Advisory Committee, I'm pleased to say that XBRL appears to be embraced by the International community.
Yet, no high-tech software tool or list of best practices can ensure transparency. Former SEC Chairman Arthur Levitt has said that "strong corporate governance ... is the blood that fills the veins of transparent disclosure." And good corporate governance, in turn, derives from a sound and ethical tone at the top and unimpeachable integrity. Only thus will we achieve the full transparency our citizens and our markets demand.
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|Date:||Jun 1, 2004|
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