|EXECUTIVE SUMMARY |
| ENHANCED BUSINESS REPORTING (EBR) WILL IMPROVE the quality of information companies provide so investors can make better decisions about a company’s situation and prospects. The EBR Consortium is leading the effort to improve the quality, integrity and transparency of nonfinancial information.
MEMBERS OF THE EBR CONSORTIUM WILL DEVELOP a voluntary, global disclosure framework for the presentation of the nonfinancial components of business reports, including key performance indicators. The new model’s focus won’t be on historical information, but on information that delivers a broader view of a company’s current and future performance.
EBR WILL HELP COMPANIES BECOME MORE EFFICIENT as the information that management monitors to optimize internal performance begins to form the basis for external reports, subject to reasonable limits for commercially sensitive information.
TWO GROUPS ARE LOOKING AT THE IMPACT OF EBR on public and private companies. The EBR Public Company Task Force has prepared sample reports showing how companies can use EBR and is studying ways to simplify reporting requirements. The AICPA’s Private Companies EBR Task Force is looking at similar areas and at ensuring that EBR is scalable for privately held businesses.
THE ACCOUNTING PROFESSION HAS A KEY ROLE to play in protecting the public interest and restoring trust in the financial reporting process. As EBR makes business reporting more transparent, it will strengthen the economy and protect investors.
|ALAN ANDERSON, CPA, is senior vice-president of global project management and strategy for Franklin Templeton Investments in San Mateo, Calif. He was formerly senior vice-president of member & public interest at the AICPA. His e-mail address is firstname.lastname@example.org . PAUL HERRING, FCA, is a partner of Grant Thornton LLP. His e-mail address is email@example.com . AMY PAWLICKI is director of business reporting, assurance and advisory services at the AICPA. Her e-mail address is firstname.lastname@example.org . |
hich of these two drug companies is more valuable to investors and other stakeholders? Company A reported higher earnings every quarter for the past two years. Over the same period, company B invested a greater share of its revenue in research and development. Company B is expecting FDA approval to market a new drug that could improve the quality of life for millions and is working on several other products that could offer immense public and shareholder benefits. If you had to base your decision solely on their financial statements, could you make an informed assessment?
Research shows investors, creditors and company executives in fact don’t use financial statements as their primary decision-making tool. It also shows a widening gap between market and book value; Roland Burgman of AssetEconomics Inc. says 60% of the market value of the Russell 3000 index is attributable to growth expectations. Over time there has been a shift from companies that are predominantly asset-intensive to those that are asset-light and intangible-heavy. These findings demonstrate the need for a better way to document and report on such businesses.
Enhanced business reporting (EBR) responds to this need with reports that give all stakeholders the information they need to make better decisions about a company’s prospects. With EBR, the focus of communicating data shifts from a snapshot based primarily on financial, historical or lagging information to a model that incorporates both financial and nonfinancial data. EBR delivers a broader view of current performance and a greater understanding of an entity’s future. To this end all CPAs—CFOs, financial managers and internal audit directors at companies of all sizes, and external auditors of public and private companies—need to fully understand EBR, how it developed and what it offers.
|“Enhanced business reporting will help companies move beyond the earnings game, placing more emphasis on measures that give a better picture of their value, risks and opportunities.”
Robert Herz, CPA, Chairman
FASB, Norwalk, Conn.
The Enhanced Business Reporting Consortium ( www.ebrconsortium.org ) is leading the effort to improve information used for business decision making. Its mission is to improve the quality, integrity and transparency of information in a cost-effective and time-efficient manner. Members will develop a voluntary, global disclosure framework designed to be the “gold standard” in business reporting. This framework will provide structure for the presentation of nonfinancial components of business reports—including key performance indicators—and facilitate greater integration of financial and nonfinancial components on an industry-by-industry basis. (For more details, see “ The EBR Consortium .”) EBR will make it easier for stakeholders to understand the opportunities and risks a company faces and better reflect the complexities of modern business and the quality and variability of earnings and cash flows.
Value That’s Hard to Define
Market Value by Asset Type—S&P 500 (1982–1999)
Source: Intangible Assets and Value Creation by Juergen H. Daum, John Wiley & Sons, 2002.
TRANSPARENCY AND GOOD GOVERNANCE
With the advent of the Sarbanes-Oxley Act, corporate business activities and the reporting of them have become more transparent than ever before. In their 2003 book The Naked Corporation: How the Age of Transparency Will Revolutionize Business (Free Press), Don Tapscott and David Ticoll defined transparency as “the accessibility of information to stakeholders of institutions regarding matters that affect their interest.” CPAs and others can measure a company’s transparency by their ability to clearly understand its current state, its business strategy and its prospects for the future.
Enhanced transparency goes hand in hand with good corporate governance. In 2004 the Organisation for Economic Co-operation and Development (OECD) released its revised Principles of Corporate Governance. One of those five principles covers disclosure and transparency in reporting. It says, “Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis.” The corporate governance framework should “ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.”
The EBR framework will help management and boards of directors meet these disclosure needs and demonstrate their commitment to good corporate governance. Boards will be able to more easily provide the level of oversight shareholders demand. And with better information, regulators can ensure that capital markets function efficiently.
|“Quality reporting improves investment allocation for clients. It also increases value for the accounting profession as an evolutionary body interested in protecting the public interest by providing more relevant and useful information for decision-making purposes. Enhanced business reporting allows the profession to be enablers of the process and not just historians.”
Diane Conant, CPA, Partner
Conant, Nelson & Conant, Las Vegas
THE EBR VALUE PROPOSITION
CPAs and other financial professionals are trained to look at historical data to determine how an entity performs today or will perform in the future. However, financial statements are not intended to provide all the information investors and other consumers may require. Many performance factors that are not captured in traditional financial reporting also have an impact on a company’s current and future valuation.
EBR can deliver this information and provide many benefits to companies that adopt it. Increased transparency and higher-quality reporting enhance credibility and allow investors, analysts and other consumers of company information to better understand long-term strategy. EBR helps reduce the uncertainty that contributes to market volatility and a higher cost of capital. As the marketplace becomes better informed, the real/perceived pressure on companies to either meet or explain variations in quarterly earnings’ forecasts declines. This shared understanding lets investors and management take a long-term strategic view of a company’s performance and future opportunities, rather than a short-term focus from one quarter to the next.
Companies that adopt the EBR framework also will benefit from more efficient reporting processes as external reporting becomes more closely aligned with internal reporting. Information that CPAs and other financial managers monitor to optimize internal performance will form the basis for external reporting (subject to reasonable limits on commercially sensitive information). The more closely external reporting mirrors internal reporting, the more efficient it will be.
“Just as the preparer community stands to more clearly communicate its message, the assurance community can benefit from more services, with less risk, delivered more efficiently,” says Mike Willis, a partner at PricewaterhouseCoopers in Tampa and founding chairman of XBRL International. “We can also communicate our opinions more accurately, with greater reliability, and overcome misuse or misrepresentation of our work.” As the reporting model evolves with the changing needs of global capital markets, the assurance model must adapt itself accordingly. New or expanded assurance services will be necessary to allow auditors to issue opinions on EBR content, which will be delivered in an electronic format on a near real-time basis.
|“Microsoft is a strong supporter of the EBR Consortium and believes this initiative can have a significant impact on the usefulness of disclosures. XBRL will play a key role in the implementation of the consortium’s mission to improve the quality, integrity and transparency of information used for decision making. Investors will have better access to performance information because XBRL facilitates effective and timely analysis of that information.”
Director of external reporting
Microsoft Corp., Redmond, Wash.
In addition to developing the strategy for implementing EBR, the AICPA’s Special Committee on Enhanced Business Reporting created the Public Company Task Force and the Private Company EBR Task Force to conduct research and develop examples of what EBR reports might look like.
Chaired by Paul Herring, former AICPA director of business reporting, assurance and advisory services, the Public Company Task Force spent most of 2004 preparing several sample reports appropriate for public companies (available for review online at www.ebrconsortium.org/pctf_report_Introduction.htm ). The reports show potential approaches and demonstrate the potential benefits and commercial opportunities for stakeholders, including
The scope of enhanced business reports, with examples of the subject matter companies may consider including.
A range of alternatives for reporting on particular elements, such as whether to be very specific when disclosing the components of a strategy or to follow an open framework.
The reports also include sample disclosures for a number of industries, performance measures and an example of how companies can apply XBRL and other business reporting technologies.
Having completed this initial charge, the Public Company Task Force now is studying ways to simplify the reporting requirements for public companies within the context of EBR. After decades of increasingly complex reporting requirements, disclosures have become difficult for even the most sophisticated users to understand. Multiple reporting jurisdictions have created redundant disclosure requirements and reporting processes have become inefficient and error-prone.
The task force is developing guiding principles for business report disclosures and will apply them in reviewing existing reporting requirements and practice. Ultimately it plans to suggest ways standard setters and regulators can simplify business reporting. The goal is to improve the transparency of corporate reporting by focusing on the quality rather than the quantity of published information about a company.
Private company impact. The Private Company EBR Task Force, chaired by Harold Monk, CPA, CFE, managing partner of Davis Monk and Co. in Gainesville, Fla., is working on a similar effort, but with a view to ensuring the requirements of EBR are scalable for privately held businesses. “We want to make financial reporting more transparent at all levels and ensure users get the type of information they find important in their decision making,” Monk says. “We’re not sure these factors are always in the basic financial statements. The more financial statements can be used to help make decisions about loans and issuing bonds, the more this information will help business leaders make decision that are favorable to clients.”
Tom D. Foard, CPA, CFM, CMA, vice-president and CFO of Publishers Circulation Fulfillment Inc. in Towson, Md., also serves on the Private Company EBR Task Force. “In public companies the emphasis has traditionally been on the company venue and reporting models due to shares trading,” he says. “However there are plenty of other stakeholders in the public company environment—including bankers, credit agencies, vendors and employees—who deserve the same level of EBR public companies will get. We need an EBR framework that is scalable and relevant to any company setting, especially small business. The bottom line is to give small business the tools necessary to communicate their growth potential, including management’s expectations and how to mitigate risk and seize opportunities.”
This task force’s next step is to prepare sample reports, similar to those developed by its public company counterpart, to show what an EBR framework for private companies might include. Once these reports are complete, the group will get feedback from the preparer and creditor perspectives. Monk and Foard say challenges in scalability will be the primary focus.
Greater transparency in business reporting will help strengthen the economy and protect investors. The accounting profession has a key role to play in protecting the public interest and restoring trust. Participation in the EBR Consortium is critical to achieving these goals. Working with each other, members will develop and adopt a scalable EBR framework that meets the changing needs of all the individuals and organizations that participate in our 21st century capital markets.
|To find out more about the EBR Consortium and how you can participate, please contact Amy Pawlicki at email@example.com or visit www.ebrconsortium.org .