A Tale of Better Communication
Accountants and auditors usher in 2017 with trepidation as the profession braces itself for the dawn of a new era of corporate reporting. This is courtesy of the triumvirate implementation of the Disclosure Initiative, new auditor’s report and sustainability reporting.
These changes were born from the desire of capital market participants to obtain better understanding of corporations as well as communication of value by corporations to various stakeholders. They mark a paradigm shift for the profession to explore contemporary communication methods to improve understanding of corporate annual reports.
The Disclosure Initiative was initiated in 2013 by the International Accounting Standards Board (IASB) and presented as a central thrust of ‘Better Communication’ by the Chairman of the IASB in June 2016. It represents a facelift of financial reporting as an effective communication tool, as opposed to the current ‘tick-the-box’ approach of voluminous disclosures and masqueraded financial performance reporting.
With the Disclosure Initiative, corporations would now only need to disclose material information in any order that is most relevant to shareholders. Financial statement discourses are thus effectively decluttered in a 4R approach: Remove, Reorder, Regroup and Re-emphasise.
This Initiative would hopefully address the needs of users of financial statements for simple, non-jargon disclosures to accompany the primary financial statements in a manner reminiscent of a student reading poetry by William Shakespeare.
New Auditor’s Report
Synonymous with the term ‘Key Audit Matters’ (KAM), the new auditor’s report unveils the mystery surrounding the black box of auditing financial statements. It attempts to communicate risk assessment and responses of the auditor arising from the audit to shareholders.
Published as a final standard in January 2015 by the International Auditing and Assurance Standards Board (IAASB), the enhanced auditor’s report has often been hailed as a silver bullet to influencing the perceived value of auditing across jurisdictions that have adopted this new approach.
Moving forward, auditors are required to include in their reports KAM arising from their audits, as well as expand elaborations on the going concerns or the ability to continue operating in the near future of corporations. KAM refers to matters of significant risk and judgment encountered during the audit that requires further attention by the auditor, thus enabling shareholders to place themselves in the shoes of the auditors and understand the practical challenges faced by auditors.
Introduced by the Bursa Malaysia in October 2015 as the next generation reporting tool after previously requiring corporate social responsibility (CSR) disclosures, sustainability reporting revolves around the underlying triple P (People, Planet, Profit) elements that are not comprehensively communicated within financial statements.
Central to the idea of sustainability reporting are the identification and prioritisation of material sustainability matters across three themes: environmental, economic and social (EES). Whilst financial statements could encompass reporting of economic matters in terms of profits, it is well understood today that profits are not the only yardstick of measuring economic matters to corporations, thus leading to the need for sustainability reporting.
It is widely expected that the seismic shift from traditional CSR disclosures to sustainability reporting would encourage corporations to embed transformational and strategic sustainability matters as part of corporate strategy and stewardship.
It is also envisaged that the implementation of sustainability reporting would gradually set the tone and base for the introduction of Integrated Reporting (IR) in the future as another comprehensive communication tool.
With the lockstep introduction of these changes, aspiring accountants and auditors would certainly do well to embrace broader knowledge beyond International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA) as the profession marches into the realm of uplifting communication of corporate stories as value added for the benefit of stakeholders.