Over the last couple of weeks I’ve had an increasing number conversations about the future of finance, the role of analytics within it and the changing regulatory landscape that underpins it. This follows a summit event SAP held in Waldorf last month which gathered about 60 CFOs together with the International Integrated Reporting Committee (IIRC) to debate the topic and all this prompted me to cast my mind back to 2006 and a claim for “Real-time reporting”.
It was in November of that year when the world’s biggest accounting firms joined forces in calling for a radical overall of how companies report performance saying that the current way they communicate with investors is “broken” and “redundant”. The reason they put on a united front was because what they were proposing was radical and would result, if implemented in the most significant shake-up of the type of information that companies share with the markets since accounting standards and independent auditing were introduced in the 1930s.
Frustrated by the perceived irrelevance of today’s purely financial reporting and no doubt badgered by clients who baulk at the cost involved in producing quarterly financial statements, the Big 6 (PwC, Deloitte, KPMG, Ernst & Young, Grant Thornton and BDO) called for regulators and policy makers to move towards real-time, internet-based reporting, encompassing a wider range of performance measures.
Given the raft of regulatory changes, such as the Sarbanes-Oxley Act, that had been introduced to strengthen corporate reporting in preceding years, their call was not unsurprisingly met with some entrenched resistance, and in a number of letters to the FT at the time ridicule. However at the time I found it difficult to disagree with their basic premise that, “Current systems of reporting and auditing company information will need to change – toward the public release of more non-financial information customised to the user, and accessed far more frequently than is currently done.” I’ve essentially been a proponent of this ever since.
They pointed out the accepted wisdom that the increasing discrepancy between the “book” and “market” values of many listed companies means that content of traditional financial statements is of questionable use and that incorporating non-financial measures, such as measures of customer satisfaction, product or service defects, employee turnover and patent awards, would provide more valuable indications of a company’s future prospects.
Six years later and beyond the introduction of XBRL filing requirements from a number of regulatory bodies including the SEC not much has really changed. From the outside, one might have thought that the current economic uncertainty and the fragility of many once powerful global companies would have been an impetus for change. But one suspects that senior business leaders on advisory panels are pushing back on any suggested changes in regulation for the moment. Indeed, my own conversations with finance leaders shows little appetite for broader regulatory disclosure and would do the minimum needed to comply.
But while progress against their original vision may have been limited, the desire of many likeminded individuals and a few visionary organizations (who are voluntarily disclosing more data) to drive a change in the way we report has not. As the workshop in Waldorf demonstrated there is a renewed interest in seeing finance lead the way and helping create a framework by which companies share more insightful information with more people. It’s not about more reporting, but instead is about creating strategies which lead to longer term sustainable value and demonstrating that to stakeholders who care about this. I believe the IIRC would recognize, as do the pilot companies involved in the program that there is much to be done to develop and implement the concepts around integrated reporting but one thing that has not stood still in the last 6 years is the enabling technologies and I believe we are now ready to make this a reality for the enlightened.
By combining solutions such as Analytics from SAP for analysis and visualization with in-memory engines such as SAP HANA that both enables the rapid retrieval of transactional ERP data and real-time monitoring and compliance; analysts, investors and other interested parties could have immediate access to the latest financial and non-financial data and address the “big-data” challenges that are inherent with integrated reporting. As a result solutions also provide a framework to allow organizations to develop and manage their strategies in a way that leads to long term value. What’s more, they could present it anyway they wanted and with the help of XBRL tagging, make easy comparisons between competitors and peer groups. With SAP’s Mobility solutions, they could even do it on a hand held device.
As many companies are already using these technologies to manage their business, no one can credibly argue that integrated reporting cannot happen until the enabling technologies arrive on the scene. For me, the only remaining obstacle is global businesses’ appetite for change and that may be somewhat intransigent. But events such as the recent Facebook stock offering with prospective P/E ratios around 90 have helped fan the flames and will surely keep the momentum for change alive.