Regular readers of the President's Page will recall that in August (p111) he announced the launch of a major new campaign by the institute, under the banner of Information for Better Markets. The first report in the series, Prospective Financial Information: Guidance for UK Directors, was published in October and last month a second one appeared; this looks at new reporting models for business.
New Reporting Models for Business does not set out to provide a blueprint that business reporting is expected to follow. Instead, it starts from the observation that there are already plenty of new reporting models around urging us to reform our ways, but none of them has yet swept the world or looks likely to do so. Rather than add yet another set of proposals to the pile, the institute decided to prepare a study that examined the reasons why the many reform proposals of recent years have so far had only a limited degree of success.
The reform proposals summarised in the report come from the most diverse sources. They are from Britain and the US, from professional bodies (including this institute), think tanks, accountancy firms, academics and consultants.
Typically, the reformers regard financial reporting information as both positively misleading and inadequate. Their proposed solution is not usually to advocate reform of financial reporting (though sometimes they do want that), but to propose extensive disclosures of non-financial, qualitative and forward-looking information.
The institute's report identifies six key issues that underlie the debate on business reporting reform:
• Multiple stakeholders. Views differ on whether business reporting can satisfy the needs of all stakeholders. The reformers tend to see IT as the solution to the problem, allowing disclosure of so much information that everybody will be satisfied.
• Decision-making. How important is business reporting in decision-making? The reformers often write as though investors and other stakeholders are totally dependent on formal business reporting. Others take a different view, stressing the importance of, for example, direct contacts with directors or extraneous sources of information.
• The invisible hand. This mysterious label refers back to a phrase used by Adam Smith, who pointed out that individuals motivated by self-interest are often led by an invisible hand to produce results that are in the public interest. Some of the reformers argue that business reporting can be led forward more effectively by market incentives than by regulators and standard-setters. The mechanism for this is that the market will reward good disclosure and punish bad. Others are sceptical.
• Conceptual frameworks. The standard-setters' existing conceptual frameworks are limited to historical, financial data and have a restrictive view of what should be recognised as assets in accounts. Some argue that they need to be broadened if business reporting is to develop in the right way. Others argue that the existing frameworks are perfectly adequate.
• Intangibles. The reformers argue that financial reporting has missed the significance of intangibles and that its failure to account properly for them invalidates its messages. Others believe that the problem is greatly exaggerated, if it exists at all.
• Transparency. While everybody agrees that transparency is a good thing, the traditional view is that in practice there should be 'escape clauses'.
The reformers doubt the validity of the arguments against disclosure and believe that business and its stakeholders would all benefit from greater openness.
The report is out for comment until 31 March 2004 and your views on the issues it raises would be welcomed. It is available at www.icaew.co.uk/bettermarkets, where you can also find out more about the Information for Better Markets campaign.