29 August 2002
City culture and the behaviour that drives business reporting will need to change fundamentally if faith in capital markets is to be restored, according to a new report from CIMA, 'Business Transparency in a Post-Enron World'. The report has been sent to the top 1000 Finance Directors to urge them to consider all the issues involved with being more transparent.
The need for cultural and behavioural change in the UK, in particular the nature of City expectations that drive the aggressive earnings game and the resulting 'short-termism' is a cycle that needs to be broken, the report's authors argue. Too much focus on market expectations and short term profits is reducing the effectiveness of business reporting, and limiting companies' willingness to disclose information.
Unless the gap between the information that companies report and the information that investors want is closed, shareholders will remain distrustful and reluctant to invest. After Enron, transparency is becoming a requirement of business reporting but in order for it to become embedded in company and market culture, there needs to be a widespread understanding of the benefits as well as across-the-board commitment.
Stathis Gould, CIMA's Head of Technical Issues and one of the report's authors, said:
"Chief Executive Officers, finance directors and auditors must understand that the quality of reporting does not just affect their individual operations but capital markets as a whole. If confidence in the market is low, the cost of capital is going to increase sharply. The only way to restore confidence is through high quality reporting by listed companies.
"The current system of financial reporting fails to meet the needs of today's economy. Companies can be more concerned with meeting market expectations than with providing comprehensive information to enable an accurate valuation. Business reporting should provide users with more forward looking information about all the relevant value-drivers, including non-financial ones.
"Performance measures used internally and those reported to external stakeholders should not be radically different. Companies should focus on measuring and reporting their main value drivers – not on getting the right figure to satisfy the market expectations."
CIMA Chief Executive Charles Tilley said:
"As this report identifies, ensuring transparency should be the number one aim of companies. Failure to do so will damage investor trust in their operations."
Business Transparency in a Post-Enron World is available from CIMA. Its aim is to bring the diverse strands of the transparency agenda together in one place for senior finance professionals and their colleagues. It explores arguments for and methods/processes to enable improved disclosure, including XBRL (Extensible Business Reporting Language), international accounting standards, the Operating and Financial Review (OFR), sustainable development and Global Reporting Initiative.
If you would like more information please contact Lottie Muir
Phone: +44 (0)20 8849 2407
Email: lottie.muir@cimaglobal.com
Fax: +44 (0)20 8849 2471
