Reporting: studies suggest that high-quality narrative reports can give your company a real competitive edge, Garry Honey offers advice on improving how you present non-financial information to investors.
| Author | Honey, Garry |
| Position | Technical matters |
The role of the accountant is changing, the skills required are shifting and, with them, so is the definition of professional competence. "No longer bean-counter, but story-teller" is how the Report Leadership group (of which CIMA is a founding member) would express it. The role of narrative in corporate reporting is increasingly significant both to the Accounting Standards Board (ASB) and to institutional investors. The principles of the operating and financial review are enshrined in the ASB's reporting standard RS1, and the enhanced business review set out in the Companies Act 2006 reflects this. Whether it's voluntary or mandatory, narrative content in company reports now matters.
There are two ways of looking at this: carrot and stick. The stick is compliance with the regulations and the carrot is the opportunity for business improvement. The stick is summarised by clause 417 of the Companies Act, which requires the business review to incorporate a "description of principal risks and uncertainties", a "balanced and comprehensive analysis" of the business, "trends likely to affect future performance" and "key performance indicators" (KPIs).
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The business review is intended to give investors a view of the future, yet an ASB review published in January found "areas for improvement" in four key reporting aspects: forward-looking information; intangibles and non-financial resources; principal risks and uncertainties; and KPIs. Much work is still needed on the quality of narrative reporting to satisfy the regulator. From the perspective of the investor, a report by the Association of British Insurers in November 2006 came to a similar conclusion: companies need to improve the way they report forward-looking information, key risks and KPIs.
What, then, of the carrot? Who is using narrative for business improvement? Analysts at FutureValue have analysed narrative quality of FTSE-350 reports over the past four years and found a positive correlation between share price and narrative quality. "Most company annual reports are poor at explaining strategy," says Ian McDonald Wood, research director at FutureValue. "This may be down to fears of commercial sensitivity, but most likely it is down to a poor understanding of what strategy actually is."
FutureValue produces a strategic value analysis for each report, which ranks the quality of information concerning strategy, risk, intangibles and KPIs. The companies that score...
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