EBR: the next step: enhanced business reporting will improve information quality, integrity and transparency
* ENHANCED BUSINESS REPORTING (EBR) WILL IMPROVE the quality of information companies provide so investors can make better decisions about a company's situation and prospects. The EBR Consortium is leading the effort to improve the quality, integrity and transparency of nonfinancial information.
* MEMBERS OF THE EBR CONSORTIUM WILL DEVELOP a voluntary, global disclosure framework for the presentation of the nonfinancial components of business reports, including key performance indicators. The new model's focus won't be on historical information, but on information that delivers a broader view of a company's current and future performance.
* EBR WILL HELP COMPANIES BECOME MORE EFFICIENT as the information that management monitors to optimize internal performance begins to form the basis for external reports, subject to reasonable limits for commercially sensitive information.
* TWO GROUPS ARE LOOKING AT THE IMPACT OF EBR on public and private companies. The EBR Public Company Task Force has prepared sample reports showing how companies can use EBR and is studying ways to simplify reporting requirements. The AICPA's Private Companies EBR Task Force is looking at similar areas and at ensuring that EBR is scalable for privately held businesses.
* THE ACCOUNTING PROFESSION HAS A KEY ROLE to play in protecting the public interest and restoring trust in the financial reporting process. As EBR makes business reporting more transparent, it will strengthen the economy and protect investors.
Which of these two drug companies is more valuable to investors and other stakeholders? Company A reported higher earnings every quarter for the past two years. Over the same period, company B invested a greater share of its revenue in research and development. Company B is expecting FDA approval to market a new drug that could improve the quality of life for millions and is working on several other products that could offer immense public and shareholder benefits. If you had to base your decision solely on their financial statements, could you make an informed assessment?
Research shows investors, creditors and company executives in fact don't use financial statements as their primary decision-making tool. It also shows a widening gap between market and book value; Roland Burgman of Asset Economics Inc. says 60% of the market value of the Russell 3000 index is attributable to growth expectations. Over time there has been a shift from companies that are predominantly asset-intensive to those that are asset-light and intangible-heavy. These findings demonstrate the need for a better way to document and report on such businesses.
Enhanced business reporting (EBR) responds to this need with reports that give all stakeholders the information they need to make better decisions about a company's prospects. With EBR, the focus of communicating data shifts from a snapshot based primarily on financial, historical or lagging information to a model that incorporates both financial and nonfinancial data. EBR delivers a broader view of current performance and a greater understanding of an entity's future. To this end all CPAs-CFOs, financial managers and internal audit directors at companies of all sizes, and external auditors of public and private companies--need to fully understand EBR, how it developed and what it offers.
IMPROVED DECISION MAKING
The Enhanced Business Reporting Consortium (www.ebrconsortium.org) is leading the effort to improve information used for business decision making. Its mission is to improve the quality, integrity and transparency of information in a cost-effective and time-efficient manner. Members will develop a voluntary, global disclosure framework designed to be the "gold standard" in business reporting. This framework will provide structure for the presentation of nonfinancial components of business reports--including key performance indicators--and facilitate greater integration of financial and nonfinancial components on an industry-by-industry basis. (For more details, see "The EBR Consortium," page 73.) EBR will make it easier for stakeholders to understand the opportunities and risks a company faces and better reflect the complexities of modern business and the quality and variability of earnings and cash flows.
TRANSPARENCY AND GOOD GOVERNANCE
With the advent of the Sarbanes-Oxley Act, corporate business activities and the reporting of them have become more transparent than ever before. In their 2003 book The Naked Corporation: How the Age of Transparency Will Revolutionize Business (Free Press), Don Tapscott and David Ticoll defined transparency as "the accessibility of information to stakeholders of institutions regarding matters that affect their interest." CPAs and others can measure a company's transparency by their ability to clearly understand its current state, its business strategy and its prospects for the future.
Enhanced transparency goes hand in hand with good corporate governance. In 2004 the Organisation for Economic Co-operation and Development (OECD) released its revised Principles of Corporate Governance. One of those five principles covers disclosure and transparency in reporting. It says, "Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis." The corporate governance framework should "ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company."
The EBR framework will help management and boards of directors meet these disclosure needs and demonstrate their commitment to good corporate governance. Boards will be able to more easily provide the level of oversight shareholders demand. And with better information, regulators can ensure that capital markets function efficiently.
THE EBR VALUE PROPOSITION
CPAs and other financial professionals are trained to look at historical data to determine how an entity performs today or will perform in the future. However, financial statements are not intended to provide all the information investors and other consumers may require. Many performance factors that are not captured in traditional financial reporting also have an impact on a company's current and future valuation.
EBR can deliver this information and provide many benefits to companies that adopt it. Increased transparency and higher-quality reporting enhance credibility and allow investors, analysts and other consumers of company information to better understand long-term strategy. EBR helps reduce the uncertainty that contributes to market volatility and a higher cost of capital. As the marketplace becomes better informed, the real/perceived pressure on companies to either meet or explain variations in quarterly earnings' forecasts declines. This shared understanding lets investors and management take a long-term strategic view of a company's performance and future opportunities, rather than a short-term focus from one quarter to the next.
Companies that adopt the EBR framework also will benefit from more efficient reporting processes as external reporting becomes more closely aligned with internal reporting. Information that CPAs and other financial managers monitor to optimize internal performance will form the basis for external reporting (subject to reasonable limits on commercially sensitive information). The more closely external reporting mirrors internal reporting, the more efficient it will be.
"Just as the preparer community stands to more clearly communicate its message, the assurance community can benefit from more services, with less risk, delivered more efficiently," says Mike Willis, a partner at PricewaterhouseCoopers in Tampa and founding chairman of XBRL International. "We can also communicate our opinions more accurately, with greater reliability, and overcome misuse or misrepresentation of our work." As the reporting model evolves with the changing needs of global capital markets, the assurance model must adapt itself accordingly. New or expanded assurance services will be necessary to allow auditors to issue opinions on EBR content, which will be delivered in an electronic format on a near real-time basis.
PUBLIC AND PRIVATE COMPANY BENEFITS
In addition to developing the strategy for implementing EBR, the AICPA's Special Committee on Enhanced Business Reporting created the Public Company Task Force and the Private Company EBR Task Force to conduct research and develop examples of what EBR reports might look like.