Mon 2 Oct 2017
News - Financial reporting critical for trust in business
Financial reporting is critical for trust in businessPhilippa Foster Back
CBE, Institute of Business Ethics
Responsible financial reporting lies at the heart of responsible capitalism and, in today’s world, it is more than ever up to directors and, in particular, independent non-executive directors to ensure they do the right thing as a board when it comes to making choices about how to present profits and other key financial data.
Independent non-executive directors are responsible for ensuring the hallmarks of responsible reporting are ever-present in the financial statements that are approved by the board as showing a true and fair view.
Seeking to do the right thing by challenging and probing questionable accounting processes, policies and outcomes can be a real test of the strength of non-executive directors’ independence and calibre. They may feel pressured and threatened by other directors – executive and non-executive – and even by the auditors, internal and external. Even obtaining independent advice on the issues concerned can be interpreted by others as a lack of trust. Ethical courage is therefore a must.
Poor financial reporting often plays a part in corporate crises, as recent cases show. For example, supermarket chain Tesco has just opened a multi-million pound compensation scheme following its £250m accounting scandal. Poor financial reporting by banks and other financial institutions can be seen as a core contributor to the financial crisis and the lack of trust in the financial sector that ensued.
Misleading accounts undermine the confidence of investors and other stakeholders to the point where financial support can dry up and the franchise is lost. Yet this is more than just a question of conforming to the rules laid down by standard setters. Most accounting involves judgment and all judgment contains an ethical dimension.
If a corrupt culture infects the financial reporting process, it is like a cancer that progressively undermines the true and fair view of the financial statements unless it is treated – and treated swiftly and effectively.
The hallmarks of responsible financial reporting are not negotiable. A new board briefing from the IBE – Responsible Reporting: doing the right thing
– sets out six elements of responsible reporting:
1. Truthfulness and integrity
2. Fair presentation and freedom from bias
3. Neutrality supported by prudence
These hallmarks provide an interdependent conceptual framework for responsible financial reporting. If one or more of them is absent, then the framework is unstable.
To sum up, at all stages of the corporate reporting process the board must keep the company’s values at the centre of its discussions and decision-making, because financial is an important element of how we create a culture of accountability. Boards must be prepared to act when they detect any that might, directly or indirectly, undermine the presentation of a true and fair view. A half empty bottle should not be presented as a half full one.Responsible Reporting: doing the right thing
is available from the IBE website: http://www.ibe.org.uk/list-of-publications/67/47#pub3307
Check out also the upcoming ILA Integrity in the Boardroom training session and make sure you register on time! http://ila.lu/en/events-next-events-detail/dates/integrity-in-the-boardroom-25-10-2017-08-30/