Current corporate reporting is unfit for purpose and in need of urgent reform, the International Integrated Reporting Council (IIRC) chairman Mervyn King said yesterday in London.
Speaking at the annual president’s dinner of the Chartered Institute of Management Accountants (CIMA), King said there is an urgent need to change the way companies report, particularly because investors increasingly take account of companies’ environmental, social and governance (ESG) factors as a first step of their investments.
King started his speech differing from the views of Milton Friedman. The American economist argued that the only social responsibility of a company is "to use resources and engage in activities designed to increase its profits so long as it stays within the rules of the game".
In contrast with Friedman’s views, King said companies are part of society and put the global consequences of Lehman Brother collapse as example of the deep integration between companies and society.
The IIRC chairman emphasised that research during the 2000s on listed companies in different stock exchanges, showed that 80% of their market capitalisation was not represented in balance sheets prepared under financial reporting standards.
"For some 70 years, certainly since the Great Depression in the 1930s, we were reporting to the companies and through companies to our stakeholders and telling them only 20% of what was happening.
And we were reporting in a language of financial reporting standards incomprehensible for the average user. The consequence was that knowledge was being lost in incomprehensible information," he said.
For King the two great challenges in the 21st century are financial stability and sustainability, however, to achieve this goal financial reporting is "crucial but not sufficient".
King said with the collapse of Tyco, WorldCom and Enron in the early 2000s "the International Accounting Standard Board (IASB) and the Financial Accounting Standards Board (FASB) believed they had to improve standards of financial reporting and as a result complexity was added and reporting became more incomprehensible to users".
He added that both, IASB and FASB, and other organisations such as CIMA and the Global Reporting Initiative have concluded Memorandums of Understanding with the IIRC, which are a sign that "the future of financial reporting lies on integrated reports, which are the outcome of integrated thinking".
King concluded quoting blind author Helen Keller’s words, who said the only thing worse that being blind is having sight and no vision.
"What do you see around you? In the 21st century we have crossed boundaries. We have to change our mind-sets. We cannot continue with tools of decision making and reporting which actually created some of the problems and issues that I talked of tonight," he remarked.
Related linksThe International Integrated Reporting Council