What’s coming our way in corporate reporting

The Corporate Reporter’s Clive Lotter answers some of the questions around corporate reporting.

Covid-19 has pushed social and environmental issues to pole position in the minds of the general public and hapless politicians.

The embattled CFO, already stressed from managing through unprecedented challenges, may soon face the reality of government and market regulators ramping up compliance with corporate reporting standards.

Is compliance yet another headache in a lengthening list?
Or will the astute recognise the opportunity to future-proof their businesses by measuring their profits against the actual impact of business activities that generated those profits? New look corporate reporting contains the tools to steer your organisation into the post-Covid-19 reality.

But first, let’s scan the regulatory horizon…
In South Africa all registered companies must comply with the Companies Act of 2008, which regulates how they report their activities and results to stakeholders and in the public domain. Those businesses listed on the JSE must also comply with the King Code on Corporate Governance (King IV) and JSE listing requirements. Public sector organisations such as government departments and state-owned enterprises report in terms of King IV, the Public Financial Management Act of 1999 and National Treasury regulations.

Many South African companies have adopted the globally recognised Integrated Reporting (IR) framework methodology for preparing their annual reports. The IR framework is highly recommended by King IV, the World Bank and other leading institutions, but isn’t yet compulsory in South Africa. It is likely that integrated reporting will soon be made compulsory by regulators in South Africa and across the world.

Nevertheless, some South African listed companies still prefer to publish old-fashioned annual reports or a results booklet along with the year-end results presentation, but I see this practice being viewed with growing suspicion by shareholders and interested stakeholders.

Sustainability or corporate social responsibility reporting has become compulsory in the European Union and elsewhere, but not yet in South Africa. Nevertheless, most leading South African organisations already issue sustainability reports, shining an ever-brightening spotlight on those that don’t.

The 193 national signatories to the Paris Agreement on Climate Change, the United Nations, World Economic Forum and other global institutions are driving a worldwide shift to sustainable practices. The Paris Agreement commences its next lap at an international conference scheduled for Glasgow in November 2021, and with a Joe Biden-led USA now fully committed, is likely to drive far-reaching changes.

Far more probing sustainability reporting is about to take centre stage in corporate compliance – and CFOs should begin preparing for that reality.

Navigating the changes
CFOs rightly complain that the current ‘alphabet soup’ of competing reporting standards is confusing and hinders the creation of easily comparable reports.

Two events in the past three months significantly cleared the fog and propelled corporate reporting deeper into the economic mainstream.

In November 2020 five of the leading global standard setters agreed to combine their efforts, with the International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) heavyweights deciding to merge completely. Professor Mervyn King, arguably the most well known personality in international corporate reporting, expects a consolidated reporting framework to emerge within two to three years, probably under International Financial Reporting Standards (IFRS) Foundation oversight.

On 20 January 2021 the IIRC released an long awaited update to its IR framework that optimised this methodology for guiding businesses to sustainable profitability through their own reporting. The IR framework is proving invaluable to organisations that introduce its ‘integrated thinking’ approach to their corporate processes, risk and scenario planning.

The global community has mandated the United Nations (UN) to steer commercial activities onto a sustainable path through two primary initiatives. Under the auspices of the UN, the Paris Agreement corrals 193 signatory countries into working collectively to keep global warming to 1.5°C or less. Each country, including South Africa, has committed to specific emission reductions and more transparent reporting on their outcomes.

For private sector corporations the UN has established a Global Compact featuring a programme of 17 Sustainable Development Goals (SDGs) for organisations to engage. Over 12,000 companies from 160 countries are already involved in the UN Global Compact, with many South African companies now mapping their results and impacts against the SDGs.

The ball is in your court…
How 2021 will shape up remains anyone’s guess, but we can safely bet that how companies report their results will be sharply in focus. Regulators are keenly aware that organisations avoid ‘warts and all’ reporting – albeit for solid competitive reasons – and will tighten up compliance to get the results they need for comparative measuring across industries and countries.

My advice is: Don’t avoid or gloss over regulatory compliance. What CFOs may see as a necessary evil is actually evolving into an invaluable management tool for navigating – even surviving – the business realities of the forthcoming post-pandemic world.