Sanchia Temkin
7 January 2009
Johannesburg — SIGNIFICANT efforts to strengthen financial reporting in recent years have resulted in improvements to corporate governance, the process of preparing financial reports, and the auditing of financial reports, a survey by the International Federation of Accountants reveals.
The study sought to determine the extent to which the financial reporting process - and financial reports themselves - have improved, and whether action is needed to make them more relevant.
More than 340 participants from all sectors of the financial reporting supply chain worldwide - including investors, preparers, company management and directors, auditors, standard setters and regulators - took part in the survey.
Interviews were conducted with 25 high-level participants including investors, company directors, chief financial officers, and regulators.
The survey found that corporate governance had improved due to an increased focus on governance and changes to company codes and standards.
"Despite the strengthening of the financial reporting process and the many improvements made, there is still much to be done to meet the needs of investors and other stakeholders," said Norman Lyle, chairman of the financial reporting supply chain project.
"Survey respondents raised concern about the reduced usefulness of financial reports due to complexity and the increased focus by companies on compliance instead of reporting on the essence of the business," Lyle said.
Participants said the process of financial reporting had improved over the past five years.
Participants from Eurasia, Africa, Asia and Latin America were more positive about the benefits of the financial reporting process than respondents from the European Union, the US, the UK, Canada, and Australia.
However, participants considered the less desirable changes over the past five years to be the costs of switching to international financial reporting standards and the complexity of the international accounting standards.
On whether financial reporting standards should be principles based or rules based, some participants said that the situation was complex and the difference between principles and rules was not always clear-cut.
They said a combination of both approaches might be necessary and appropriate.
Overall, participants said the auditing of financial reports had become better over the past few years.
However, auditors raised over-regulation as one of the main areas of concern .
They said that turning accounting and auditing standards into rules, including oversight and litigation, had made external auditors wary of exercising professional judgment.
Some participants in the survey preferred the use of fair value in accounting standards, while some were unsure as to whether fair value accounting was improving the fundamental understanding of the business and accomplishments of management.
Participants said more disclosure on executive remuneration, pension obligations and expensing share options - including business reporting - had led to more transparent financial reporting.
They also said uniformity on reporting had led to more consistency and better comparability in financial reports internationally.
However, they acknowledged that there would always be differences because there were so many unique solutions.
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