IFRS research needed

Reporting financial performance to stakeholders in the annual report is an important aspect of corporate governance. AICD believes that the context for reporting financial performance to stakeholders in privately held businesses is quite different to companies that raise funds in capital markets. AICD is concerned that increasingly legislation and regulation based on corporate governance practices appropriate for large listed entities “flow down” to regulate proprietary companies.

This means that privately owned businesses may be constrained by regulation designed to address accountability relationships existing in the public domain.

In the last quarter of 2004 AICD joined with accounting firm Pitcher Partners to research the attitudes of proprietary company directors regarding financial reporting regulation. There is little or no information concerning the usefulness of general purpose financial reports to stakeholders in large proprietary companies and therefore this research was seen as a valuable opportunity to learn more about this
segment of the market.

A research questionnaire was sent to 1304 AICD members across Australia.

To direct this research towards larger companies the selection criteria included companies with more than 21 employees and turnover of more than $10 million a year.

155 responses were received in total representing 11.9 percent of the total population.

However, it was disappointing that less than 23 percent of these responses were from directors who had a controlling interest in the company. As a consequence, although a majority of responses were from large companies, the results did not provide further insight into the regulation of proprietary companies from the perspective of owner-managers.

The need to report to shareholders annually is the fundamental concept that underlies preparation of the statutory financial report in accordance with the Corporations Act 2001.

However the research results were inconclusive regarding the usefulness of the information provided. Only one in three respondents indicated that shareholders used the statutory financial report in their decision-making processes, which suggest limited usefulness. However 18 percent of respondents prepared an annual report voluntarily and a further 22 percent had their financial report audited by choice.

The fact that a reasonably significant percentage of respondents chose to prepare annual reports and chose to have an independent audit provides prima facie evidence that these functions both have value. Further, a majority of respondents (who generally had a high level of financial reporting experience and knowledge but not a controlling interest), considered that generally the component statements within the financial report were
“very understandable”.

These seemingly opposing views from respondents, combined with the trend to provide shareholders in capital markets concise (or summarised) financial information rather than a full statutory financial report, indicate that debate concerning the usefulness of the financial report is yet to be resolved. In accordance with the Corporations Act 2001 large proprietary companies are required to lodge their financial report with ASIC unless they have applied for and obtained specific exemptions.

Financial information lodged with ASIC is available to the general public from the ASIC database. This database is intended to provide stakeholders with financial information to assist in their decision-making. The research results indicate that approximately half of the respondents access information from the ASIC database, but mainly in respect of competitor companies.

It is not possible to gauge the extent of competitive advantage or disadvantage that might arise, but in any event, the public availability of financial information was never intended to serve that purpose.

The results of this research raise more questions rather than providing answers. Very little is known about the behaviour of owner-managers and their needs for financial information. The lack of participation in research and in the development of legislation by this market segment also contributes to the general lack of understanding as to how the information needs of stakeholders in large proprietary companies might be satisfied.

As a consequence, it seems that public demands for competitive information is driving the nature and extent of financial information that proprietary companies provide to the market, rather than the need for proprietary companies to be accountable to their stakeholders.

In the absence of comment or complaint from proprietary company stakeholders, it is not possible to assess whether or not reporting requirements are appropriate, inappropriate, onerous or satisfactory. The research results suggest that the regulation of financial reporting by proprietary companies is operating satisfactorily.

If you have any comments that you would like to contribute to this debate please contact the AICD at breport@companydirectors.com.au or Dianne Azoor Hughes, national technical director at Pitcher Partners tel:03 9289 9772 or e-mail dhughes@pitcher.com.au

Both AICD and Pitcher Partners would like to thank all respondents for their participation in this research.