Non-financial disclosures in the
annual report
The Second Asian Roundtable on
Corporate Governance
(June 2000, Hong Kong)
Roger Adams
Head of Technical Services and Research Association of
Chartered Certified Accountants
Presentation overview
Aspects of non-financial disclosure
Why should non-financial disclosures matter?
The Turnbull Report on Internal Control (UK - 1999)
New approaches to stakeholder recognition in the UK
Risk, internal control and the Operating & Financial
EU recommendation on environmental disclosure
Parallel initiatives - the Global Reporting Initiative
How are these changes being reflected in the
education and training of accountants?
Aspects of non-financial disclosure
Mainstream corporate governance disclosures
Turnbull / internal control / risk related
Other aspects:
human rights
fraud and corruption (ethical)
Why should non-financial disclosures
matter? 1
“Leading companies are beginning to build stakeholder
trust and simultaneously improve their business
performance by measuring and reporting on both
financial and non-financial indicators related to such
issues as environmental management, worker
relations and social responsibility. In fact, they are
creating a new kind of competitive advantage by
linking value and values, to position themselves as
the companies of choice among customers,
employees, investors, suppliers, business partners
and local communities”.
KPMG “Beyond the Numbers”
Why should non-financial disclosures
matter? 2
 risk can be controlled but not easily financially
– mainstream corporate governance issues (board
structure / auditor independence / voting rights)
– social issues (labour policies / human rights)
– ethical issues (bribery and corruption / money
laundering / codes of conduct)
– environmental issues (global warming / GMO’s /
contaminated land)
all exposed in our CNN / goldfish bowl world
trend is towards fuller coverage of above issues
The Turnbull Report on Internal
Control (UK - 1999)
Are the significant internal and external operational,
financial, compliance and other risks identified and
assessed on an ongoing basis?
Does the company communicate to its employees
what is expected of them and the scope of their
freedom to act?
Are there established channels of communication for
individuals to report suspected breaches of laws or
regulations or other improprieties?
The Turnbull Report on Internal
Control (UK - 1999)
Are there specific arrangements for management
monitoring and reporting to the board on risk and
control matters of particular importance?
Compliance with Turnbull requires a board to
consider all the above issues and more.
Significant risks may include market, credit, liquidity,
technological, legal, health, safety, environmental,
reputation, and business probity issues.
The Turnbull Report on Internal
Control (UK - 1999)
Accreditation mechanisms such as
– ISO 14000,
– SA 8000 and
– AA 1000
have a significant role to play in enabling
boards to fulfil their newly enlarged
responsibilities under the Combined Code
New approaches to stakeholder
recognition in the United Kingdom
Company Law Review: 1999 - 2002
– new responsibilities for directors? pluralism vs.
enlightened self-interest
– enhanced disclosures in Operating and Financial
Review (= US MD&A)
Other initiatives
– integrated reporting approaches (The Centre for
Tomorrows Company)
– new regulations for pensions fund trustees dealing
with explicit recognition of social and
environmental issues
Risk, internal control and the
Operating & Financial Review
What is the appropriate vehicle for these new
types of disclosure?
- a separate report?
– the unaudited section of the annual report and
accounts pack?
– the audited financials themselves?
– The Management Discussion & Analysis / MD&A
section ( UK = the Operating and Financial
Review/OFR) - this seems to be the most
recommended (though least used?) route open
The OFR now
“A framework for the directors to discuss and
analyse the business’s performance and the
factors underlying its results and financial
position, in order to assist users to assess for
themselves the future potential of the
(UK ASB 1993)
The OFR now
operating review: results for the period,
dynamics of the business, investment for the
future, profit for the year, total recognised
gains and losses and shareholders’
financial review: capital structure and
treasury policy, taxation, funds from
operating activities and other sources of cash,
current liquidity, going concern, balance sheet
value (inc.. intangibles)
The OFR in the future - 1
i. A fair review of the development of the company’s /
group’s business over the year and position at the
end of it, including material post year end events,
operating performance and material changes
ii. The company’s purpose, strategy and principal
drivers of performance
iii. An account of the company’s key relationships, with
employees, customers, suppliers and others, on
which its success depends.
iv. Corporate governance - values and structures
The OFR in the future - 2
v. Dynamics of the business: known events, trends,
uncertainties and other factors which may
substantially affect future performance
vi. Environmental policies and performance, including
compliance with relevant laws and regulations
vii. Policies and performance on community, social,
ethical and reputational issues
viii. Receipts from, and returns to shareholders
“Modern Company Law for a Competitive Economy” UK
Company law Review Steering Group.
EU recommendation on disclosing
environmental issues in the annual report
Commission Recommendation “On the recognition,
measurement and disclosure of environmental issues
in the annual accounts and annual reports of
companies” - in draft from June 2000
Covers mainstream (IAS 37 / FRS 12) recognition and
measurement issues
proposes new disclosure requirements to cover
environmental policies, improvements, resource use
and emissions, expenditure to P&L and B/S
A common core of social indicators may follow in 1 2 years
Parallel initiatives - the Global
Reporting Initiative (GRI)
Global guidelines for reporting on economic,
social and environmental aspects of corporate
activity (i.e. sustainability or the triple bottom
line - see handout)
ACCA + US CERES / Tellus Institute + CICA +
UNEP + other European, North American,
Japanese, Indian and South American
ED issued 3/99 - revised guidelines due June
/ July 2000. Permanent body from 2001.
How are these changes being reflected in
the education / training of accountants?
 base accounting and auditing examinations on
international standards
set out to “green” the examination syllabus
develop new programs: e.g. international diploma in
corporate governance
deliver on all these issues regularly through corporate
communications channels: web-site, members journal
sponsor research and influence standard setters
in the case of the GRI, become a standard setter
Conclusions - 1
Greater accountability & transparency
More evidence of stakeholder dialogue
Growth of integrated or triple bottom line reporting
More emphasis on values based reporting and
reporting of values
Expanding the role of the OFR/MD&A
Growth in volume of socially responsible investment
Accountants: best placed act as corporate
governance referees?
Accountants:implications for their education and
Conclusions - 2
(from “Beyond the Numbers” - KPMG 2000)
“Companies are
recognising that failure
in many non-financial
areas can heavily
damage the bottom
line, perhaps
“Because most general
business risks derive
from non-financial
factors, organisations
have found that how
they manage those
business risks can
influence their financial
“Beyond the numbers” KPMG
“Risk in the Boardroom” Canadian Institute of CAs
“Making Values Count” ACCA
“CACG Guidelines - principles for corporate
governance in the Commonwealth”Commonwealth
Association for Corporate Governance
“Reporting Guidelines” Global Reporting Initiative
“The Corporate Reporting Jigsaw” Centre for
Tomorrow’s Company
UK Company Law Review
www.acca.org.uk/resources (for T&R)
IASC: www.iasc.org.uk
Global Reporting Initiative (GRI):

similar documents