Expanding Corporate Disclosure
Volume 17, Number 1 Article by R Narayanaswamy March, 2005
Expanding Corporate Disclosure: Discussion :
Over the years, companies have become more responsive to the needs of the investment community for relevant and reliable information on their activities, strategies and plans. Securities regulation has moved from a governmentadministered, merit-based system to a marketdriven, disclosure-based system for raising resources in the capital market. Evidence from research suggests that firms that provide superior disclosures reduce their cost of capital. However, providing disclosures can invite negative competitor reaction and greater shareholder litigation.
The Round Table discussion on Expanding Corporate Disclosure aimed at understanding the role of disclosure in capital and other markets, and the concerns and constraints of companies in improving the quantity and quality of disclosure. A panel with representatives from corporate houses, the Big 4 accounting firms, the government, regulatory bodies and academia participated in the discussion.
Lamenting the prevailing over-exuberance in analysing and presenting financial information, Ravi Ramu, Chief Financial Officer, MphasiS BFL Group, underlined the need for an honest, crisp, easily accessible story of the management's understanding of its business, its pressure points and how things are going to pan out. He also emphasised the need for a balanced approach pertinent to all stakeholders, benchmarks for each type of company and the inclusion of environmental issues and issues regarding intellectual property in disclosures.
Quoting the US FASB, John Philip, Head-US GAAP, Infosys, said that the three most important areas for accounting rule makers to focus on are revenue recognition, fair value and financial performance reporting. Tracing the problems in financial performance reporting to rule-based accounting and the neglect of the underlying principles, he stressed the need for an accounting system based on an improved and consistently applied framework. Extensible Business Reporting Language or XBRL which uses technology to tag financial data, now in use in the US, would be the new language of business reporting.
Connecting the inadequacy of research studies in corporate disclosures to the inclination of the research community towards finance rather than accounting, V K Vasal, Professor, Department of Financial Studies, Delhi University, pointed out that conceptual weaknesses are noticeable particularly in regard to definitional, methodological and interpretative aspects. A clear-cut distinction should be made between legally-mandated reporting (minimum required disclosures under law), and extended reporting (disclosures which are recommendatory or voluntary). A repository that can collect, process, and disseminate information on the various research studies conducted is urgently needed. Despite environmental control being exercised by several institutions, self regulation is the way forward.
M P Pillai, Professor and Chair, National Law School of India University, sized up the legal aspects of corporate disclosure. The practice of an independent auditor looking into company accounts was introduced in 1855, when limited liability entered the corporate world. The Companies Act mandates disclosures in areas other than the financial, such as documents and reports compulsorily registered with the Registrar of Companies being accessible to the public. Institutional investors who hold a large chunk of the investment in the corporation, and have the expertise and the time to go into the details, must play a vital role in corporate governance and act as trustees of society.
New technology based IT and BT companies have many intangible assets such as the knowledge capital endowed in on-going research. M&A decisions depend on the synergy that can be created between the constituents with respect to R&D. The investor needs to know the value of such intangible assets and the expected returns from them. In the US, the present accounting standards on valuing intangibles came into existence as a result of a sub-committee on intangibles headed by Baruch Lev of New York University. From an economist's point of view, according to T Krishna Kumar, Retired Professor and Head, Economic Analysis Unit, Indian Statistical Institute, the existing procedures are not satisfactory and there are alternative ways of valuing intangibles, which can be proved to be better than the residual method proposed by Lev.
Santosh Shetty, Senior Manager, KPMG, appraised the panel of certain new developments in corporate governance norms, particularly Clause 49 of the Listing Agreement, dealing with the new norms for listed companies. The key amendments relate to the composition of the Board of Directors, roles and responsibilities of audit committees, improving the quality of financial disclosure, CEO/CFO certification of financial statements, and improving disclosures to shareholders. The new disclosure requirements include a statement of related party transaction and disclosure of the accounting treatment with details and explanations of any deviations. The requirements of Clause 49 are largely in line with the Sarbanes-Oxley Act, 2002.
The core competency of the regulator is the moot point in the arena of corporate disclosure, emphasised N Nityananda, Chartered Accountant. A proper corporate ethical code and framework are essential. A single body must take responsibility for formulating and implementing accounting standards and rules, and all corporate and regulating entities must conform to the prescribed accounting standards. The format of corporate accounting and reporting and audit reporting must be overhauled. Aberrations between tax and corporate accounting also need to be addressed. Partnerships between educational and corporate bodies can infuse professionalism and consolidate knowledge management in the field.
The discussion covered other issues such as the auditor's liability, the proactive role of the Institute of Chartered Accountants of India and of regulators, industry-regulator, private-public partnerships, associations of enlightened investors who can wage proxy war against managements, the commonality between disclosure practices and privacy issues on the Internet, consolidated accounting for group companies and the drivers of disclosure in India.
Reprint No 05105a