These findings are from interviews with 133 top executives
of large, U.S.-based multinational businesses, for
PricewaterhouseCoopers' Management Barometer
NEW YORK, Jan. 26, 2006 (PRIMEZONE) -- Despite an ongoing focus on improved financial reporting, particularly in the context of Sarbanes-Oxley, a PricewaterhouseCoopers survey shows that senior executives say improvements can still be made in several aspects of their company's financial reporting, including:
-- the fit of information to stakeholder needs, through increased
use of contextual information such as key performance indicators,
strategy, risks, markets, products and people issues;
-- reducing complexity and improving clarity; and
-- the extent to which reporting conveys the information used for
corporate decision-making.
In a particularly significant finding, only a bare majority says their financial reporting models do a good job of providing information valuable for managing the business.
Uneven fit with stakeholder needs. Senior executives see much room for improvement in reporting to their company's five key stakeholder groups -- customers, employees, shareholders, suppliers, and analysts -- with many saying the information needs of some groups are being under- or over-delivered relative to their strategic importance. According to the executives surveyed:
-- Only shareholders appear to be receiving the appropriate
amount of information.
-- Analysts are viewed as receiving too much.
-- Customers, employees, and suppliers are seen as receiving
too little.
Although many large companies have taken steps over the past two years to improve transparency, shareholders and analysts are again seen as benefiting most, relative to their perceived importance:
Information Taken Steps
Very/Extremely Needs Addressed To Increase
Important to Very/Extremely Transparency
Stakeholders Business Strategy Well (Past 2 Years)
-- Customers 83% 50% 56%
-- Employees 73% 46% 62%
-- Shareholders 64% 62% 63%
-- Suppliers 47% 32% 36%
-- Analysts 32% 50% 58%
This finding contrasts sharply with the views of analysts. Preliminary results of a separate analyst survey currently being conducted by PricewaterhouseCoopers show that the analyst community remains greatly dissatisfied with the level of useful information delivered by companies' annual and quarterly financial reports. Areas frequently cited as lacking include the level of granularity and transparency of cost structures and segmental analysis, as well as the need for greater consistency of key performance indicators within industry groups.
More clarity needed. When senior executives were asked to rate the complexity of their company's financial reporting model on a 10-point scale, where 10 means "clear to all users" and 1 means "clear only to accounting technical experts," the average rating was a lukewarm 6.1. This finding was consistent across industry groups.
-- Only 22 percent see their company's financial reports as
"clear to all users;"
-- Another 35 percent describe them as only "somewhat clear;" and
-- 34 percent view them as "clear only to accounting technical
experts."
Given the dynamics of business today, 68 percent believe that financial reporting standards could be realistically simplified -- including 69 percent of product sector companies, 67 percent of service businesses, 78 percent of technology companies, and only 64 percent of non-techs.
"What senior executives are telling us is that corporate reporting is still primarily slanted toward meeting the information needs of shareholders and analysts, and requires improvements in transparency to meet the needs of other stakeholder groups-with greater attention to customers, employees, and suppliers," said Vin Colman, PricewaterhouseCoopers' Risk and Quality Leader. "Equally important, these professionals are also clearly interested in financial reporting that has greater clarity or simplification."
Reporting could better mirror information used for managing the business. Only a bare majority (53 percent) says their company's financial reporting model performs "extremely" or "very well" in providing valuable management information used for running the business. Nearly four in ten (39 percent) say their model performs only "somewhat well" or "not very well" in this regard.
"This is a particularly significant finding," said Ray Beier, Leader of PricewaterhouseCoopers' National Technical Services group. "The survey confirms that the existing corporate reporting framework has evolved into a labyrinth of complexity, a backward-facing accounting and reporting model that appears to be focused more on compliance than true communication. It's difficult to argue for the value of transparent financial reporting as a measure of the historical and prospective performance of the business, if management is not deriving value from that information in actually running the business."
In fact, a greater number of senior executives say their financial reporting model performs "extremely" or "very well" for several other management functions, including support for making economic decisions. And only 24 percent are content with its historic financial risk information:
Performs
Extremely/
Very Well
-- Current financial information useful
in making economic decisions 63%
-- Historic financial performance information 62%
-- Historic operational performance information 54%
-- Valuable management information
used to manage the business 53%
-- Historic financial risk information 24%
-- Historic operational risk information 19%
Companies with a financial reporting model that performs "extremely" or "very well" tend to include larger businesses expecting comparatively higher revenue growth over the next 12 months (10.0 percent growth, versus 7.5 percent for all others).
Two internal management accounting reports get greatest use for decision-making: the projected P&L/ income statement (regularly used by 79 percent) and projected cash flow model (57 percent). Discounted cash flow analysis, payback model, and projected balance sheet tend toward only periodic use:
Present
Financial
Reporting
Model is
Valuable
Decision Making to Mgmt
Any Regularly Sometimes Regularly
Use Used Used Used
-- Projected P&L/ Income
Statement 87% 79% 8% 89%
-- Projected Cash Flow
Model 81% 57% 24% 66%
-- Discounted Cash Flow
Analysis 70% 39% 31% 45%
-- Payback Model 70% 26% 44% 32%
-- Projected Balance Sheet 62% 26% 36% 28%
"Overall, when the external financial reporting model is considered to be 'extremely' or 'very valuable' for making management decisions, there is a corresponding higher use and utility of key internal management accounting reports that have their basis in the financial reporting model," says Colman. "What this tells us is that when financial reporting is considered valuable, it will be used more frequently for decision making. By extension, if financial reporting is not perceived as valuable by investors or other users, they will struggle to obtain the information they need for decision-making purposes -- a significant risk that may impact the efficiency of the capital markets."
PricewaterhouseCoopers' Management Barometer is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.
Additional information is available from Pete Collins, survey director and publisher, at 646-471-4496, or pete.collins@us.pwc.com.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries work collaboratively using connected thinking to develop fresh perspectives and practical advice.
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