Why companies can benefit from connected reporting

Globalization has led to a more complex business structure. This means that companies have to comply with a wider range of reporting standards. As companies grow, enter new markets and develop new products and services, they inevitably face greater complexity.

Businesses today inhabit a more complex environment than at any time in history. Over the past few decades, globalization has meant a dramatic expansion in the scope and reach of many companies. Even if companies are not selling their products in every region of the world, it is likely that they have complex supply chains reaching into distant markets, shared service centers and a range of other operational entities.

Among the 500 companies that EY surveyed for this report, half have more than 10 business units and one-third are active in more than 10 countries. More than 60% have seen their number of legal entities and jurisdictions in which they operate increase over the past three years. Companies are also diversifying into other market segments. Over the same period, more than 70% have increased the number of products and services they sell.

Greater business complexity is mirrored by greater reporting complexity. Among our respondents, three-quarters have more than five reporting systems, and a similar number must comply with more than five reporting standards. More than two-thirds have increased the number of reports they issue over the past three years.

Business growth also brings other challenges for reporting, as Neri Bukspan, Financial Reporting and Disclosure Leader, FAAS Americas at EY, explains. “As they become larger and more global, companies experience a dramatic rate of change in regulations and investor expectations, and face greater scrutiny from auditors, boards and institutional investors,” he says. “Investors and others demand more information, and expect it to be robust, controlled and timely.”

Therefore, as complexity rises, companies face the need to upgrade their reporting infrastructure.

Companies face increasing demands on reporting, driven by both internal and external stakeholders. The number of reports companies issue is growing, and reporting is expanding to include more financial and nonfinancial aspects. Nontraditional areas, such as corporate responsibility and sustainability, will increasingly have to be covered, and reporting will also tend to include a forecasting element.

Growing business complexity is coinciding with an increasingly complex reporting environment. Companies face more varied demands than ever from external stakeholders. For example, they must comply with a constant flow of regulatory and accounting requirements. Three-quarters of respondents agree that the reporting environment has become more complex in recent years.

Reporting is set to become yet more wide-ranging. There are now many aspects of reporting: regulatory financial; management and board; forecasting; governance; functional; corporate social responsibility (CSR); remuneration; tax and people; sustainability and integrated reporting. Each one may give rise to a portion of a report or a separate report.

Different stakeholders with different needs

Almost 70% of respondents agree that it is very challenging to satisfy the different needs of external stakeholders with corporate reporting. For example, on the one hand, regulatory requirements demand highly detailed reports with a very high degree of data accuracy to fixed timetables. On the other, investors may require much more accessible, short-format information on key performance indicators (KPIs) on as frequent a basis as possible.

“As both regulators and financial reporting standards require a significant volume of data to be presented in financial statements, it can often be difficult for shareholders or investors to identify the information they require,” argues Andrew Davies, UK&I FAAS Leader at EY.

Demands for frequency

The pace of business is increasing, and companies are attracting groups of investors with ever-shorter investment time horizons. Therefore, doubts are growing about whether the current reporting cycle is fit for purpose. Increasingly, the standard reports, such as the annual report, are regarded as reference materials. They have less and less bearing on the investment decision-making process and rarely result in market-moving information. More than two-thirds of survey respondents agree that external stakeholders are demanding more frequent reports.

An emphasis on forward-looking information

The emphasis on nonfinancial reporting is also increasing. Nearly three-quarters of respondents say that there is pressure on the finance function to provide more nonfinancial reporting information to internal and external stakeholders. This includes areas, such as governance, CSR, remuneration and sustainability reporting, that many companies now recognize to be highly important for their external image.

There are substantial challenges to improved reporting. The speed of regulatory change is such that companies find it difficult to keep pace. With limits on resources, companies need to improve reporting efficiency, especially by integrating or upgrading IT systems, strengthening the consistency and availability of data, and optimizing processes. Finding the right talent for reporting functions, beyond the traditional accounting skill set, is also a challenge. Downsizing of the finance function has made it more difficult to have the available resources to improve reporting, according to the majority of respondents.

External challenges include the speed of change

A fluid, dynamic market environment is the number one external reporting challenge, according to respondents. The pace of market change means that it is difficult for the finance function to provide sufficiently rigorous data that is not swiftly out of date.

Regulatory change poses concerns

Respondents also point to the number of accounting and financial reporting requirement changes — and the pace of this change — as a key challenge. This forces them to adapt their IT systems, and invest in more training and resources to deal with the compliance challenges. “Over the past few years, we’ve had a huge rise in the volume of accounting standards that has meant financial reporting has become more complex,” says Davies. “Changes in financial instruments, share-based payments, pensions and other accounting standards have all increased quite dramatically the number of disclosures required.”

Companies face major internal challenges

The biggest internal challenge is time to produce reports. Companies are clearly struggling to gather and analyze information, and report in a timely way. This is not only because of the sheer volume of information and the need to ensure accuracy and timeliness. It is also because of internal inefficiencies and resource constraints. The complexity of the organizational structure is also a key barrier, as is managing the cost of a highly involved reporting process.

Talent is a key issue

Talent is another major challenge. With reporting pressures increasing, and cost pressures on the finance function remaining intense, companies must find highly talented individuals who can work productively and strengthen reporting processes, while at the same time minimizing costs. More than 60% of survey respondents find it difficult to appoint the right people with the right skills for reporting.

Companies see substantial scope for reporting to improve. They think that their reporting frameworks could be made less complex and time-consuming, and could provide better information. This would also have internal benefits, in terms of greater accuracy, consistency and transparency that, in turn, would lead to better decision-making.

Most companies express fairly high levels of satisfaction with most aspects of their current reporting processes. Generally, they consider the timeliness, cost and level of compliance to be effective. “Most companies are not a disaster. In fact, many are quite good in many areas. But most still have much, much more output and optimization that they could achieve,” says Bukspan. “It could be systems. It could be integration of different naming conventions among different divisions, the finish of and choice of KPIs, process issues, cleanliness of data or IT.”

Improving efficiency

In addition, 78% agree that they could introduce greater efficiencies to the reporting process. Just 27% say that they are highly effective at efficiency of production in corporate reporting, and only 25% are very effective at speed of closing.

Quality of reporting content

In addition to improving the efficiency of the reporting process, 74% of respondents agree that they need to improve the quality of information that they provide to external stakeholders. A key element of this involves moving beyond regulatory compliance. Purely complying with regulators’ requirements does not tend to result in reports that are accessible and useful to other external stakeholders.

There is a strong aspiration to move toward connected reporting. Companies recognize that this would strengthen the reporting process and the quality of reporting. In turn, this would bring benefits for relationships with investors, connectivity with regulators, decision-making and the reputation of the company. Many find it difficult to implement connected reporting, and will need to make progress in a number of areas for this aspiration to become reality. The most urgent steps needed are to improve the availability, accuracy and consistency of data, and invest in IT infrastructure.

Despite a background of increased complexity and the awareness that reporting could be more efficient, many companies have been slow to recognize the wider benefits of improving their reporting. “Financial reporting is still often seen as a compliance issue, rather than a marketing or reputational issue, when it has the opportunity to be all three,” says Davies. However, a growing number of companies recognize not just that they could be more efficient in their reporting, but also that better reporting would have benefits for investor relations and decision-making.

The benefits of connected reporting

Connected reporting offers a solution to the challenges of improving reporting. It enables organizations to meet the increased demand for consistency on financial and nonfinancial information. By connecting information, companies can improve both the decision-making process and the quality of the decisions they make, and provide a better picture for external stakeholders.

Connected reporting also helps companies to address the challenges of consolidation by bridging the gap between the different requirements of internal and external audiences and objectives. By helping to simplify IT structures and automating systems and methods, it reduces complexity. This, in turn, supports the production of consistent data and thus consistent, accurate reporting process and messages.

Moving to connected reporting

Part of the reason for slow progress toward connected reporting, even where the benefits are recognized, is that companies must overcome major obstacles in order to implement it. The most significant of these are improving the availability, accuracy and consistency of data, and investing in updated IT infrastructure. Standardizing business processes is also crucial. Internally, it is important to connect the right competencies within the organization in order to provide all the information needed for connected reporting.

“There are two main steps that companies need to take,” says Chiang. “First, processes have to be upgraded — meaning the actual flow of the information, how it gets captured, how it gets transformed, and how to push output deliverables. Second, overlay the IT system, because you want to automate as much of the capturing, accumulation, transformation and generation as possible.”