Effective internal controls for greater corporate reporting confidence

Regulatory reform and stakeholder expectations are raising the bar for corporate reporting – greater transparency and accountability will be needed to clear it. 

It’s a sign of the unusual times we are living through that corporate reporting is now making front page headlines. 

Recent high-profile business collapses have raised fundamental questions about the current reporting framework, highlighting its crucial role in building trust between business and society. 

At the same time, companies are facing their own internal reporting challenges, from managing huge volumes of data to measuring non-financials and explaining how they create long-term value.

What does this mean for you?

The outcomes of the Brydon review into the quality and effectiveness of audit, the Kingman review on the future regulation of financial reporting and Competition and Markets Authority (CMA) review are not yet finalised (June 2020), but they will almost certainly result in a package of reforms that will change UK corporate reporting forever.

At the heart of these changes is an ambition to ensure that the UK continues to be a world leader in auditing. Brydon’s 64 recommendations impact a variety of parties and take a strong stance on directors’ responsibilities, strengthening internal controls over financial reporting (ICFR) and the prevention and detection of fraud. Alternative Performance Measures (APMs) and certain Key Performance Indicators (KPIs) will likely have to be audited in future and that will mean companies need robust definitions, data, processes and controls to support the new KPIs. In future, CEOs and CFOs may have to vouch for the effectiveness of these internal controls and, if any weaknesses emerge, they may be held accountable.

But with these new responsibilities come opportunities. When a company understands clearly how it creates value and underpins this with robust KPIs, it can communicate with confidence. When a company also identifies the risks and controls that underpin the KPI reporting process that confidence is further enhanced. Academic studies show that companies with robust internal controls over financial reporting are rewarded with lower costs of capital and higher share prices.

Assessing your current reporting framework

An effective reporting framework should address the issues that are fundamental to a business – from how it creates value to how that is measured and how confident CFOs are that the metrics are reliable.

Secondly, executives need to carefully consider what level of reporting is appropriate for their business: the legal minimum level; what they feel they should report on as a moral imperative; or what they could do to achieve an industry-leading level of reporting that fully aligns with their corporate vision.

Bridging any gaps between current processes and future requirements means working through your existing corporate reporting and asking, amongst other questions:

• How important is it for corporate reporting to communicate how your company creates value to attract diverse investors.

• How easy do you think it is for potential investors to understand your performance, medium term strategy and long-term value creation story from your current annual report & accounts?

• How well does your reporting capture and communicate the non-financial dimensions of your performance and value creation, including the measures that matter to your key stakeholders? 

• If you had better corporate reporting data, KPIs, processes and controls, what would it enable you to do that you cannot do now?

Counting what counts

In today’s business world, an increasing proportion of a company’s value lies in its intangible assets, but non-financials such as culture and environmental impact are harder to measure than more traditional metrics. At the same time, it is becoming more widely recognised that these intangibles are crucial to generating long-term value. This makes it more important that new ways to measure non-financials are developed and commonly agreed.

Having the right KPIs in place is crucial to effective reporting. As non-financial data becomes more important and compliance pressures mount, there are several key questions to answer:

• How confident are you that you have the right financial and non-financial KPIs, both now and in the future?

• How would you know if the data you collect to measure KPI’s and the controls and processes you have in place are not working?

• How confident are you in the unaudited KPIs that are already being reported to the market?

Get in contact if you’d like to benchmark your control environment against the best in practice, based on the Committee of Sponsoring Organisations of the Treadway Commission’s (COSO) framework.

We can also help with:

• Maturity assessments by group and by division.
• Fraud analytics.
• Creation of sample process flow charts.
• Scoping and risk assessment for business processes and IT applications.
• KPI risk assessment.
• Process mining to visually demonstrate what’s actually happening in your processes to help with scoping and issue identification.
• Valuable finance insights from your general ledger data.