The paradox of innovation in corporate reporting - FutureValue
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The paradox of innovation in corporate reporting
17/04/2015
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The search for transparency in corporate reporting is fundamental to the search for certainty in investment. It is one of the enigmatic issues that Communicate’s upcoming conference on ‘Corporate Reporting, Human capital and the Intangible Asset’ will address. The gap between market value – how investors collectively value a company – and book value – what accountants say a company is worth – can be significant. For a company such as Google it can be in the ratio of 100 to 1. Across the stock market the intangibility ratio is probably around 4 or 5 to one and it varies from sector to sector, depending on the degree to which the company’s success depends upon elusive intangible assets. Analysts will tell you that the difference between market and book value amounts to the net present value of future earnings. But this tells us nothing about the capacity of a company to generate those earnings, or what it needs to achieve a given level of earnings. So, the definition, ‘though technically correct, does nothing to enlighten and reduce investor uncertainty.

There is something of the oxymoron about the phrases ‘human capital’ and ‘intangible asset.’ Capital and asset come from the hard, certainty-seeking world of accounting. Human and intangible convey a more ethereal sense. This not to say the accountants are not human. As an FCA the author would be first to challenge that conclusion! But there is an uneasy relationship between the hard, historically focused world of numbers with its search for spurious certainty, and the more indefinable, impalpable world of intangibility and people.

Accountants, as a rule, aren’t innovators. As a profession we still use a system of accounting developed by Lombardy merchants in the fifteenth century. Evolution and innovation in the system of double-entry bookkeeping since then has been limited and marginal. Our training is in many respects backward looking. Our experience imbues a historical mindset. We look for certainty and spurious accuracy applying a technique that sometimes seems to be more of an art than a science. Other factors retard the search for innovation. Our tax system was developed for an industrial era that recognised tangible assets only. Anything that is not tangible is still treated as an expense charged to our P&L Accounts and disappears off our balance sheets. To reduce our tax burdens we are all keen to let the current system prevail. No-one has yet designed or proposed a palatable alternative.

Which brings us back to the world of corporate reporting? Why? Because it is a world dominated by and led by accountants. They conduct the audits of our listed companies. They are the regulators of our corporate reporting. Accountants advise the Government on its reporting legislation. Event the vaunted global initiative of Integrated Reporting is dominated by accountants. What price then radical innovation and true transparency in corporate reporting? The world of corporate reporting needs a much broader input of disciplines and thinking. It is surely time for a Business Reporting Council, more than just a Financial Reporting Council.