How capitalism is broken and the shift to real-time reporting

Just back home from a very intense couple of weeks of work and travel, and finally able to comment on the call to action by the world’s six largest audit firms on corporate reporting, released on 8 November. The starting point for their initiative is the belief, concisely articulated by KPMG Chairman Mike Rake, that “the current [financial reporting] model is broken.” Since a substantial part of my work history is in capital markets, a consistent theme for me as I’ve explored the global knowledge economy over the last decade is how investor reporting needs to shift. It is patently obvious that the current financial reporting system does not adequately serve investors or other corporate stakeholders. Investors are making decisions based on deeply inadequate and substantially historical information. The basis of a capitalist economy is that capital is allocated effectively. Since investors are in essence buying a pig in a poke when they buy shares in public companies, in the absence of effective reporting, the system is intrinsically broken.

The auditors’ report, titled Global Capital Markets and the Global Economy: A Vision from the CEOs of the International Audit Networks, provides a comprehensive yet compact view of the state of financial reporting, and where it needs to go. While the report covers issues such as harmonization, oversight, and liability, the real meat of the report – certainly in terms of the reaction it has received – is in its call for substantial disclosure of non-financial information, and a shift to real-time reporting on some issues. Back in the mid-1990s, when I first started to grapple with these issues, I came to the conclusion that while these shifts were inevitable, it would take well over a decade, and there were others who would be better equipped to drive those changes. A decade has passed, and while there has been much examination of the challenges of non-financial reporting, and some solutions (perhaps best articulated in the book Building Public Trust, by Samuel DiPiazza, CEO of PricewaterhouseCoopers, and Robert Eccles), there has been little change in corporate reporting practices, save at the edges. I have spoken about the potential shift to real-time reporting in a number of my keynotes over the last years to associations of corporate treasurers, CFOs, and investor relations executives, with a muted response. A commentary I made in 2002 on creating the transparent corporation, discussing the role of XBRL in reporting intangibles, is still completely current today.

There is no question that there are massive challenges in shifting to real-time reporting, including verification, restatement, and more. Yet in a world driven by information, in the long run a shift to real-time reporting in some form is inevitable. The report ends specifically with a call to lively conversation on the issues raised, and that has certainly been the case. Interesting commentary on the report has included Leon Gettler’s view that the auditors are trying to weasel out of risk, Dennis Howlett’s thoughts on the issues of bringing in intangible reporting, and Gartner's overview analysis to urge its clients "not to wait for regulators to issue new financial reporting rules before doing something about more frequent financial reporting". I believe that the issues raised in the report are deeply important, and that the report’s release is the most significant event within the last few years, in terms of accelerating the inevitable shift to a substantially different future for corporate reporting. These issues are now squarely on the agenda, and after progress on these vital issues languishing for years, there is now the potential for some real action.