Financial Reporting

Poor Nonfinancial Reporting Tests Investors’ Trust

Many senior finance executives admit that the public has a low level of trust in large companies, often because of nontransparent reporting.
David McCannNovember 16, 2018
Poor Nonfinancial Reporting Tests Investors’ Trust

Corporate executives can talk all they want, for public consumption, about their companies’ strong connections with investors and customers. But when asked anonymously, a good many of them admit that companies aren’t very much trusted.

According to a new global study of 1,000 CFOs and controllers by EY Financial Accounting and Advisory Services (FAAS), only 58% of respondents said the current level of trust between the public and large companies is “high” or “very high.”

A key culprit for the trust gap: a lack of transparency in corporate reporting — including nonfinancial reporting.

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“Organizations have an urgent need to develop reporting transparency that builds trust and helps explain how they are creating long-term value by exploiting the data at their disposal and turning it into a strategic asset,” says Peter Wollmert, EY’s global FAAS leader.

The weak level of trust in business is reinforced by a disconnect between the respective reporting agendas of companies and the public, Wollmert adds.

There is a tendency to report the wrong things — those that are easy to measure, versus what stakeholders want to know, according to the report.

That’s particularly true of nonfinancial (i.e., intangible) assets. The report notes that in the 1970s, about 80% of the S&P 500’s market value was accounted for on balance sheets by tangible assets; today, the figure is less than 20%.

Insufficient reporting of nonfinancial information as drivers of organizational performance denies investors an opportunity to fully understand the business’s potential for long-term value creation.

“Organizations must account for and explain performance much more clearly, coherently, and transparently, and manage nonfinancial information with the same rigor and assurance as financial information,” Wollmert says.

Indeed, if all reporting information — whether financial or nonfinancial — is not investment-grade, trust will suffer, according to the report.

Research from EY’s Climate Change and Sustainability Services team shows that much of the impetus for improved nonfinancial reporting is coming from the institutional investor community.

“Global policy debates, new regulatory requirements, and more stringent supply chain practices play a part,” the report says. “But the collective voice of the investor continues to be among the clearest.”

For instance, the climate and sustainability team’s research found, 96% of investors said nonfinancial performance had played a pivotal role “frequently” or “occasionally” in their investment decisions in the past 12 months.

In fact, while 62% of respondents to the broader EY survey said corporate reporting enjoys high levels of investor trust, that number rose to 83% among those who have their nonfinancial information audited.

Also, 73% of respondents said their companies’ performance on nonfinancial KPIs “has a significant impact on intangible assets.”