The Traditional Reporting Model Is Failing To Meet Its Objective Accounting Essay

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The Institute of Chartered Accounting in England and Wales (ICAEW) has requested an examination of the monograph New Reporting Models for Business (2003). In this report, a few selected models which fulfil the growing demand of more information are recommended and justified.

Current Business Reporting

The traditional reporting model is failing to meet its objective; adapting to the changes in this continuously evolving business world. The public are losing faith in business reporting, as increasingly important information is not being disclosed. Jonas and Young (1998) recognise the lack of focus on users and how this consequently undermines the quality of reporting.

Reformers highlight a number of problems that are present in our current business reporting model. Development of Information Technology (IT) has expanded the range of users along with their needs. Therefore it is unreasonable to suggest that all their needs can all be met by a general purpose report (Accounting Standards Steering Committee, 1975). Furthermore, the current model concentrates on lagging, historical costs which do not show any indication of future prospects of the company. Reports also fail to recognise and disclose enough information on qualitative and intangible assets.

Some users for example: investors gambling on performance for a short-term may influence the managers to side-track from their long-term goals. Thus managers focusing on financial measures may make short-term and myopic decisions, Ezzamel et al.'s (2008). Finally, the gap between information available to users and managers and users demand a greater transparency of the companies' transactions.

Expectation of the new models

Reformers suggest various ways in which business reporting can regain the trust of users. Firstly, as the business world is moving towards a "knowledge-based economy" with user driven processes, information has become a crucial concern in economic growth. Thus users are demanding more knowledge of the companies' activities to be easily accessible to them. Secondly, the advancement in IT has had a drastic effect on the nature of business, it can be used to assist globalisation of the capital market and intensify competition between companies worldwide. Since this development, there has been an increase in the groups of users, so the new model needs to take this into account. Thirdly, current reporting is based on historical costs, so models should provide information which allows investors predict the future growth of the company. Fourthly, reports should include non-financial measures and more qualitative rather than financial information as figures alone are not attributable to the company's performance. Finally, new models should align the internal and external reporting to avoid information asymmetry. Further beneficial reasons for why companies disclose are:

lower the cost of capital,

development in technology reduces cost of delivery of disclosure,

value creation,

effective resource allocation,

Reduced litigation costs arising from accusation of inadequate or misleading information

competitive advantage

improving long-term performance

An effective business model should meet the issues addressed above. It is difficult to suggest one model that fulfils these needs; however, there are various aspects of certain models which will be beneficial the economy if implemented. Nielsen C. et al, (2008) advocates that voluntary information is significant for understanding value creation and disclosure will improve investment and decision making of users.

Jenkins Report

Jenkins Report is one of the most influential reports worldwide (Vivien A Beattie, 2000). This voluntary model is the main recommendation as it concentrates on reporting non-financial measures, forward-looking financial forecasts, aligning information of managers and users and user orientation. Vivien Beattie et al, (2004) articulate that this model improves reporting by adopting a customer focus. It also recognises that "timing and the level of detail" in a disclosure can help investors avoid significant expenditure. By disclosing forward-looking information, the company allows investors to predict their own forecasts and allocate the money wisely.

Lymer, A and Tallberg, A. (1997) emphasise that in the midst of globalisation and the expansion of the group of users, Jenkins report acknowledges how technology plays a significant role in satisfying their needs in a timely manner and it seeks to increase the magnitude and the nature of information available to them. It intends on providing a "broader, integrated range of information". Beattie, V and Pratt, K, (2002) suggest that adopting this model will enhance financial statements, improves auditing and facilitates change. It is evident that the Jenkins disclosure of forward-looking information does affect the investors' decision-making as it signify management's perception for the company's potential growth, (Eaton, T.V, and Stanga, K.G, 2000). Ann Vanstraelen et al (2003) found that voluntarily reporting forward-looking, non-financial information will improve predictions of the company's future consequently giving a competitive advantage to those who disclose such information. Though other model such as GRI are widely more accepted by companies, measuring the indicators are unclear and ambiguous (Kundsen, J.S. 2007)

The 21st Century Annual Report

The Jenkins Report does not focus on intangible and IT so another useful model to implement is the 21st Century Annual Report. This approach provides a basic framework in which shareholders can have structural influence. It is reactive to the dramatic changes in social attitudes and our present-day society and aims to provide an open, transparent accurate indicator on financial, environmental and social commitments incorporated into a long-term scheme. For example, the innovation ratio allows companies to measure objectivity through value added each year by its people (i.e. employees) and so Prototype plc evaluates the company using this key performance measure. It also measures intangibles to help assess risk in certain areas of the company's activities. This tends to provide a better portrait of the company to the stakeholders (ICAEW, 1998). ValueReporting also focuses on intangibles and transparency however, its cost-benefit ratio should be considered before implementing (Coleman, I and Eccles, R, 1997).

Benjamin A. (1998) refers to the concept of an interactive web-based program as the form of communication of the 21st Century. It will host an ongoing permanent dialogue which exhibits all of the company's activities and progress. Similarly, the Inevitable Change uses a standardised electronic library to inform the users of the company's activities. ICAEW (2003) also states that this web-based report will be a "faster and fairer" way of customized information that focuses users' need. Stakeholders are able to filter out the information that is most important to them, essentially providing a framework. However, this means more work for the regulators; in determining who can receive what information.

Problem of new models

Nevertheless, there are difficulties in implementation as managers are unwilling to disclose so much just in case they lose their competitive edge. It is very difficult to find a balance between too much disclosure of sensitive information and transparency, (Linsley, P.M and Shrives, P.J, 2005). Only companies who are large and are internationally stable seem to disclose non-financial information as it may not be feasible for smaller firms (ACCA, 2008). Robb, S.W. G et al. (2001), Ann Vanstraelen et al (2003) and ICAEW (2003) also indicate that there is apathy from investment community. This may be because they are unaware what information they need to be receiving or as many traditional mainstream investors who own a lot of shares believe that shareholder activism is a waste of times; it is difficult to understand why only a monitory should spend money on shareholder activities from which all shareholders will benefit from (Coombes, P. and Wong, S., 2004).

There is also a threat of lawsuit if any inaccurate predications are made on forward-looking information (Johnson, M.F. et al, 2001). It is impossible to develop objective indicators for measuring social performance (Norman, W and MacDonald, C. 2003). Although change in the current reporting model is necessary, there is little precision on what the new models should look like, (ACCA, 2003).

Conclusion and Recommendations

In conclusion, the Jenkins Report meets the needs of users by centralising on non-financial and forward-looking, transparency consequently creating long-term value. Areas such as intangibles and use of IT, the 21st Century Annual Report provides a sufficient framework of reporting. Combining these two models will generate a reporting model which will be substantial in an advancing business world. The recommended models are frameworks and voluntary. Companies are more like to comply with these suggestions if influenced by the government. However, many accountants feel that enforcing these new approaches on them might be limiting their management scope and creativity and undermining their professionalism.

It is apparent that current model needs to be changed, but it is very unclear as to how the new models will look like. However, it is still early stages of implementation and there is room for improvement. As technology develops there will new ways in which business reporting can grow. Therefore there needs to be a model which can easily integrate this into its structure. Inevitably, the future of business reporting will be a balance between what the users and what the standard setters think is necessary.