Reports are failing users

One of the hardest things to do in life is to see yourself through the eyes of others. Almost all of us are hopeless at appreciating how we come across, and social conditioning makes people very reluctant to give frank feedback.

I think a similar dynamic is at work in accounting. It’s very hard for a CFO to appreciate how users analyse the accounts precisely because it requires an external perspective.

I remember suggesting to the CFO of a complex conglomerate that he publish a reconciliation of opening and closing net debt. The formal cash statement was of course useless, and my cashflow model always seemed to have a multi-billion-euro hole.

I remember suggesting to the CFO of a complex conglomerate that he publish a reconciliation of opening and closing net debt. The formal cash statement was of course useless, and my cashflow model always seemed to have a multi-billion-euro hole.

He looked surprised, produced exactly the document I was asking for and added that it was already in an appendix. It wasn’t. He simply wasn’t able to look at his disclosure and appreciate what was missing because he already knew all the answers. It’s like expecting someone very rich to really understand poverty.

Statement failure

As I have written before, the statutory cashflow statement is almost entirely useless. Despite this, some companies manage to make it even worse with inappropriate aggregation.

Consider working capital. Most analysts want to analyse the movement in trade working capital (trade debtors, trade creditors and inventory), as it can contain all sorts of useful insights. But all too often there will be a line called ‘movement in trade creditors and other liabilities’, which distorts the TWC analysis. ‘Other liabilities’ could be almost anything, and the reader has no idea of the scale, direction or relevance.

Lumping these two very different metrics together severely damages the ability of an external analyst to work out what is going on.

There is often a similar problem with capital expenditure. I want separate disclosure of investment in tangible and intangible assets, yet many companies aggregate these two lines with a third called ‘other investments’. At a stroke, transparency is severely damaged.

The obfuscation is usually benign but can sometimes be deliberate if a company has something to hide. Almost all accounting fraud would have been easier to spot with better cashflow disclosure.

Lack of understanding

This may all sound arcane but it goes to the heart of much that is wrong with accounting today. The professionals who write the standards and the companies that prepare the accounts do not understand how the information will be used.

I have met lots of standard setters and very few have any experience of analysing a set of accounts. If you don’t know what users are looking for, you won’t know what’s missing.

There is to my knowledge no standard anywhere that tells preparers that they cannot disclose additional information. There is always the option if disclosing more and, in particular, avoiding inappropriate aggregation.

I have reluctantly concluded that the statutory cashflow statement is going to remain largely useless for the foreseeable future as we get side-tracked by other, less pressing issues.

Stand back

My plea to companies is simple. Stand back and think about how users analyse your accounts. Ask yourself what you, as the CFO, would look for when analysing a peer or competitor. Would you like to be able to look at trade working capital trends? Would you like to be able to model the cashflow? Would you want to understand, separately, the trends in tangible and intangible assets and acquisitions? Of course you would.

Then ask yourself, frankly, whether your disclosure is helping or hindering such efforts, and then please do something about it.