Table of Contents
Table of Figures
2 Insights into the Corporate Disclosure Proce
2.1 Value Reporting: Investors’ Need of Informatio
2.2 Failures of the Current Corporate Reportin
2.2.1 Valuation Proble
2.2.2 Communication Problem
2.3 Consequences: Necessity for Improved Disclosure Proces
2.4 Benefits and Disadvantages of Improved Disclosure Process
3 Tendencies of Corporate Reportin
3.1 Efforts to Improve Corporate Reporti
3.2 Changing Accounting Regulations in Germa
3.3 Trend towards Voluntary Disclosures
Table of Figures
fig. 1: Elements of Value Reporting
fig. 2: The Dialogue Spectrum.
fig. 3: The Gap Analysis
fig. 4: Quality Level of Business Reports in 1995
fig. 5: Quality Level of Business Reports in 1998
Recent scandals, like the Enron Bankruptcy, undermined the investors trust in the information given by the corporations. Enron, one of the biggest consolidated group in the US and in the world, became famous all over the world by the surprisingly bankruptcy in December of 2001. Even a few weeks before the petition of bankruptcy analyst recommended to buy Enron stock and thousands of investors lost their savings or their pension backups. By creative balancing Enron succeeded to take advantage of gaps in the Generally Accepted Accounting Principles (GAAP). Financial data in the annual business report was manipulated so that investors who relied on this information made wrong investment decisions. Likewise investors and analyst trusted in the confirmation of the accounting firm Arthur Andersen & Partner which was authorized to prove the correct balancing of Enron.
The Enron Bankruptcy is just one example, many bankruptcies like the ones of Sunbeam, Waste Management or Global Crossing had followed yet. “Creative balancing” gained currency among other listed corporations and the value and the profitability of blue chips were overvalued. Scandals like this emphasize the importance of the given information for the entire stakeholders, critically the investment community, because they have a deep impact on the investment decisions. Corporations are more and more forced to offer corporate voluntary disclosures which fulfill the “call for evidence of activities” (cf. Pricewaterhouse-Coopers, 2000b, p. 1) made by the business environment and to regain public trust.
Additionally, the globalization of markets has a strong influence on the corporations’ orientation. More and more corporations become international and listed. Thus, the competition on capital market increases and the constant need for capital requires a better explanation on the business performance. To help investors with their capital allocation decisions, corporations have to provide a more reliable, relevant, and useful information on a voluntary basis. In general, investors should get a better understanding of the corporation by more transparency. So, the traditional reporting in a vast number of corporations, based on financial data, is added by voluntary disclosures with the hope to hasten the process of the stock markets recognition of their corporate value.
Investment decisions are always made under uncertainty and from the investors’ perspective it has to be profitable with a minimum risk. Corporations have to report about their corporate value for reducing the investors’ risks. Therefore, it is necessary to develop measures based on identified value indicators and a reporting mechanism for the communication to the key stakeholder. The competitive reality of the capital markets demand a new performance measurement that means not using only financial figures as foundation, but also a wide set of measures including non-financial ones.
2 Insights into the Corporate Disclosure Process
2.1 Value Reporting: Investors’ Need of Information
Since the 1980s corporations’ management are coined of the shareholder value approach. In the centre of this approach is the objective to maximize the corporate value and therefore to increase the shareholder value. Under the assumption of a perfect capital market, an increased shareholder value would be reached only by a value based management. In reality, investment decisions are made under uncertainty and for globalization reasons they are reinforced multiple. Corporate value is the basis for making effective decisions because investors are using methods based on the discounted cash flow methods. The liberalization of the capital markets lead to an enhanced competition for capital which forces corporations to report about their true value.The capital market is efficient when the stakeholders get prospective information about the corporate value but this is not required by legal regulations like the GAAP or Security and Exchange Commission (SEC). The condition to create and preserve shareholder value is the communication on the capital market. Without reporting on investments which create value and on internally performance measurement systems there is a significant danger that corporations will be undervalued by the capital markets.
Value reporting includes the traditional financial accounting - required by regulations like GAAP and International Accounting Standards (IAS) - which is expanded by the business reporting. This ensures that the communication gap between the market participants, as described below, is reduced and the investors’ needs are satisfied by providing information to make forecasts about the value and risk of investment.
Value reporting does not replace the traditional reporting which is delivered by annual and quarterly reports. It should improve the current disclosure process by addition of helpful information for investors. The value reporting focuses on qualitative supplemental information and is partly related to the accounting rules. In contract to balancing, the corporations’ advantage of value reporting is that the taxes are not relevant. Also, the regulations for annual and quarterly reports focus on backward-looking information which does not adequately reflect the corporate value. This aspect emphasizes the importance of voluntary disclosures such as business data, managements’ analysis of business data, forward-looking information, information about management and shareholders, background about the corporation, and information about intangible assets which are helpful to investors.
It becomes obvious that traditional reporting wins out, because it focuses on historical data such as earnings which are generated in the elapsed year. If annual reports are disclosed three months after the business year transaction, the reported data can be 15 months old. Also, in quarterly reports the data can be about five months old. Compared to this, the value reporting is relevant to the current and prospective situation.