Why change in financial reporting is key for firms

Listed companies are required to publish annual audited financial reports and interim unaudited financial reports prepared in accordance with the International Financial Reporting Standards (IFRS).

Investors rely on financial reports to get a glimpse of the financial performance of the companies.

Generally, financial statements are voluminous and complex for most investors. In addition, most disclosures in the financial reports are often historical, quantitative and only depict the short-term performance of the company.

Issues of how companies impact the society they operate in, the environment, the overall sustainability of the business and governance structures (ESG) have increasingly become key determinants for investors as they decide which companies to invest in.

As much as financial performance is still very important, investors are turning to ESG frameworks that indicate long-term sustainability of businesses. The Covid-19 pandemic has posed a real test to the sustainability of businesses and the robustness of business operations.

Business leaders are required to rethink and reimagine their vision of success which was previously, premised primarily, on financial performance.

Most listed companies, like other businesses, have been highly impacted by the pandemic. At the same time, investors now more than ever are demanding information on the degree of impact of the pandemic on the listed companies’ business, the mitigation measures taken to ensure the sustainability of the companies as well as forecast on future operations.

It should be appreciated that companies would not predict, with precision, the effects of Covid-19 and that the actual impact would largely depend on several factors beyond a company’s control and knowledge.

However, investors have a right to this information as well as the sustainability fundamentals of those companies.

Investors are now more informed and as the Covid-19 pandemic unfolds, there will be more scrutiny by these investors on the robustness, operational optimisation and sustainability of the business and operations of listed companies.

Sustainability reporting would, therefore, be a vital tool for listed companies to bolster trust and confidence among investors and all stakeholders. 

Going forward, companies, listed or otherwise, must make a quick shift from just financial reporting to integrated reporting. Integrated reporting enables a company to tell its story to its shareholders and investors of positive societal and environmental impacts and contributions, its intangible assets and competitive advantages tied to ESG matters and financial performance, including profitability and returns.  

Now is the time for businesses to prove they are more than just a balance sheet.

This holistic approach will come with its own share of challenges, key among them being the shift in mindset from the traditional financial reporting.

There is an urgency to transform the thinking around ESG matters and integrated reporting. For firms to create long-term value that will sustain them during and after Covid-19, boards of companies must empower their management and investor base to bridge the information gaps around ESG and integrated reporting.

Companies must also continually monitor the effects of the pandemic on business performance and and provide accurate information in a proactive manner to investors and other stakeholders.

The writer is the head of regulatory affairs at the Nairobi Securities Exchange