Corporate annual reports are now available mainly as soft copies. Gone are the days when management students and analysts used to pore over hard copies to decipher the performance of companies. Information flow today is almost in real time and the regulatory requirements of dealing with information asymmetry have made the flow of information both uniform as well as instantaneous via news channels and websites. The biggest casualty in the process is the Chairman’s speech, which has been largely marginalised.

The three main reports now hogging the limelight are: Directors Report (DR); Management Discussion Analysis (MDA); and Corporate Governance Report (CGR). These, along with the financial statements, notes on accounts and the auditors report, give a comprehensive picture of the year gone by with all the affirmations and positive developments that have happened, and buttressed with an overdose of statistical highlights.

There is clearly no dearth now on the content part, which is bristling with loads of information.

The key question is whether the investor is privy to exceptions and red flags which are so vital to informed decision-making? And, more importantly, are there headwinds in sight in an otherwise exemplary year of performance?

The Exceptions

There is a view gaining ground that we need to move to a regime of ‘exception’ reporting rather than tabulating mere affirmations and assertions.

There must be a one-pager on the following: key discussions and disposal points on various committees of the board; significant control and process related issues highlighted in internal audit reports; alarm signals emanating from contingent liabilities; findings of inspection reports from RBI/SEBI and other regulators; matters relating to frauds and whistleblowers; and risk factors — both external and internal.

The purpose of this is to get a holistic picture of the health of a company. Information on all or some of the issues pointed out may be in some corner of the annual reports, lost in the maze of information.

Is there a downside to exceptions reporting? To my mind, it is an emphatic No. It actually enhances the credibility and quality of information reporting, giving the reader of financial statements the positives as well challenges inherent in a business.

Transparency is all about knowing not only how fast a car can travel on a eight-lane highway but also the potential potholes ahead.

The focus must be to strike the right balance — between affirmations and exceptions. Overdose of either could lead to ill-informed decisions.

The next question is: Should this ‘exception’ page be prescriptive or voluntary? History reveals that anything prescriptive invariably becomes a box-ticking exercise, with form taking precedence over substance. Anything voluntary must evoke excitement, so vital to make the information page meaningful and purposeful. Companies which have voluntarily disclosed more than what is required have always commanded a higher premium in the market.

It is almost like going back to the basics. In the earlier years, the report card of a student would contain the marks in various subjects and the rank of the student. Somewhere in the bottom, the class teacher would write — ‘areas to improve’. This would be a candid expression of specific qualitative factors the student should focus on. And such feedback was given to the student who topped the class as well.

The exception page would be somewhat similar to the class teacher’s note in the report card. Are we ahead of times in even bouncing off thoughts on and exception reporting page? No other country it is learnt has an ‘exception reporting’ page in the overall regulatory framework.

But that should not deter us from at least taking baby steps in this direction if it helps the cause of the average investor.

The writer is a chartered accountant

Related Topics