Companies vie for top marks from UCT’s Department of Accounting
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| Professor Alex Watson from the Department of Accounting. |
Professor Alex Watson and her team from UCT’s Department of Accounting
annually assess the financial statements of the country’s top companies
which jostle for positions in the rankings. They rate the corporate reports
in the following categories: Top 10, excellent, good, adequate and
perfunctory (the bottom-of-the-class ranking).
This year the Standard Bank Group won top marks, with Sasol breathing
down their necks for second place. The Nedbank Group came third.
It is the 12th year that the Department of Accounting has taken out its
red pens to assess the quality of the country’s reports. In UCT’s
adjudication team this year were Professor Alex Watson, Professor Mark
Graham, and Goolam Modack, who each pored over the statements prepared by
the top 100 largest listed companies as well as 10 parastatals. The criteria
for assessment included presentation, performance review, financial
disclosure, governance and sustainability issues as well as forward-looking
intention. Each report was marked by the three adjudicators separately using
a mark plan and the recommended rankings were collated.
According to Modack:"The mark plan is not made public, as this could have
the disadvantage of encouraging gamesmanship amongst the participants,
rather than striving to encourage excellence."
It appears that this process is paying dividends, as Professor Watson has
noted that each year the standards have improved. This is an edited version
of her speech at the awards ceremony hosted by Ernst & Young:
Over the years of the contest, we have seen significant improvements in the
quality of the corporate reports prepared. On the whole, the quality of the
statutory financial statements is now very high – the factors that
distinguish the better reports is the quality of the accounting policies
presented, and more recently, the quality of the information presented in
response to the onerous requirements of IFRS 7, the international reporting
standard. It is in the non-statutory section that we see more examples of
excellence in corporate reporting.
In identifying excellence, we are looking for information that is useful to
a potential investor – as far as possible the information must be robust and
it must definitely be relevant to that type of business. We are looking for
information that can be used to predict the future prospects of that
business – while we understand that making forecasts is always difficult,
and particularly so in the volatile economic periods that we have recently
experienced – we do believe that it is possible to give investors
information about the factors that are likely to influence future
performance of the company. Companies that do this successfully are those
that clearly specify their financial objectives (and to some extent other
objectives as well), together with a reconciliation of prior year disclosed
objectives and the performance in the current year.
Sensitivity of profits to macroeconomic factors, gross margins and any
threats to those margins, any indicators of future activity levels or
changes in the mix of activities are all the sort of information that we are
looking for. A number of companies manage to highlight the impact of that
type of information successfully by providing a high level overview of
factors that contributed to a change in profit levels during the reporting
period. That combined with factors that could influence future performance,
such as outstanding orders or acquisition or disposal of businesses can
provide useful information.
An increasing concern for us is the accessibility of the information –
generally speaking, corporate reports are getting longer with more detailed
information provided. That is not always an improvement – as always, it is
quality and not quantity that determines the value. Companies that have
produced excellent reports are those that place emphasis on the appropriate
information, and relegate the less relevant information to either the web or
more detail in the corporate report. The inclusion of high level summaries,
graphic presentation of key relationships and good indexing and
cross-referencing all contribute to our presentation of excellence.
We have made the point before and repeat it here as it is particularly
appropriate in the current environment. There is no general description of
what is excellence in corporate reporting – that requires a comprehensive
communication of the factors that are currently important to that type of
business at that point in time. With all the economic turmoil of the last
year or so – we placed increased emphasis on liquidity issues, the
information given in relation to the determination of fair values and the
disclosure of disaggregated information for different periods of the year.
Management of a business are in the best place to determine what the risks
are that their business is facing, and what factors are likely to influence
their business going forward. Effective communication of that is what we are
considering when we are assessing excellence.
As happened last year, we were asked to include the reports of 10
parastatals in the contest. A new development this year is that we were also
asked to indicate how we would have ranked those parastatals had they been
included in the top 10 ranking.
On a very subjective basis, we consider Eskom’s financial statements to be
on a par with the listed company that we have rated 8th. The other
parastatal that we considered to have produced a report of an excellent
quality is Transnet, and we consider that to be equivalent to the listed
company that we have ranked 5th.
These are the top 10 listed companies for 2009:
10 Gold fields
We particularly liked the detailed information available in the
sustainability report; so many of those reports contain general comments
that lack substance, but that certainly does not apply to this company.
Disclosure includes clearly identified objectives, achievements and future
targets in relation to key sustainability issues.
9 Massmart Holdings
The information in this report is particularly accessible, partly as a
result of useful indexing per category of stakeholder and the emphasis
placed on information that is considered to be particularly relevant. We
especially liked the financial directors’ report in this annual report; it
covers the key issues relating to the performance of the group and is
cleverly cross-referenced to the relevant detail in the group financial
statements. The reporting on the underlying business, factors driving
movements in gross profit and the impact of the economic climate was
particularly well handled.
8 Barloworld
The Barloworld report contains good segmented disclosure and includes
particularly well structured and comprehensive disclosure in relation to
accounting policies. The financial report is well structured and includes
much detailed information. The sustainability report includes more
quantitative information than most and in many cases includes comparative
information.
7 Truworths International
This financial report provides meaningful information on the factors that
are particularly relevant to its key risks including bad debts, inventory
turnover, write downs and margins. The disclosure in relation to the
management of the risk and cost of credit is particularly good and is of
particular relevance given the economic climate. The format of the risk
report, including clear identification of risk status, is a useful summary.
6 ABSA
We liked the graphic presentation of the key financial and strategic
objectives presenting the actual results of 5 years together with the
targets and meaningful benchmarks e.g. return on equity compared to cost of
equity of the company that we ranked 6th. This is a lengthy (412 page) but
well structured report that would have been even longer had the bulk of the
sustainability report been included in the report. This is a good example of
the inclusion of key information in the report, with more detailed
information available in the notes, particularly with respect to employment
equity and other employee related issues. The accounting policies are
particularly detailed and clear. This and a more detailed segment report
contributed to the ranking of ABSA.
5 Apexhi
Probably a surprise inclusion in the rankings, particularly sneaking into
the top half of the rankings, is a financial report that is innovative and
informative. Though not directly relevant in the ranking the humour, art and
references to music of different eras are worth mentioning. The ranking is
awarded as we all felt that this is a company which explained a particularly
complex capital structure exceptionally well. Before agreeing on the
ranking, we individually considered what additional information the entity
could have provided that we would have considered useful and none of us came
up with anything – we did that as the financial report is simpler than most,
but that does not imply that it cannot be excellent. The simplicity of their
business, the high level of disclosure of the factors driving the gross
margins, coupled with meaningful forward looking information all contributed
to its top 5 Ranking.
4 GROUP FIVE
This relatively-short financial report is a good illustration of what we
consider to be the way forward for financial reporting. The financial report
includes all the key information, presented in a variety of appropriate
graphic and other formats. The financial report is backed by the inclusion
of a disk containing more detailed information, making the summarised and
detailed information very accessible. This company gave particularly good
disclosure of its long term strategy, strategic risks and financial goals.
Another positive factor was the linking of the 2008 disclosures to the risks
identified in the 2007 financial statements. It was probably one of the best
with forward looking information, although we acknowledge that this may be
relatively easier given the long term nature of its product cycle.
3 NEDBANK GROUP
This financial report includes an impressive risk and capital management
report. Detailed information is provided in an accessible format, partly as
a result of the extensive use of diagrams, tables and graphs. Disclosure of
the requirements of Basel II was well handled, including a useful linkage to
the requirements of IAS 39 and comparison with the requirements of Basel I.
Appropriate emphasis was placed on the impact on the performance over a
longer period than is the norm in order to highlight the impact of a
turnaround strategy implemented in 2004.
2 SASOL
The finance director’s report still ranks as one of the most useful
extracts of the financial reports that we look at; it is well structured,
rich in information and easily understandable. The financial report has an
appropriate emphasis towards issues of particular relevance to the group and
the information is particularly accessible as a result of good structure and
layout combined with a variety of different forms of graphic presentation.
Early adoption of some new IFRS was also commended.
1 STANDARD BANK
Standard Bank produced a financial report of an exceptional all round
quality. Outstanding aspects were the explanation of the implementation of
Basel II and the reconciliation to the GAAP requirements in IFRS 7. A good
risk report, clear identification of the impact of a major acquisition
during the period and the analysis of the profit and activity volumes were
all positively reviewed. The abridged sustainability report together with
the detailed information available on-line are of a high quality. The
statutory financial statements are of an exceptional quality, in particular,
the formulation of accounting policies and the excellent disclosures in
relation to segment reporting and financial instruments were noted by the
adjudicators.
Posted on 26/05/2009 by Carolyn McGibbon
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