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Saturday, July 28, 2012

ICAI Award for excellence in financial reporting-an analysis

Now is the time of the year when the Institute of Chartered Accountants of India opens its annual competition for the best presented annual report. The different categories are as per activity(service, infrastructure, manufacturing, non profit, public sector), ownership(public, private) and turnover(>500 crores and others). You can read about it at this link Like many other awards, its reputation was somewhat tarnished post the Satyam scam(as Satyam was an award winner too), but it has bounced back. The object of this post is to educate the reader about the award criteria, and to comment on it. I had also ranked companies’s financial reporting as an academic exercise during my stay in IIM Ahmedabad, so I can claim some expertise in ranking!
  1. ·         Compliance with statutory/regulatory norms
  2. ·         Quality of financial reporting(‘clean’ audit report without qualifications/adverse comments)
  3. ·         Adequacy and presentation of financial information by using schedules, cross references, subtotals, rounding off, charts/graphs/comparative highlights, financial ratios. Interestingly, ‘lucidity, clarity and comprehensively’ from the angle of individual/small shareholders is also rewarded here maybe for inclusiveness!
  4. ·         Extent, nature and quality of non financial information including HR accounting, CSR activities, MD&A of company and subsidiaries, risk management, governance/ethics etc.

The award criteria in my view, miss out on the following important elements of the annual report
  • ·         Segment Reporting-this should explicitly get weight(most companies escape by stating just one reportable segment!)
  • ·         Intangible Assets-Few companies disclose their patents and other IPR. Hence, this should be incentivized, to allow shareholders to spot the next Apple :P
  • ·         Too much importance to CSR/ethics-this is activity which the company spins, not necessarily which it does well. Rewarding mere reporting of this seems inappropriate, as it is unaudited information and often spinned too well
  • ·         In this digital age, using the web version effectively and uploading high resolution coloured pictured form of annual report is not rewarded. In an era where electronic version is sent by default to those shareholders having email IDs on record, this aspect assumes importance.
  • ·         Other information like investor presentation, conference call transcripts, videos etc are not evaluated at all. This being useful non financial information helping to interpret the financial reports, should certainly get some weightage. 

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