After the corporate scandals of 2002, there has been no shortage of suggested accounting reforms. Many ideas, including principles-based standards, seem too abstract to offer any fast results. But the latest paper in Deloitte's Integrity and Quality series provides a refreshingly practical perspective. It is packed with helpful tools to improve the financial reporting process.
Basically, Deloitte is advocating better explanations of the values, risks and ratios needed for a solid understanding of a company's financial position. The goal is to provide explanations that better reflect the risks in a company's business and the subjectivity in its accounting principles.
Examples of useful disclosures involving values, risks and ratios include:
- Explanations of the proximity of book values to economic values, along with the estimates and assumptions used in financial reporting and the possibility of impairment.
- Information about risks of off-balance-sheet arrangements and assessments of internal controls, as well as the risks and rewards related to the countries in which a company does business.
- Comparisons of key balance sheet ratios with the norms for the industry in which a company competes.
To help companies communicate with auditors and prepare better disclosures, Deloitte has provided a list of questions to consider in assessing a company's financial position, along with a summary of key balance sheet ratios and corresponding industry averages.
Admittedly, the data needed for better reporting goes beyond that found on the face of a balance sheet. But Deloitte emphasizes that although the balance sheet is a logical starting point for assessing a company's financial reporting – it is only a starting point. The additional information needed for a full understanding can be presented in the notes to the financial statements and the MD&A (management's discussion and analysis) portions of annual reports.
Download Deloitte's paper on "Quality of Financial Position – The Balance Sheet and Beyond."