Accounting for Value

Aug 03, 2010

Since 2004, the Prince of Wales has been leading the charge for new corporate accounting standards that would take into consideration social and environmental factors that affect the cost of doing business, but that are ignored by traditional standards.  This would include both factors that will impact a company’s bottom line, but also external costs imposed by companies on society and currently unaccounted for.  For example, environmental damage may be a by-product of a company’s core business that is unaccounted for, but it might also lead to a risk of an increase in the cost of acquiring certain raw materials.  Neither the current cost nor potential risk are fully encompassed by today’s standards.  The goal of the Prince’s undertaking (read more here) is to increase both global access to, and international consistency of, information about the true value of companies to investors.

The initiative has assumed renewed urgency in the last year, as the global financial crisis has revealed an even more fundamental lack of transparency and consistency in reporting.  As we have seen, even major (globalized) companies operating within a single country, such as the United States, have been subject to different reporting guidelines regarding basic financial information, to say nothing of social or environmental criteria.  The inconsistency with which various firms reported on repurchase (or “repo”) financing deals are a notorious example.

Yesterday, the Financial Times reported that the Prince’s initiative has at last come to life in the form of an International Integrated Reporting Committee.  The Committee brings together major corporate players, such as Nestlé, India’s Tata, and the big four auditors (PwC, Deloitte, Ernst & Young and KPMG), along with major academics, international regulators, civil society (such as the Global Reporting Initiative) and other notables.  The goal is to build a consensus behind a set of internationally consistent standards that the G20 would adopt by 2011.  These would, at least in theory, provide investors with the kind of high-quality, comprehensive, information they need to take a systemic view of the risks and opportunities implicit in their portfolios.  They would also provide regulators with the critical data they need to perform their roles in the financial system.

The IIRC is a worthy endeavor, and I wish it every success.  As investors consider the kind of information they need to truly understand their portfolios, we hope they will also demand consistent and transparent reporting from governments, the lack of which can lead to equally egregious mispricing of government debt.  In addition to their holdings of private equity and debt, investors hold a considerable amount of public debt, either as a store of value in a diversified portfolio, or as a speculative wager. In either case, better reporting by governments is also vital in order to properly assess value.  Consistent and comprehensive information from both governments and private sector actors around the world is essential for the creation and sustainability of wealth, both for investors, and the public in general.

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