Assessing market reporting

Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.

This article appeared in the July 3, 2007 issue of the Bangkok Post.

By Dominic Nixon

Globalisation of standards, increasing cross-border M&A and tightening local regulations are all driving Asia's financial services sector to move toward international financial reporting standards (IFRS). But are Asia's financial services firms meeting the expectations of analysts and other stakeholders?
According to a survey of Asian financial services firms conducted for PricewaterhouseCoopers by the Economist Intelligence Unit in January 2007, they are generally confident that they are meeting demands. Overall, 63% feel their market reporting is very effective. But how high are the demands? Our research suggests that many financial services firms in the region benchmark their reporting against domestic peers, rather than overseas players. In addition, equity analysts judge Asian firms against the standards of the Asia markets they cover, rather than New York or London.

It is perhaps no surprise that respondents from financial services firms in Asia's more developed markets (defined here as Australia, Hong Kong, Japan, New Zealand and Singapore) believe that the region as a whole is further away from reaching international best practice than their counterparts in Asia's emerging markets (China, India, Indonesia, Malaysia, Pakistan, Taiwan, Thailand and South Korea).

By definition, firms in developed markets are more aware of IFRS, having been exposed to global markets for longer. They have also expended more effort in trying to reach such standards and thus have a more realistic view of what's involved. A significant proportion (41%) of respondents in developed markets say that market reporting in Asia will not be on par with international best practice until 2015 or later, while 40% say they will be on par by 2010.

By contrast, among respondents in emerging markets, 59% are confident they will reach IFRS by 2010, while 38% feel that this milestone will not be reached until 2015 or later. This suggests that respondents in emerging markets are underestimating the gap between themselves and their peers in more developed markets.

In addition to this, our experience in the Thai market suggests that bridging the gap to international standards is not a priority. As there is no regulatory requirement to comply with IFRS, Thai financial services firms see no need to start moving on this. They will only do so if they feel that there is a clear commercial benefit, i.e. that such reporting would help raise capital, and attract greater investor interest at higher prices. No institution wants to be the first to move without regulatory requirement, as they feel that disclosing more than their peers would be to their disadvantage.

Respondents to this survey can see some of the obstacles that must be overcome to meet IFRS. In developed markets, increasing volumes of transactions, cost pressures and a lack of skilled personnel are deemed the biggest challenges in the provision of market reporting information. In emerging markets, where labour costs are lower, financial services firms struggle in different areas, and are often challenged by a lack of procedures to aggregate/produce information, as well as data quality issues.

In order to bridge the gap between the current perceived quality of reporting and the reality of international best practice, financial services firms in Asia will need to work harder to create a corporate culture that views good reporting as a means of improving performance, rather than simply an obligation to regulators.

Improvement to market reporting will take strong leadership from senior management, who will need to:

• Take a holistic view: Embed the reporting concept as a means of improving performance, rather than simply reacting to regulatory requirements.
• Think beyond the silo: Processes and functions overlap and affect each other. Risk managers, treasurers, financial and regulatory reporting accountants all use the same data and face similar issues when determining how to meet the demand of their various stakeholders.
• Develop a long-term vision for technology: 57% of respondents said they need better IT systems if they are to improve market reporting.
• Establish clear and efficient processes: Financial services firms need well-defined and automated processes in place to aggregate the data required and to process it. Voluminous manual processes raise operational risk, and could result in erroneous reporting in the longer run.
• Make productivity a priority: In our survey, 40% of respondents from developed markets cited a lack of skilled personnel as one of the most significant challenges to providing market-reporting information. The only solution is to identify innovative ways to improve processes, leveraging the technical expertise that is available.
• Know what the stakeholders want: Companies should have a good understanding of where improved disclosures will have the greatest impact. In order to gain such understanding they must increase communication with stakeholders.