Our students are often asked, “What are the various financial statements?”
- Balance Sheet
- Income Statement
- Notes to the Account
- Cash Flow Statement
- Statement of Changes in Equity
The Americans set the pace with the Sarbanes-Oxley Act in response to the collapses of Worldcom and Enron. The Act is a set of rules that are targetted more towards severe corporate misbehaviour, eg. fraud and the falsification of accounts.
Some examples of these non-financial areas cited:-
- What are company’s relationships with important parties, such as customers, employees and suppliers?
- Are the products of company of certain quality?
- Are your employees committed to the company?
- What is the key source of future revenue and profit in a firm?
- What is the state of product innovation?
- What is the level of brand loyalty and strength?
- What is the level effectiveness of the board and top management?
Most of the white-collared executives surveyed in Europe said they would prefer to see more incisive information on their companies’ key non-financial drivers of success.
How to make such information on key non-financial drivers a reality?
- Set industry standards to measure these crucial drivers. Without such standards, reliability of such information would be a big concern.
- Coerce a mindset change in companies that non-financial measures do affect profitability. I believe the companies will get the message when the market reacts to such information compared across companies and industries.
- It is also important to have board members and executives who are knowledgeable about non-financial measures. In similar vein, the scope of auditing would expand too and will thus require the necessary expertise beyond accounting and/or auditing.
These non-financial measures would help us to see the company’s future prospect better.
Reference – “Inadequacies of Financial Statements”, Business Times, Michelle Quah, February 4, 2005.