Failing corporate reporting system needs complete overhaul

Perhaps the most significant development in financial reporting to have occurred globally since the transition to International Financial Reporting Standards is digital financial reporting. But in Australia, nothing has happened in the three years since a joint parliamentary committee recommended the move, and we now lag the world. This inability to access information efficiently will over time undermine the ability of Australian firms to access international capital markets.

Companies currently lodge information with the Australian Securities and Investments Commission and access is on a pay-per-view basis. This is an economic barrier to accessing information that limits scrutiny. It does an unintended favour for foreign multinationals, making public evaluation of their tax affairs laborious and expensive.

However, the problem is broader. It makes critical research into financial reporting in Australia difficult, and limits public scrutiny of company activities. For example, the Australian Accounting Standards Board and a group of academics concerned with evaluating financial reporting quality in unlisted domestic firms had to pay $50,000 to access the necessary financial reports.

Compliance with accounting standards (and other requirements) by companies has long been recognised as a challenge. For those arguing non-compliance is not an issue, in a recent study considering asset impairments (in accordance with AASB 136 Impairment of Assets), 32 per cent of firms in the broad sample exhibited an indicator of asset impairment (market value less than book value) and these firms generally reported marginal profitability and poor cash flows.

Climate reporting overreach

Problematically, only 44 per cent of these firms recognised an asset impairment. Interestingly, they made relatively fewer continuous disclosures than other firms. This suggests significant non-compliance with an accounting standard, non-compliance with continuous disclosure rules, or both.

Financial information obtained by different regulatory bodies is inconsistent and there are sometimes restrictions on making data available that should otherwise be public. For example, large industry superannuation funds are not registered as companies and do not lodge reports with the ASIC.

Then there are the proposals to expand the boundaries of corporate reporting to include climate reporting. It is problematic that Treasury proposes that this be aligned with the requirement to prepare financial reports and addressed by Part 2M of the Corporations Act. This uses financial criteria, not climate impact criteria, and there is a clear mismatch.

The consequence of this is that more than 23,000 entities will be required to prepare climate reports, and most will have minimal (immaterial) climate impacts to disclose. This contrasts with the National Greenhouse and Energy Reporting regime, which considers climate impacts and requires reporting by fewer than 500 entities.

Those pushing for wide-scale adoption of climate reporting, including the big four accounting firms, are compromised because of how much extra work they will get from helping put these reports together.

These issues are just the tip of the problems in the system, and show why an overhaul is urgently needed.

Peter Wells is an emeritus professor of accounting at University of Technology Sydney.