The results come from a KPMG study, Another Year On, which assessed companies’ responses to Recommendation 7.2 of the Australian Stock Exchange Corporate Governance Guidelines, which requires CEO/CFO assertion that their sign-off on financial and non-financial statements is founded on a sound system of risk management and internal control compliance.
It models a similar study conducted by KPMG that followed the nature and quality of disclosure in the 2004-05 financial year.
“The increase in the number and quality of disclosures over the last year suggests we can look forward to continued improvement in this approaching reporting season,” said KPMG national partner in charge, energy & natural resources Alison Kitchen.
The results also reflect the growing interest in non-financial risk amongst investors as demonstrated in several supporting submissions to the recent Parliamentary Joint Committee on Corporate Social Responsibility.
In its submission to the committee, BT Governance Advisory Services (BTGAS) illustrated why non-financial risks were becoming more important to investors and to the longer-term financial position of companies. BTGAS cited analysis by the Carbon Disclosure Project that indicated a 5% increase in energy prices could impact earnings per share by as much as 15% in some industries.
In its report, the Joint Parliamentary Committee encouraged companies to inform investors of the material non-financial aspects of its risk profile by disclosing their top five sustainability risks and providing information on the strategies to manage such risks.
“Companies in the resources sector have a head start over other sectors in this regard, as they generally have had an acute understanding how non-financial risks affect their business and have been traditionally very strong in managing and communicating their risk profile and systems,” Kitchen said.
While the heightened disclosure rate of financial and non-financial risk is good news, the most pleasing change is the increased number of companies providing investors with significant insights into their risk profile and risk management strategies.
Ninety five per cent of companies provided a description of their risk management system and 50% disclosed their risk profile.
Within this group, there is a smaller group of companies providing very descriptive summaries of their risk profile and risk management systems.
Kitchen said: “These leading companies, many of whom are from the resources sector, have set the benchmark and are forging ahead of the pack in an area we believe is of increasing interest to investors.
“This is a vast improvement in the number and quality of disclosures and sends a clear message to Australian boards and management in other sectors.”
With companies approaching their reporting season, KPMG partner, internal audit services Rob Hogarth, urged CEOs and CFOs to carefully consider the scope of their sign-off.
“KPMG advises CEOs and CFOs to give careful consideration to the sign-off on non-financial controls and only to consider these controls if they can be readily assessed within a supported framework.
“This process can be made easier by management maintaining open and clear communication with their board.
“With companies beginning to compile their annual reports, CEOs and CFOs need to focus on their approach to 7.2 now or else face the risk of being left behind.”
