How confident are you as a director in your organisation's ability to comply with continuous disclosure requirements as the Australian Securities and Investments Commission (ASIC) pursues any breaches with increasing vigour?
Dawna Wright, a partner at McGrathNicol, notes that a listed entity must disclose material information as soon as an officer is, or ought to be, aware of it. But in a complex organisation, compliance is far from easy.
"In most organisations, the data that eventually culminates in a material decision comes from a wide range of sources, eventually finding its way to the head of a business unit, an executive and finally to the board. The flow of information can be as quick as an email or a tweet read instantly by thousands of investors. Yet the formal financial reporting flows and decision-making processes are more often ambiguous and are rarely well documented. How can the board possibly stay ahead of the market in its disclosures? Directors need to be confident that their reporting systems can keep up," she says.
It is likely that a "deep dive" into the financial reporting system will be required in order to determine what "immediately upon becoming aware" should look like in your organisation. Wright recommends asking questions such as:
- How long does it (and should it) take material information to flow from the coalface to the boardroom?
- Is the decision-making process documented? What are the relevant information sources? Do directors know where the critical points are?
- What are the subjective areas affecting financial results? How robust are the financial models? Where are the soft spots? Has a sensitivity analysis been performed on the key variables and assumptions?
- What are the likely lead indicators of material variances from forecasts? Is the relevant data sourced directly from systems or manually compiled?
Wright notes ASIC recently confirmed that two areas of its focus for 2013 reports will be the impairment of goodwill and revenue recognition – both challenging for continuous disclosure.
"These are often material enough to be on the board's radar – directors themselves are part of the decision-making process. They need to be given sufficient information and time to make an informed decision, allowing for independent advice if required. The Australian Securities Exchange's interpretation of 'immediate' is 'promptly and without delay'. Complexity will be taken into account when assessing timing, but only within reason."
Wright warns that the consequences of non-disclosure can be significant – a potential plunge in share price and a possible loss of investor confidence, not to mention shareholder class actions. "Dealing with these issues under the shadow of an enforceable undertaking results in an increase in scrutiny and costs as ASIC imposes its consultants and scope."
To reduce your organisation's risk and test its ability to comply, Wright suggests that as a starting point, you consider:
- A risk-based approach – Identify the soft spots that are most likely to result in write-downs or other adjustments.
- A documented process – Document the financial reporting, forecasting and decision-making processes and profiles of the organisation, including a timeline from coalface to boardroom that allows for independent advice and appropriately balances accuracy and timeliness.
- An independent stress test – Review the efficiency and robustness of the reporting systems and models, with a team that is independent from directors, management and auditors.
- Benchmarking – Compare across divisions and with other organisations.
- KPIs and dashboards – Ensure directors are getting the right information at the right time (not too little and not too much, combining "lead" and "lag" indicators).
If you do find yourself the subject of a regulator enquiry, Wright says you should consider:
- A forensic "deep dive" – Find out "who knew what when", so you can respond from a position of full knowledge.
- Find the balance – Neither an uninformed disclosure too early, nor a perfect disclosure too late, will be helpful.
- Seek independent verification – An independent report will add weight to your position when reporting to regulators.
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