CORPORATE REPORTING AND ANALYSISBy

Dr. S.A.S. ARUWA, CNA____________________________________________________________________

Being a paper presented at ANAN Practitioners Forum

at Mainland Hotel, Lagos on 3rd August, 2010

____________________________________________________________________Abstract

Good corporate reporting is generally an indication of competitiveness and superior corporate governance. Good reports show initiative and effort on the part of the preparers. Significant changes in the corporate external reporting environment have led to proposals for fundamental changes in corporate reporting practices. A variety of new information types are been demanded, in particular forward-looking, non-financial and soft information. Openness and transparency in annual reporting on an unprecedented scale may be inevitable with the adoption of International Financial Reporting Standards (IFRS) and Nigerias commitment to adopt IFRS; Nigerian companies will have no alternative but to bring themselves up to speed. One way is to ensure that companys reports actually reflect good governance. INTRODUCTION Good corporate reporting is generally an indication of competitiveness and superior corporate governance. Good reports show initiative and effort on the part of the preparers. The better reports always address all the required relevant information concisely, and disclose thoroughly the measures taken including on activities, corporate policy, strategic plans, the companys prospects and current initiatives to protect the environment, (Pushpanathan, 2010:15).

In recent times the demand for financial disclosure of listed companies has dramatically increased and the failures of large companies listed on the most important stock exchanges have placed extra pressure on listed companies and standard setters for the increase in the quality of corporate reporting.Significant changes in the corporate external reporting environment have led to proposals for fundamental changes in corporate reporting practices. Recent influential reports by major organizations have suggested that a variety of new information types be reported, in particular forward-looking, non-financial and soft information.

It cannot be stressed enough that companies should be more open if they want to improve. For example, significant related party disclosures involving holding companies, subsidiaries, associated companies and joint ventures, as well as other director-related transactions ought to be disclosed in a transparent manner in the annual reports. The more relevant information it shares with its stakeholders, the better a companys corporate governance is likely to be.Openness and transparency in annual reporting on an unprecedented scale may be inevitable with the adoption of International Financial Reporting Standards (IFRS) and Nigerias commitment to adopt IFRS; Nigerian companies will have no alternative but to bring themselves up to speed. One way, of course, is to ensure that companys reports actually reflect good governance.

A recent study by the design agency Bostock & Pollitt (2006) found that companies have two main reasons for producing an annual report. The first is to meet the governments regulatory requirements. The second is to market the company to key stakeholders. Corporate reports are viewed as follows:It provides a balanced overview of our results and financial position at the end of the year and satisfies all regulatory requirements.

It achieves the primary regulatory requirements. The second is to market the company to key stakeholders.It is a legal requirement but it also enables you to get your message out to key stakeholders It forms a branding exercise also.

It achieves the primary regulatory purpose when signed off by the auditors and regulators.

It achieves our statutory obligation for filing.

is to give stakeholders a view of business, what drives it, what affects it, how we measure ourselves going forward.It is a communications piece to stakeholders raising the key issues for the business and addressing how management will address these issues going forward.Companies want to meet their legal requirements. They also want to communicate with their key stakeholders. The law provides a framework within which companies are free to find their own solutions. When the corporate reporting agency Black Sun (2006) analyzed the FTSE-100 annual reports published for the year ending December 2005, they found evidence of significant change:

95% of companies discussed their corporate strategies, up from 75% a year before

40% provided business objectives or targets, up from 16%

the percentage of firms discussing values and principles rose from 30% to 66%

the proportion disclosing Key Performance Indicators (KPIs) almost doubled from 19% to 36%.Many criticisms have been leveled against financial reporting. However, these criticisms may simply be the symptoms of a financial reporting expectations gap, comprising of the much discussed audit expectations gap as well as a financial statements expectations gap. Only once the limitations of the financial statements are recognized can the real debate regarding the corporate communication of performance and risk begin.Statement of Accounting Standards (SAS) 1 (Disclosure of Accounting Policies), SAS 2 (information to be disclosed in Financial Statements), SAS 10 and 15 (on Banks and Non-Bank financial Institutions), and SAS 18 (on Statement of Cash flows) directly provide guidance on the Information content of corporate reports in Nigeria. The International Accounting Standards (IAS) 1 prescribes a complete set of financial statements to include:

a) statement of financial position as at the end of the period;

b) an statement of comprehensive income for the period;

c) a statement of changes in equity for the period:

d) a statement of cash flows for the period;

e) notes, comprising a summary of significant accounting policies and other explanatory information; and

f) when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, a statement of financial position as at the beginning of the earliest comparative period.

SAS 2 prescribes that Financial Statements should include the following:

a) Statement of Accounting policies

b) Balance Sheet

c) Profit and Loss Account or Income Statement

d) Notes to the Accounts

e) Statement of Cash flows

f) Value Added Statement

g) Five year Financial Summary

This paper provides the knowledge, judgment and perspective necessary to be both proficient and insightful at understanding, interpreting, and analyzing the information contained in corporate financial statements and their accompanying nonfinancial information.

TRANSFORMATIONS IN CORPORATE FINANCIAL REPORTINGThroughout its history, financial reporting has evolved continuously. As a service activity, the practice of accounting responds to changes in the context in which it operates. Changes in manufacturing industry brought about by the Industrial Revolution (especially the rapid increase in the scale of business activity) were responsible for much of the early development of financial accounting. Related significant influences include the emergence of the corporate form (and hence the divorce of ownership from control), the development of active markets for shares, the formation of Professional Accounting associations, and the regulation of accounting and auditing practices (Ryan, Scapens and Theobald, 1992). In recent times, the professional bodies have sought to monitor the environment, identify key changes, and develop strategies to accommodate these changes. Changes in accounting practice are highly pragmatic, drawing upon academic research in a selective manner.

However, the pace of change has not been uniform. It is possible that the technological revolution may mark a further period of intense change in the course of development of corporate reporting practices. The rapid developments in information and communications technology, in particular, have led to the transformation of the global infrastructure. We now have global capital markets, widespread electronic commerce, and short-term strategic corporate alliances. Business is increasingly flexible and consumer-driven, rather than producer-driven.

Allied to this there has, since the late 1980s, been a steep rise in the market value of companies relative to the book value of their assets (i.e., the valuation ratio) (Higson, 1998). This appears to be due, in large part, to the growing importance of service and knowledge-based companies relative to traditional manufacturing companies. Soft assets, in particular human capital and intellectual property, are critical to these companies. In recent years, management practices have embraced the use of a balanced scorecard, which recognizes that corporate value depends on a range of critical success factors, with accounting measures lagging behind non-financial performance indicators (Kaplan and Norton, 1996).

In relation to business information, there is no longer any significant technological or cost constraint on the amount of information that can be disseminated. Moreover, sophisticated, user-friendly software agents provide the user with effective decision-support facilities. The Internet provides an efficient means of electronic information dissemination to external parties, potentially on a real-time basis.

Given these far-reaching changes in the general environment, business practices, and business information technology, it is not surprising that the relevance of the traditional corporate reporting model is being called into question. Five key features of the traditional corporate reporting model are coming under attack. The arguments being presented by critics are as follows. First, the fundamental entity and going-concern assumptions upon which the current reporting model is based are undermined by short-term strategic alliances. This is because companies are no longer relatively stable groupings of the factors of production. The term virtual organization is increasingly used to refer to such transient organizations comprising soft assets. Second, the periodic nature of current reporting sits uncomfortably with the real-time nature of modern information flows. Third, the high degree of information aggregation is no longer necessary or desirable, since large quantities of information can now be conveyed cheaply and reliably. Moreover, sophisticated software agents support search and analysis by users, thus reducing the problem of information overload. Fourth, the historical, backward-looking perspective of the traditional model is not fully consistent with the manufacturing and commercial flexibility now required for company survival and success. As the pace of change quickens, the past becomes a less useful predictor of the future. This signals the need for more forward-looking, strategic information. Finally, the traditional model, rooted in financial information, is shown to be incomplete and partial when set against the broad range of financial and non-financial performance measures now widely accepted as useful indicators of corporate success. Non-financial information relating to critical success factors such as customers, employees, and products is needed.

As a consequence of this misfit between the traditional corporate reporting model and the modern business world, various organizations around the world have begun to examine the future of corporate external reporting. The two countries that have been at the forefront of this debate are the US and the UK. The American Institute of Certified Public Accountants (AICPA) (1994) report represents a significant point in the development of this debate. Although not a turning point, this report marks the start of the latest phase in the ongoing discussion.One of the most influential documents worldwide has been the report of The Special Committee on Financial Reporting set up by the American Institute of Certified Public Accountants (AICPA, 1994), known as The Jenkins Report, and formally titled Improving Business Reporting A Customer Focus. This report proposes a comprehensive model of business reporting that includes a broader, integrated range of information. The principal information categories are: financial and non-financial data; managements analysis of this data; forward looking information; information about management and shareholders; and background company information. These five broad categories encompass ten distinct elements shown as follows:

Information Categories Proposed by AICPA (1994) 1. Financial and non-financial data: Financial statements and related disclosures High level operating data and performance measurements that management uses to manage the business2. Managements analysis of financial and non-financial data Reasons for changes in the financial, operating, and performance-related data, and the identity and past effect of key trends.

3. Forward-looking information Opportunities and risks, including those resulting from key trends

Managements plans, including critical success factors Comparison of actual business performance to previously disclosed opportunities, risks, and managements plans.4. Information about management and shareholders Directors, management, compensation, major shareholders, and transactions and relationships among related parties 5. Background about the company Broad objectives and strategies

Scope and description of business and properties Impact of industry structure on the company

Flexible auditor involvement with business reporting is recommended, whereby the elements of information on which auditors report, and the level of auditor involvement with those elements, are mutually agreed by the company and the users of its business reporting. It is recognized that a different (lower) level of assurance will be appropriate for some elements.

Wallman (1995) proposes a piecemeal, partial solution to the critical issues faced by financial reporting, including additional reporting of soft assets and business risks and on-line access to large sections of the companys management information system. Subsequently, Wallman (1996) proposes an integrated, comprehensive solution to these problems. This model, to be contrasted with the current black and white model, defines a spectrum of disclosure based on the extent to which items meet existing recognition criteria, i.e., whether an item: meets the definition of the element; is measurable with reliability; and is relevant. The core would broadly correspond to current financial statements. Information in the layers outside the core would increasingly raise definitional, reliability and measurement concerns (e.g., regarding intellectual capital) and be subject to a lesser degree of attestation. To fully exploit developments in information technology, Wallman (1997) proposes a disaggregated, user-controlled access model.

The AICPA set up The Special Committee on Assurance Services (The Elliott Committee) in 1994, with a final report appearing in late 1996 (AICPA, 1996). A new concept of professional service was developed (assurance services) to serve as the foundation for new opportunities for the accountancy profession. Assurance is defined broadly as independent professional services that improve the quality of information, or its context, for decision makers, a definition which embraces both the reliability and relevance of information. Based on this definition, assurance services encompass, but are not confined to, attestation services. Attestation services require the issuance of a written report that expresses a conclusion about the reliability of a written assertion made by another party (SSAE No.1, AICPA, 1993). The level of service in attestation engagements is currently limited to audit examination, review, and the application of agreed-upon procedures. Thus, the traditional financial audit is but one form of attest service which is, in turn, but one form of assurance service. All involve independent verification.

Three of the six main new service opportunities identified by the committee concern external corporate reporting. These are risk assessment, business performance measurement, and information systems reliability. The Elliott Committees view was that, while external users will eventually demand these new services, demand will initially stem from the companys management.

The Financial Accounting Standards Board (FASB), the US standard-setting body, has launched a sample business information reporting package on its website (FASB, 1998). This illustrates how a company might use the Internet to respond to the information needs of investors and creditors as understood by the AICPA Special Committee on Financial Reporting (The Jenkins Report). Entitled FauxCom, this fully integrated web-based package has been specifically designed to exploit the search, selection and analysis capabilities of modern technology. The package allows drilling down to the desired level of detail and provides navigation buttons which allow the user to jump between the financial statements, the related notes, five-year summaries, and the Management Discussion and Analysis (MDA). Graphs are available at the press of a button and information can be downloaded directly to Excel files.

The international accountancy firm Price Waterhouse (PW) proposes enhanced, voluntary disclosure of future-oriented information covering both financial and non-financial performance measures. PW calls its proposed reporting model ValueReporting, and offers an illustrative report (Blueprint Inc.) showing the possible structure and content of corporate reporting in the future (Wright and Keegan, 1997). The Chief Executive Officers letter includes an overview of the principal financial and non-financial value drivers. Following this, there is a detailed quantification of financial value drivers, customer value drivers, people value drivers, growth and innovation drivers, and process value drivers. Subsequently, as PricewaterhouseCoopers (PwC), they published a series of surveys of preparers and users in Western countries during 1997 and 1998 (Eccles and Kahn, 1998) that confirm the existence of a wide information reporting gap.

In the UK, the Royal Society for Arts produced a report in 1995, entitled Tomorrows Company (RSA, 1995), that has received considerable media attention. This inquiry proposed a more inclusive, non-adversarial approach to both business practices and financial reporting, intended to support sustainable success. To achieve this, it is argued that there would need to be relatively greater use of non-financial performance measures.

In 1998, the RSA, under the auspices of the Centre for Tomorrows Company, issued Sooner, Sharper, Simpler: A Lean Vision of an Inclusive Annual Report (RSA, 1998). This proposes a largely narrative, core document, available on the Internet, for stakeholders, supplemented by detailed reports covering financial, value chain, people, and sustainability issues. The Institute of Chartered Accountants in England and Wales (ICAEW) has published a number of documents which address specific issues relating to the future of corporate reporting. Most notably, the ICAEW has suggested a framework for the comprehensive reporting of risk (ICAEW, 1997) and has considered the implications of digital technology (ICAEW, 1998). The users dissatisfaction with historical-cost financial information and their consequent interest in alternatives have driven these changes. There are three reasons why the profession should pay more attention to complaints about the usefulness of traditional reports. These are: i) the growing importance of assets and risks not measured by historical cost accounts as determinants of a business future success; ii) the growing reliance by some users on direct meetings with companies as an information source, raising issues to do with equality of access; and iii) changes in information technology (Swinson, 1998).

In 1999, The Institute of Chartered Accountants of Scotland (ICAS) published a discussion document entitled Business Reporting: the Inevitable Change? (ICAS, 1999). This presents a blueprint for business reporting based on detailed empirical research into interested parties views about current financial reporting. Four key themes were investigated, arising from exploratory interviews: the cyclical nature of corporate communications and users decision-making;

the perception of differential user access to company information;

differing concerns regarding information overload; and

the need to create and maintain confidence in the company via the provision of assurance relating to business information.

From the above summary, it can be seen that the current re-examination of corporate reporting embraces five distinct aspects: i) the parties to whom the company has an obligation (including a reporting obligation), ii) the means of disseminating information, iii) the content of the reporting package, iv) the need for assurance services in relation to new information types, and v) the need for regulatory reform. Each of these aspects is considered, in turn, as follows.

The parties to whom the company has an obligation to report:

In the early 1970s, great attention was given to the objectives of financial statements. It became generally accepted that the primary objective of financial accounting should be to aid users in their decisions. In the UK, The Corporate Report (ASSC, 1975) identified seven legitimate user groups, such as employees, customers and suppliers. Despite this, investors are currently viewed as the defining class of user (ASB, 1999, para.1.10).The debate regarding the participant groups in whose interests a company should be run is still ongoing. Currently there are two approaches being advocated, the enlightened shareholder value approach, in which management run the company with the exclusive objective of maximizing shareholder value, and the pluralist approach, in which a wider range of interests is valid and has to be balanced. It is the former approach that is currently enshrined in law and, hence, companies reporting obligations do not extend to stakeholder groups other than shareholders. In proposing an inclusive, non-adversarial approach both to business practices and corporate reporting, the RSA is voicing support for the pluralist approach.

Means of disseminating information:

Wallman (1997), FASB (1998a), ICAEW (1998a,b), ICAS (1999), and the company law review (DTI, 1999, ch.5.7) all address explicitly the impact of information and communications technology on corporate reporting. The Internet is generally viewed as the principal means of information dissemination in the future. This technology allows anyone with a telephone line and a networked digital terminal to access any database connected to the network and to download information for their own use. The use of this technology has been growing exponentially over recent years, a trend that is expected to continue. Commercial websites are increasingly being used as a reporting medium, with financial and other corporate information being included in addition to promotional and sales material. A recent study (Hussey and Sowinska, 1999) has shown that, in March 1998, 91 of the FTSE 100 companies had a website, 63 of which included financial disclosures. Fifty-four included detailed accounts, 45 included an interim statement, 17 included their preliminary statement, 12 included a summary statement, and 26 included financial highlights. Yet the Auditing Practices Board (APB) has confirmed that auditors do not currently have any responsibility for financial information on the Web. The Board acknowledges, however, that it would be possible for auditors to offer an opinion on whether a company has controls in place to ensure reliable online information.The Internet is also capable of supporting two-way communication, a feature that is exploited in the ICAS (1999) proposals relating to on-line questioning of management. This facilitates interaction between management and interested parties, thereby enhancing corporate governance structures. ICAS (1999, p.74) suggests that the two principal functions of the Annual General Meeting (the opportunity for questioning of management by shareholders and voting) could be conducted more effectively via the Internet.

Content of the business reporting package:The above summary of key influential reports gives an indication of the broad range of information types that have been suggested as part of the reporting package. It is apparent that there is a degree of overlap between the suggestions, but a detailed comparison is rendered extremely problematic due to terminological differences and variations in both the scope covered and the level of detail provided. This sub-section attempts to synthesise this material by providing a tentative framework for classifying and describing information types.

AICPA (1994), RSA (1995), Wallman (1996), Price Waterhouse (1997), ICAEW (1999), ICAS (1999), FPM (1999), and DTI (1999) all address explicitly, either in general or specific terms, the content of the business reporting package. Their suggestions are based either on a combination of casual observation and logical argument or, in a few cases, on detailed empirical investigation. This reflects the two approaches that are used in practice to determine the content and presentation of corporate reporting, i.e., the normative approach (what users should know) and the empirical approach (what users want to know).

In general terms, there is a call for more information. This is because advances in information technology (in particular, sophisticated software agents) mean that large quantities of data can be searched and analyzed based on the users individual specifications. More specifically, however, there is a call for information that is forward-looking and/or non-financial in nature. This information may be quantitative or qualitative and is intended to augment, and not replace, the existing set of largely historical, financial information contained in the financial statements. There are two main reasons for this shift in the nature of the reportable information set. First, it is recognized that many non-financial performance indicators lead financial performance indicators, hence providing more up-to-date information about future prospects. This is important in a world where rapid change means that companies must be adaptable in order to survive. Second, it can be argued that the exclusive reliance on financial performance indicators, which appears to privilege the interests of shareholders, is inconsistent with the pluralist approach to business. Non-financial performance indicators, for example employee turnover and average delivery time, address the specific interests of these stakeholder groups directly.

Several of the reports share the concept of a business having key drivers of success that must be identified and communicated. Unfortunately, the terms used vary. The AICPA refers to critical success factors, Price Waterhouse (1997) refers to value drivers, while ICAS (1999) refers to drivers of company performance. In the general call for more forward-looking and non-financial information, it is possible to identify four broad issues about which such information is considered desirable. First, there is forward-looking information about strategy. Second, there is information relating to risk. Third, the reports all tend to discuss (although at different levels of detail) value drivers and related non-financial performance measures (or performance indicators). The fourth and final area where additional information is required is background information, principally about the business of the company and the people who manage it. The AICPA (1994) discusses risk only generally under the heading forward-looking information. ICAS (1999) identifies a number of specific sources of risk, ranked in a user survey in terms of their importance as drivers of company performance. Among 29 drivers, six risk-related drivers ranked highly as follows: vulnerability to competition ranked second, customer and supplier dependencies ranked tenth, while flexibility to technological change, vulnerability to exchange rate changes, vulnerability to interest rate changes, and vulnerability to changes in government policy all ranked between ten and twenty.

The most detailed proposals in relation to risk are contained in ICAEW (1997). This discussion paper proposes a separate statement of business risk that not only brings together the current piecemeal disclosures required by various accounting standards and guidelines (e.g., SSAP 18, FRS 13, and the Operating and Financial Review), but radically augments them. This statement would identify and prioritize key risks, describe the actions taken to manage each risk, and identify how each risk is measured. The identification of key risks would be based on their likelihood and significance, perhaps using a risk mapping technique. Importantly, all types of business risk, rather than only financial risks, would be included. Thus, the statement of business risk would encompass external, environmental risks as well as internal risks, the latter of which could arise from operational, financial or other sources. A variety of possible measurement methods is considered. In a follow-up report, the ICAEW (1999b) rebut concerns regarding directors legal liability and commercial sensitivity, noting that extensive risk disclosures are made in prospectuses. The need for a separate statement of business risk is, however, played down. Non-financial performance measures are frequently grouped into themes, with the themes sometimes linked to the identified value drivers. For example, Price Waterhouse (1997) identifies four non-financial value drivers, relating to customers, people, growth and innovation, and process. RSA (1998) identifies three non-financial themes as the basis for reports to supplement the core document: value chain, people, and sustainability. FPM (1999) identifies four non-financial themes around which to group performance measures: activity, development, environment, and relations. In each of these three examples, financial was an additional theme. Allowing for terminological differences, a consensus does seem to emerge from this. Four distinct themes appear to exist in addition to the financial theme: customer/relations/people; growth and innovation/development; sustainability/environment; and process/value chain/activity. Finally, background about the company and information about management and shareholders are two of the five broad categories of information proposed by the AICPA (1994). ICAS (1999) identify, through empirical investigation, quality of management as the top driver of company performance and, consequently, recommend that detailed biographical information relating to the top management team be disclosed (pp.76-77).

It is possible to describe information items based on their character and attributes. In particular, within the literature it has become common to use the following three dichotomous descriptors: forward-looking versus historical; financial versus non-financial; and quantitative versus non-quantitative.

Assurance services:

Not surprisingly, fundamental changes in the business reporting package necessitate changes to the way in which that information is audited. AICPA (1996) has a seminal work relating to this changed set of practices. This report introduces the term assurance services and provides a detailed examination of the issues. It is argued that the traditional attest function provides reliability assurance, with direct assurance on relevance representing a new field for the accountancy profession. Two forms of reliability assurance are distinguished: data assurance which relates to specific data items and system assurance which relates to the design and operation of an information system. If the anticipated move away from point-in-time to real-time corporate reporting occurs, then system assurance will become of increasing importance to users. Relevance assurances support the various stages of the users decision-making process, from problem definition, through information search, selection and analysis stages. Relevance services are more customized, targeted services compared to the highly structured audit services.

Given the importance to users of information about risk and non-financial performance measures in business reporting models, assurance service opportunities relating to risk assessment and performance measures are clearly of direct relevance. They are types of data assurance. Given the move towards allowing external users access to large sections of the corporate database, potentially on a real-time basis, assurances relating to information systems reliability are also of direct relevance.ICAS (1999) identifies, based on its empirical research, confidence in business information as one of four important themes relating to the corporate communications process. It proposes a shift towards the assurance of processes in addition to outputs and that multiple levels and forms of assurance be developed (p.79). It suggests that assurance seals could be tagged either to individual information items or to entire web pages, with electronic warnings at the gateways between assurance levels (p.82).

It is, however, clear from the available literature that, although the general direction and nature of future developments in assurance services in relation to business reporting have been mapped out, detailed methods and procedures have yet to be determined.

The need for regulatory reform:

The regulations concerning corporate reporting emanate principally from Statement of Accounting Standards (SAS) and other statues, with the Stock Exchange listing requirements being a further consideration for listed companies. Currently, the information contained in a companys annual report and accounts is a mixture of mandated information (contained principally in the audited financial statements and the directors report) and voluntary information. Indeed, over the years, the amount of voluntary information (disclosed mainly in the unaudited sections of the annual report) has been rising at a faster rate than the amount of mandated information (Lee, 1994). The auditors responsibility with respect to other information in documents containing audited financial statements is limited to a review for material inconsistencies (APB, 1995).

The nature and scope of regulatory reform required to accommodate the proposed changes in business reporting depend largely upon whether the changes are made mandatory or not. If, for example, it becomes mandatory to provide information relating to strategy, risk, non-financial performance indicators, and background, then new financial reporting and assurance standards will clearly need to be developed. However, to date, commentators who have discussed regulatory requirements have proposed evolutionary, voluntary, user-driven change in the short-to-medium term (e.g., ICAS, 1999, pp.82-84). It is likely that regulatory reforms will seek to accommodate gradual change in business reporting, rather than mandate radical change.

APPLICATION OF ANALYTICAL REVIEW PROCEDURES

The current demand for going-concern audit mandates that auditors conduct some analysis of the corporate reports. The adversarial nature of financial reporting provides opportunistic financial reporting practices. As opined by the Chairman of the FASB, Beresford (1997), there is virtually no standardthat has been written that is free from judgment in its application. For instance GAAP permits alternatives (such as, LIFO versus FIFO for inventory valuation), requires estimates for (for example, the useful life of depreciable assets), and incorporates management judgments (are assets impaired?). Managers have a degree of flexibility in choosing specific accounting techniques and reporting procedures and the resulting financial statements are sometimes open to interpretation.

The flexibility of GAAP financial reporting standards provides opportunities to use accounting tricks that make the company seem less risky than it really is. For instance, some real liabilities like equipment leases can be transformed into off-balance sheet (and thus less visible) items. The company would appear from the balance sheet data alone, to have less debt and more borrowing capacity than is really the case. Bankers who fail to spot off-balance sheet liabilities of this sort can underestimate the credit risk lurking in their loan portfolios.Companies can also smooth reported earnings by strategically timing the recognitions of revenues and expenses to dampen the normal ups and downs of business activity. This strategy projects an image of a stable company that can easily service its debt, even in severe business downturn.According to SAS 10, Banks recognize their revenues when they are earned or realized. The timing of classification of loans and advances as non-performing, so as to put the related interest income in suspense, is a controversial issue. Whilst some banks take such interest income on non-performing loans into interest suspense account, others take it into interest income thereby overstating profits.

Managers have reasons to exploit this flexibility. Their interests may conflict with the interests of shareholders, lenders, and others who rely on financial statement information. There is therefore, the need to undertake further analysis of the corporate reports. The Auditors rely on Analytical Review Procedures to assess the corporate reports.Analytical Review is the examination of ratios, trends, and changes in balances from one period to the next, to obtain a broad understanding of the financial statements.

Analysts can broadly be defined as anyone who uses financial statements to make decisions as part of their job. This includes investors, creditors, financial advisors, and auditors. To perform good audits, we need more skills than forensic and general accounting skills, tax planning, risk management, and securities analysis are all vital competencies for auditors to possess.Independent auditors carefully examine financial statements prepared by the company prior to conducting an audit of those statements. An understanding of managements reporting incentives coupled with detailed knowledge of reporting rules enables auditors to recognize vulnerable areas where financial abuses are likely to occur. Astute auditors choose audit procedures designed to ensure that major improprieties can be detected. Current Auditing Standards require independent auditors to use Analytical Review Procedures (ARP) on each engagement. This can help auditors avoid the embarrassment and economic loss from accounting surprises, such as the one that occurred in WorldCom.Analytical Review Procedures are the tools auditors use to illuminate relationships among the data. These procedures range from simple ratio and trend analysis to complex statistical techniques. The auditors goal is to assess the general reasonableness of the reported financial information in relation to the companys activities, industry conditions, and business climate. Auditors look behind the numbers when the reported figures seem unusual.Three types of financial information are needed (AICPA, 1994):

1. Quarterly and annual financial statements along with nonfinancial operating and performance data like order backlogs, customer retention rates, etc

2. Managements analysis of financial and nonfinancial data (including reasons for changes) along with key trends and a discussion of the past effect on those trends.

3. Information that makes it possible both to identify the future opportunities and risks confronting each of the companys businesses and to evaluate managements plans for the future.

The auditor should consider analytical review information that has already been prepared by management. Examples include exhibits, charts, graphs and similar analyses included in the companys internal management reports, board reports, divisions or line of business statistics, and similar documents. The key is not to calculate all the ratios possible, but to identify those few key relationships that best satisfy the auditors objective of substantiating or corroborating the account balance. When deciding whether to incorporate analytical review procedures into the audit programme as substantive tests of balances, the auditor should consider the extent to which the underlying data should be tested. Analytical procedures means the analysis of significant relationships, ratios and trends, including the resulting investigation of fluctuations or relationships that are inconsistent with other relevant information or which deviate from predicted amounts. Analytical procedures include the consideration of comparisons of the entitys financial or non-financial information with, for example comparable information for prior periods.;

Analytical procedures also include consideration of relationships among elements of information that would be expected to conform to a predictable pattern based on the entitys experience. Various methods may be used in performing the above procedures. These range from simple comparisons to complex analyses using advanced statistical techniques. Analytical procedures may be applied to consolidated financial reports, financial information of components (such as subsidiaries, divisions or segments), individual elements of financial information and individual elements of non-financial information. The auditors choice of procedures, methods and the level of application is a matter of professional judgement.

Analytical procedures are used for the following purposes:

a) to assist the auditor in planning the nature, timing and extent of other audit procedures;b) as a substantive procedure when the use of analytical procedures can be more effective or efficient than tests of detailed transactions or items in reducing detection risk; andc) as an overall review in the final stage of the audit.

Analytical procedures have become increasingly important to audit firms and are now considered to be an integral part of the audit process. The importance of analytical procedures is demonstrated by the fact that the Auditing Standards Board, the board that establishes the standards for conducting financial statement audits, has required that analytical procedures be performed during all audits of financial statements. The Auditing Standards Board did so through the issuance of Statement on Auditing Standards (SAS) No. 56 in 1988, which requires that analytical procedures be used by auditors as they plan the audit and also in the final review of the financial statements. In addition, SAS No. 56 encourages auditors to use analytical procedures as one of the procedures they use to gather evidence related to account balances (referred to in auditing as a substantive test).SAS No. 56 describes analytical procedures as the "evaluation of financial information made by a study of plausible relationships among both financial and nonfinancial data" (AICPA, 1998, 56 p. 1). Accounting researchers have helped to clarify the process that auditors use to perform analytical procedures by developing models that describe the various stages of the process. One such model developed by Hirst and Koonce (1996) describes the performance of analytical procedures as consisting of five components: a) expectation development, b) explanation generation, c) information search and explanation evaluation, d) decision making, and e) documentation. Due to the importance of each of these five components to understanding the analytical procedures process, each of them is described in more detail.

The first step in the analytical procedures process is the development of an expected account balance. SAS No. 56 and O'Reilly et al. (1998) provide some guidance as to the sources of information an auditor can use to develop these expectations. Examples of such sources include the following:i) Financial information from comparable prior periods adjusted for any changes expected to affect the current-period balances. For example, an expectation of sales revenues for the current year might be based on the prior year's sales, adjusted for factors such as price increases or the known addition or loss of major customers.

ii) Expected results based on budgets or forecasts prepared by the client or projections of expected results prepared by the auditor from interim periods or prior comparable periods.

iii) Available information from the company's industry. For example, changes in sales revenue or gross margin percentages might be based on available data from industry-wide statistics.

iv) Nonfinancial information. For example, sales revenue for a client from the hotel industry might be based on available data as to room occupancy rates.

After an auditor has developed an expectation for a particular account balance (e.g., sales revenue), the next step in the analytical procedures process is to compare the expected balance to the actual balance. If there is no significant difference (referred to by auditors as a material difference) between the expected and actual balance, this conclusion provides audit evidence in support of the account balance being examined. However, if there is a material difference between the expected and actual balance, the auditor will investigate this difference further. At this point the auditor will develop an explanation for the difference. Hirst and Koonce (1996) interviewed auditors from each of the six largest accounting firms and found that the source of the explanation usually depends on what types of analytical procedures are being performed. If analytical procedures are being performed during the planning phase of the audit, the auditor usually asks the client the reason for the unexpected difference. However, if the analytical procedures are being performed as a substantive test (method of obtaining corroborating evidence) or during the final review phase of the audit, in addition to asking the client, auditors will often generate their own explanation or ask other members of the audit team for an explanation.

When developing an explanation for an unexpected change in account balances, an auditor considers both error and nonerror explanations. Nonerror explanations are sometimes referred to as environmental explanations, since they refer to changes in the business environment in which the client operates. For example, an environmental explanation for an unexpected decline in gross profit (sales revenue less cost of sales) may be that the client faces increasing foreign competition and has been forced to reduce selling prices. An error explanation, on the other hand, might be that the client has failed to record a profitable sale to a major customer. If this mistake is unintentional, then auditors refer to the mistake as an "error." However, if this mistake was intentional (i.e., the client failed to record the sale on purpose), auditors refer to the mistake as a "fraud." Auditors are much more concerned about errors and fraud than changes resulting from environmental factors. In fact, auditors are most concerned about fraud, since this raises doubts about the integrity of the client as well as about the process of recording transactions affecting other account balances.

Once an auditor has a potential explanation, whether self-generated or obtained from the client, the next step in the analytical procedures process is to search for information that can be used to evaluate the adequacy of the explanation. Similar to the explanation generation phase of the process, the extent of information search and explanation evaluation depends on the type of analytical procedures being performed. Hirst and Koonce (1996) found that during the planning phase of analytical procedures, auditors do little if any follow-up work to evaluate an explanation. Instead, consistent with SAS No. 56, auditors typically use analytical procedures at the planning stage to improve their understanding of the client's business and to develop the audit plan for the engagement. For example, if analytical procedures performed on inventory during audit planning indicated the inventory balance was higher than expected, the auditor would most likely adjust the audit plan by increasing the number of audit tests performed on inventory or assigning more experienced personnel to the audit of inventory. Thus, if an error or fraud has occurred with inventory, the revised audit plan for obtaining corroborating evidence will lead to detection of the error or fraud.

If analytical procedures are being performed as a substantive test, the auditor will need to gather information to evaluate the explanation being considered, since the primary purpose of substantive analytical procedures is to provide evidence as to the validity of an account balance. The type and amount of corroboration for the explanation will vary based on factors such as the size of the unexpected difference, the significance of the difference to the overall financial statements, and the risks (e.g., internal control and inherent) associated with the account balance(s) affected. As any of these factors increase, the reliability of the information obtained in support of the explanation should also increase. SAS No. 56 provides guidance for auditors in the evaluation of the reliability of data. Some of the factors to be considered by the auditors include the following:i) Data obtained from independent sources outside the entity are more reliable than data obtained from sources within the entity.

ii) If data are obtained from within the entity, data obtained from sources independent from the amount being audited are more reliable.

iii) Data developed under a system with adequate controls are more reliable than data from a system with poor controls.

After an auditor gathers information for purposes of evaluating an analytical procedures explanation, it is a matter of professional judgment in determining whether the evidence adequately supports the explanation. This is one of the most important steps of the analytical procedures process and is referred to as the decision phase of the process. Factors the auditor should consider in evaluating the acceptability of an explanation include the materiality of the unexpected difference, reliability of the evidence obtained to support the explanation, and whether the explanation is sufficient to explain a material (significant) portion of the unexpected difference. If, after evaluating the evidence, the auditor finds that the explanation being considered does not adequately explain the unexpected difference, the auditor should return to the "explanation generation" phase of the process. If the auditor believes that the audit evidence obtained adequately supports the explanation, the auditor may proceed to the final step of the process, which is "documentation." While the extent of written documentation will vary depending on the materiality of the unexpected difference, the audit work papers will generally include a written description of material unexpected differences, an explanation for the difference, evidence that corroborates the explanation, and the judgment of the auditor as to the adequacy of the explanation.Ratios commonly used for comparative analysisCorporate report analysis could be undertaken to evaluate audit risks. It can provide information on:

a) Earnings quality considerations/earnings sustainability

b) Cash flow

c) Balance sheet quality considerations/Balance Sheet measurements

Horizontal and Vertical analysis can also be conducted to elicit information on trend. The ratios commonly used for comparative analysis are presented below:

Ratio Elements compared

Gearing or debt to equity ratio Long term liabilities to equity

Current ration or working capital ratio Current assets to current liabilities

Liquid ratio, quick asset ratio, or acid test Cash and accounts receivable to current liabilities

Equity ratio Total shareholders equity to total assets

Debt ratio Total liabilities to total assets

Return on total assts Operating profit to total assets

Return on shareholders equity Operating profit to ordinary shareholders equity

Turnover of fixed assets COGS to fixed assets (or sales)

Turnover of total assets COGS to total assets (or sales)

Net profit ratio Operating profit to net sales

Stock turnover COGS to average stock (or sales)

Debtors turnover - average to collect Debtors to net sales * no. of days in the period

Sales to total assets Net sales to average total assets

Average days to sell stock COGS to average stock (or sales)

Gross Profit ratio Gross profit to net sales

Operating expense ratioCOGS to sales

Finance exp to net sales

Admin exp to net sales

Selling exp to net sales

Net profit ratio Operating profit to net sales

CASE STUDY

ANALYSIS OF BANK USING PUBLISHED FINANCIAL STATEMENTS

1. Capital adequacy variables

A bank should have adequate amount of capital to support the stability and sustainability of its operations. There are three variables which describe what is called a capital adequacy:

i) Equity over Assets (E/A),

ii) Equity over Earning Assets (E/EA), and

iii) Equity over Loans (E/L).

It is preferable for a bank to have high amount of Equity, as a bank expands its earning assets, it has to maintain Capital Adequacy Ratio ruled out by the Central Bank.

Logically it seems more correct for us to consider E/EA instead of E/A because in fact only earning assets, which directly generate earning, contains risks to be covered. 2. Growth and Aggressiveness variables

i) Loans Growth Rate (LGR).

ii) Loans Market Share Increment (LMSI).

iii) Deposits Growth Rate (DGR).

iv) Deposits Market Share Increment (DMSI).

The higher these four variables are the more aggressive the policy of a bank is. However, it is not clear whether to be aggressive all the time is necessarily a good strategy. We would rather share a point of view that this should remain a matter of specific policy within specific circumstances of a bank.

3. Cost of fund as a credibility measurement of a bank

It is commonly accepted that one can use cost of fund to measure credibility of a bank. If a bank pays relatively lower interest to funds received than other banks, it means that the bank is perceived as a more secure and trustworthy than other banks.

4. Sources of income and funds diversification variables

Dependence on single type of income source and on single type of fund source may be considered as not a good practice as this practice is relatively more viable to change in market conditions. It should be considered good for a bank to be able to generate fee-based income from activities like arranging syndicated loans, credit card administration, trade finance administration, payment agent, or collection agent, as they are relatively risk-less activities. Also, it should be considered good if a bank does not depend solely on deposits and can diversify its source of funds, for instance, by issuing marketable securities or receiving low-interest off-shore loans.

The two ratios are:

i) Non-Interest Income over Operating Income (NonII/OI) ratio as a measure of diversification in sources of income and ii) Deposits over Third Party Funds (D/TPF) ratio as a measure of dependence on deposits as a source of funds.

5. Liquidity variable

A bank should keep sufficient amount of its assets in liquid assets in case of hugely and abruptly withdrawal of deposits. Liquid assets can be in the forms of cash in vault, current account at other banks, current account at BI, or marketable securities.

The LA/D variable measures the proportion of deposits which can be repaid promptly if there is a run on that bank. Indeed, the higher this ratio the better bank is. Empirical data demonstrates that the normal banks have the highest LA/D.

Others: Loans over Deposits (L/D): The Loan/Deposit (L/D) ratio measures a balance between deposits taking and lending activities of a bank. It is commonly preferable for a bank to have this ratio not too far from 100%.Provision for loan losses over equity: Provision for loan losses over equity PLL/E for measuring quality of loans.

CONCLUSION AND RECOMMENDATIONSThe modern corporate report is the product of financial accountings gradual evolution into financial reporting. The former was concerned almost exclusively with the financial statements and related notes, while the latter refers to an expanded package containing a great deal of narrative, graphical, and photographic material. It appears that we are now on the brink of a further metamorphosis, as financial reporting evolves into business reporting. Business reporting is the term used by both the AICPA (1994) and ICAS (1999) to signal the end of a focus on purely financial information. Allied to this, the traditional audit function (a market experiencing stagnant fee income) is now conceived as part of a broader range of assurance services. Some changes have already occurred, while others are anticipated. These changes have been driven by external changes and are not research-led. Yet research now has a crucial role to play in the development of these new practices and procedures. The second issue addressed in this paper has been to provide a basic understanding of analytical procedures as basis of corporate report analysis. Space limitations, how ever, preclude discussing in more detail some of the complexities associated with analytical procedures. Some of the major issues that companies will need to deal with over the next few years include:

Electronic/Internet reporting: From early 2007, this is likely to cause issues during the transition phase; companies will also need to develop new processes to handle the online materials, whilst maintaining the old-style paper reports for those who want them. As firms need to provide more information to more people in more forms than ever before, it is likely that there will be a shift to new models for gathering and managing parcels of information, and disseminating them in different ways to different audiences. The corporate report, as the key strategic and operational summary of the business, is likely to remain central to those developments.

Global developments: The current trend is towards more international harmonization of Accounting Standards. The International Accounting Standards Board (IASB) has set out a roadmap for the convergence of the International Financial Reporting Standards (IFRS) and Nigeria is at advanced stage of pronouncing its roadmap towards full adoption of IFRS, and has committed not to expose existing standards as part of the transition.

For multinational companies no longer having to prepare accounts to meet multiple different standards, the cost savings could be considerable. So could the benefits for analysts wishing to compare performance. But as well as the obvious surface differences between accounting standards, there are also differences in the underlying philosophical approaches followed in different regions of the world, especially the conflict between a rules-driven and a principles-driven approach. Auditors and other stakeholders must brace up to these challenges.

Changes from the major accounting firms: The recent call by the major accounting firms for a radical change to the current financial reporting model would have an even more significant impact on corporate reporting than the changes we have just seen. The firms have called for quarterly financial reporting statements (with a historic perspective on performance) to be replaced by real-time, internet-based reporting that would encompass a wide range of financial and non-financial performance measures. This, they suggest, would provide a more valuable indication of company value and its future prospects than current reporting. It seems unlikely that these changes would happen quickly. But the shift from providing historic to real-time information, and the associated shifts in systems, processes and relationships with external auditors, would be so fundamental that this is an issue no Accountant or Finance Director can afford to ignore.

Improving business performance: It makes no sense to have two separate processes for gathering and reporting information: one for external audiences and one for the managers of the business. As the focus of management information shifts away from measures of past/current performance towards indicators of future performance, it is common sense that external reporting systems will become more closely linked to those used for internal reporting. At one level this will include the identification, tracking and integration of financial and non-financial key performance indicators (KPIs). At another, it could extend to measuring how well corporate values are put into practice (since values drive behaviour, and behaviour drives results). Ultimately though, these changes will be about improving the boards understanding of its business model, improving its ability to manage that business model, and enabling it to develop more robust business models for the future.

Thanks for this exciting opportunity to address my distinguished professional colleagues.References

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Dr. Aruwa is a Senior Lecturer and Head of Department of Accounting, Nasarawa State University, Keffi-Nigeria.

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