Simplifying Internal & Simplifying Internal & External Financial Reporting External Financial Reporting

at all PS levelsat all PS levels

David SpearrittDavid Spearritt

Director, ORION Consulting Director, ORION Consulting Network Pty LtdNetwork Pty Ltd

OutlineOutline

The real purpose of financial reportingThe real purpose of financial reporting Beyond financial reportingBeyond financial reporting Trends in reporting methods, stylesTrends in reporting methods, styles Checklist of issues to consider when Checklist of issues to consider when

developing reportsdeveloping reports How to find out what report readers How to find out what report readers

need/wantneed/want Why less is more?Why less is more?

Purpose of Reporting?Purpose of Reporting?

Statutory requirement?Statutory requirement?

Good practice?Good practice?

It’s my job?It’s my job?

The Real ReasonThe Real Reason

Financial information Financial information

isis

Information for decision makingInformation for decision making

Decision MakingDecision Making

Who are the decision makers?Who are the decision makers?

What decisions do they need to take?What decisions do they need to take?

What does success/failure mean?What does success/failure mean?

Internal ReportingInternal Reporting

Widespread dissatisfaction with internal Widespread dissatisfaction with internal reportingreporting

Financial management & knowledge Financial management & knowledge managementmanagement

A key feedback systems for organisational A key feedback systems for organisational learning & improvementlearning & improvement

Needs to link to organisational objectivesNeeds to link to organisational objectives Shift towards holistic reporting eg KPI’s/BSCShift towards holistic reporting eg KPI’s/BSC Eg. Balanced scorecard/ KPI’s/ QBLEg. Balanced scorecard/ KPI’s/ QBL

External ReportingExternal Reporting

Relevant MDA PracticesRelevant MDA Practices Management Discussion & Analysis (MDA)Management Discussion & Analysis (MDA)

Australian MDA driven by Corporate concise Australian MDA driven by Corporate concise reporting option reporting option

Widely utilised by listed companies. Widely utilised by listed companies. OptionalOptional Shareholders can elect to receive full AR, Shareholders can elect to receive full AR,

concise or none at all. concise or none at all. Now a key part of Public Sector ReportingNow a key part of Public Sector Reporting Still only half the equation financial)Still only half the equation financial)

Public Sector SpecificsPublic Sector Specifics

Public v Private SectorsPublic v Private Sectors

Organisational objectivesOrganisational objectives Private SectorPrivate Sector

Financial returns on financial investmentsFinancial returns on financial investments Only Govt Businesses have similar objectivesOnly Govt Businesses have similar objectives

Public SectorPublic Sector Community Returns on TaxesCommunity Returns on Taxes Some variationsSome variations

Risk / Return relationship differsRisk / Return relationship differs

Basis of financial reportingBasis of financial reporting

Private SectorPrivate Sector

Financial ReturnFinancial Return

Financial InvestmentFinancial Investment

Public SectorPublic Sector

Social ReturnsSocial Returns

Taxes or RevenueTaxes or Revenue

or or

Social ReturnsSocial Returns Community InvestmentCommunity Investment

PS Reporting DilemmaPS Reporting Dilemma

Financial results are only part of the Financial results are only part of the equationequation

What was done with the money is just as What was done with the money is just as importantimportant

Eg. – value for money. Commitments Eg. – value for money. Commitments achieved etc.achieved etc.

This is why PS budgets are more This is why PS budgets are more important than financial resultsimportant than financial results

ExamplesExamples

Investors need to know whether to invest Investors need to know whether to invest or sell in a companyor sell in a company

Managers need to know whether to cut Managers need to know whether to cut back costs, kick butt etcback costs, kick butt etc

What about public sector?What about public sector? Choose to pay taxes????Choose to pay taxes???? Who to vote for?Who to vote for? Accountability for taxes spent??Accountability for taxes spent??

Accountability DefinitionsAccountability Definitions

Pooled funds – taxes spent for purpose Pooled funds – taxes spent for purpose raisedraised

Line item controlsLine item controls Program budgetingProgram budgeting MFO/ Output budgetingMFO/ Output budgeting Inputs -> Outputs matrixInputs -> Outputs matrix

Private/Public Sector DifferencePrivate/Public Sector Difference

Private SectorPrivate Sector All of the return on investment equation is in All of the return on investment equation is in

the financial statementsthe financial statements Focus on financial returns and risksFocus on financial returns and risks

Public SectorPublic Sector Financial results are only part of the ROI Financial results are only part of the ROI

equationequation Need to match with services/achievementsNeed to match with services/achievements

Risk/ Return Risk/ Return RelationshipsRelationships

FrameworkFramework

Organisations need to monitor and report on:Organisations need to monitor and report on: Operating capacityOperating capacity Financial risks Financial risks

long term solvencylong term solvency liquidityliquidity

Achievement of community objectivesAchievement of community objectives

Sector Reporting FocusSector Reporting Focus

Financial / C

omm

unityF

inancial / Com

munity

Returns R

eturnsR

eturns Returns

Internal Internal

Business UnitBusiness Unit

Government Government CorporationCorporation

Private Sector Private Sector CompanyCompany

Financial Financial PerformancePerformanceService Service PerformancePerformance

Financial Financial Performance,Performance,Fin Risk,Fin Risk,CSO’sCSO’s

Financial Financial Performance,Performance,Fin RiskFin RiskShare Returns/PEShare Returns/PE

Budget FundedBudget Funded

DepartmentDepartment

Statutory Statutory AuthorityAuthority

Whole of Govt/Whole of Govt/

Local Govt/ NFPLocal Govt/ NFPCommunity Community objectives,objectives,Budget complianceBudget complianceContribution to Op Contribution to Op capacitycapacity

Community Community objectives objectives Fin Risk Fin Risk Op capacity/ Op capacity/ PerformancePerformance

Fin Risk (Debt)Fin Risk (Debt)Works & ServicesWorks & ServicesOperating capacityOperating capacityTax/Rate levelsTax/Rate levels

Lower Risk --------------------------------Lower Risk -------------------------------- Higher Risk Higher RiskCopyright – David SpearrittCopyright – David Spearritt

Beyond Financial Beyond Financial ReportingReporting

Financial Reporting BugbearFinancial Reporting Bugbear

Clients never happy, but don’t know what Clients never happy, but don’t know what they want!!they want!!

Need to understand their business drivers Need to understand their business drivers and report on thatand report on that

Internal consultingInternal consulting Simplified, non-numeric reportingSimplified, non-numeric reporting Trial and errorTrial and error

Internal Reporting Internal Reporting

Management –limited ability to assimilate Management –limited ability to assimilate informationinformation

Reports must support decision makingReports must support decision making Accurate, timely, reliable,Accurate, timely, reliable, Include analysis and insights on implicationsInclude analysis and insights on implications Forward looking (forecasts, etc)Forward looking (forecasts, etc)

Reports must support decision making (Cont)Reports must support decision making (Cont) Language of reader (non-numeric, graphs, Language of reader (non-numeric, graphs,

ratios, charts, explanations and analysis)ratios, charts, explanations and analysis) Short reports by exception/ pertinent issuesShort reports by exception/ pertinent issues Peer comparisons/benchmarkingPeer comparisons/benchmarking

Best Practice Fin ReportsBest Practice Fin Reports

Short – not the full ledgerShort – not the full ledger Language of reader (non-numeric)Language of reader (non-numeric) Graphs, ratios, explanationsGraphs, ratios, explanations Exceptions – decisions requiredExceptions – decisions required On-line – drill downOn-line – drill down ““Accounting is information for decision-making” Accounting is information for decision-making”

(What Decision?)(What Decision?) Blend with non-financial info (community returns)Blend with non-financial info (community returns)

Public sector organisational Public sector organisational management cyclemanagement cycle

Financial Management CycleFinancial Management Cycle

Local Government IssuesLocal Government Issues

Achieve community objectivesAchieve community objectives Delivery of Promised Outcomes Delivery of Promised Outcomes Value for MoneyValue for MoneyManage financial risksManage financial risks Budget setting & monitoringBudget setting & monitoring Integrity of Finances (sustainable revenue)Integrity of Finances (sustainable revenue) Borrowings Borrowings Capacity to Manage “Shocks” (Reserves)Capacity to Manage “Shocks” (Reserves) Forward Financial PlanningForward Financial Planning

Local Government Issues (cont)Local Government Issues (cont)

Enhance operational capacityEnhance operational capacity Paying Bills on Time Paying Bills on Time Managing InfrastructureManaging Infrastructure Adequate provision for depreciationAdequate provision for depreciation Systems, processes, controls, auditSystems, processes, controls, auditCompetencies/innovation and learningCompetencies/innovation and learning Innovation(other income streams -enterprise)Innovation(other income streams -enterprise) External funding contributions External funding contributions Employing capable finance StaffEmploying capable finance Staff Understanding financial managementUnderstanding financial management

How to find out what report How to find out what report readers need/wantreaders need/want

Reporting SurveyReporting Survey Accrual accounting widely accepted, Accrual accounting widely accepted,

But overly complex and too compliance dominatedBut overly complex and too compliance dominated Managers are feeling the pressures ofManagers are feeling the pressures of

cost increasescost increases revenue pressuresrevenue pressures increasing community expectations increasing community expectations need to manage their existing assetsneed to manage their existing assets

Executives spend small proportion of time reviewing Executives spend small proportion of time reviewing financial reports financial reports average 1 hour per weekaverage 1 hour per week mainly trying to identify any issues for concernmainly trying to identify any issues for concern

Reporting needs: Reporting needs: short, short, simple to understandsimple to understand timelytimely

Report Reader PreferencesReport Reader Preferences Shorter reports (5-10 pages);Shorter reports (5-10 pages); Simpler variance reportsSimpler variance reports

by exceptionby exception major timing issuesmajor timing issues highlight problems for reviewhighlight problems for review (not “seek and ye shall find”)(not “seek and ye shall find”)

More use of trend and other graphs;More use of trend and other graphs; Links between expenditure & services/works performedLinks between expenditure & services/works performed Matching revenue / expenditure itemsMatching revenue / expenditure items Simpler terminology and additional trainingSimpler terminology and additional training Online enquiries with drill-down capabilityOnline enquiries with drill-down capability Reduced statutory requirementsReduced statutory requirements Improved internal reportingImproved internal reporting Customised reports to individual readersCustomised reports to individual readers

not same standard report.not same standard report.

Why less is moreWhy less is more

Less gives moreLess gives more

Focus on decisions to be addressedFocus on decisions to be addressed Highlights areas of concernsHighlights areas of concerns Makes best use of management timeMakes best use of management time

Key themesKey themes

From - From - Compliance-based external Compliance-based external reporting applied to internal reportingreporting applied to internal reporting

To - To - Good internal reporting leads to Good internal reporting leads to good external reportinggood external reporting

Shift from compliance external reporting Shift from compliance external reporting to assessing value for moneyto assessing value for money

Shift from ‘selling’ the organisation to Shift from ‘selling’ the organisation to balanced reportingbalanced reporting

Key Themes (cont)Key Themes (cont)

Reporting = communication, not numbersReporting = communication, not numbers Simplification = making it simpler for Simplification = making it simpler for

readers of financial information to make readers of financial information to make informed decisions informed decisions

Simplification, not = simplifying Simplification, not = simplifying requirements for report preparersrequirements for report preparers

More is required, not less, in terms of More is required, not less, in terms of reporting and value adding advicereporting and value adding advice

ChecklistChecklist

Identify business driversIdentify business drivers Identify each managers decision frameworkIdentify each managers decision framework Identify tolerancesIdentify tolerances Identify relevant non-financial data to join Identify relevant non-financial data to join Ensure chart of accounts has necessary infoEnsure chart of accounts has necessary info Negotiate exception report frameworkNegotiate exception report framework Styles to suit readersStyles to suit readers Trial & errorTrial & error

More InformationMore Information

Website including this paper:Website including this paper:

www.orionco.netwww.orionco.net

(also includes SFR report for LGAQ)(also includes SFR report for LGAQ) To contact David SpearrittTo contact David Spearritt

david@orionco.netdavid@orionco.net

1300 767 4661300 767 466