Canada’s electronic reporting receives failing grades

Corporate reporting on the Internet is becoming the prime medium for communicating corporate financial and business information. However, most companies do a poor job of presenting this information on their websites.

By Gundi Jeffrey

Corporate reporting has changed dramatically in the past 50 years. And, as a new study makes abundantly clear, corporate reporting on the Internet is now becoming the prime medium for communicating corporate financial and business information. Unfortunately, most companies do a poor job of presenting this information on their websites.

“Corporate websites have become the front line of disclosure,” says Catherine Crofton, vice-president of Q4 Web Systems, a software company that helps companies reduce risks associated with electronic disclosures. “Yet, based on their disclosure practices, they are not in step with this fact.”

The new study on Corporate Reporting to Stakeholders, now available on the Canadian Institute of Chartered Accountants (CICA) website (www.cica.ca), concludes that companies are not using their web pages to communicate what is necessary and that “it is apparent that the use of technology to communicate with investors and other stakeholders is still at an embryonic stage.”

It had to happen

The move to electronic reporting was inevitable, given the almost universal use of computers today. It offers investors, analysts, regulators and others instant access to data on companies they are interested in; the information can be accessed by a much wider audience — when they feel like it; there’s access to a much greater volume of data than ever before; and it allows users to download information and manipulate it to suit their needs.

Recognizing the potential of this new means of disseminating information, as far back as 1999, the CICA published The Impact of Technology on Financial and Business Reporting, which along with other studies in the U.S. and Europe, indicated that there was a relatively high, and constantly increasing, level of usage of the Internet for presenting financial data.

In 2003, the Toronto Stock Exchange (TSX) released Electronic Communications Disclosure Guidelines, which strongly recommended that all listed public companies maintain a corporate website to make investor relations information available electronically. It also stressed that Internet disclosure alone will not meet regulatory disclosure requirements and that companies also had to use traditional methods of dissemination.

The overall objective of the TSX guidelines — which are updated regularly — is to encourage the use of electronic media to make investor information accessible, accurate and timely. Because the online information is seen as an extension of formal corporate disclosure, it is subject to the same securities laws and TSX standards as conventional paper reporting. As well, says the TSX, companies need to be aware of, and meet, disclosure requirements in all jurisdictions they operate in.

Canada’s annual corporate reporting awards, sponsored by various bodies, have also begun to look at electronic reporting, usually found in the investor relations (IR) sections of websites. Among the criteria the judges use to assess this type of information:

• Does the IR section have a proper “meta page title,” which includes the name of the company followed by the words “investor relations” (important for book marking)?
• Does the section immediately address visitors’ primary needs (for example, find specific information, introduce the company, provide updates)?
• Does it contain a clearly marked section that describes the company and outlines its investment proposition?
• Using these criteria, the CICA commissioned a survey of the information content, navigation and use of technology of the websites of 125 companies that participated in the 2005 and 2006 corporate reporting awards program. The survey also analyzed whether 24 items of what was considered to be “essential” information — falling under the headings of corporate overview, review of operations, financial summary and analysis and supplemental information — were made available to investors and other stakeholders and assessed how well technology was being used to enhance communications.

Not enough information

The survey found that only eight of the 24 information items were being disclosed by more than 10 per cent of the companies surveyed. Four essential items were not found at all: response to change, risk and uncertainties, accounting policy changes not yet implemented and a statement of management’s responsibility.

According to Aline Girard, an accounting professor with HEC in Montreal who carried out the CICA survey, the most important conclusion is that, “in general, companies are not using their investor relations web pages as a distinct communication medium (compared to the annual report) to convey essential information to investors and other stakeholders. This section of corporate websites seems to serve only as a library to store company reports.”

When it came to use of technology, companies didn’t do much better. Most survey companies provided access to their financial statements and auditors’ report on their investor relations web pages via a link to a PDF or HTML document containing all or part of the full annual report. A few companies put the information elsewhere on their websites. The survey notes that most of the HTML reports are simply a replication of the paper annual report. The HTML pages are long, and users have to scroll up and down several times to find the information they are looking for.

According to Girard, one of the worst offenders in the survey was a company that posted all of its communication press releases, financial reports, regulatory documents, etc., in chronological order. “There was no classification of the type of reports, documents or information at all. This is not helpful and users looking for specific information will soon be discouraged.”

Other companies’ home pages seem to address only their customers. “If you are looking for specific corporate information, you really have to search for the link to get there. Sometimes, it takes five or six clicks — even when you are used to this type of search — to get at the specific information investors are looking for. This is discouraging since, most of the time, users want to get at the information quickly.”

Girard adds that most companies did not provide a navigation menu on their home page or on a specific web page, making it difficult to locate items of interest. “As well, many companies are providing so much information that the websites are overloaded and they don’t provide helpful tools to navigate through all this information.”

On the other end of the spectrum, Crofton points out, too many companies just disclose the minimum required for regulatory compliance in the hope that this limits their potential liability. And yet they open themselves up to liability in the blink of an eye by not using stringent oversight procedures for posting their information. “I’ve seen instances where erroneous information has appeared on a website and no one has any idea as to who put it there, or when.”

This is surprising, she says, because in Canada, officers and directors are personally liable for any omission or misrepresentation of material information in any communications with investors and other stakeholders. “Material information is defined as any communication that would influence a reasonable investor’s decision to buy, hold or sell securities in a company. Without effective disclosure controls surrounding the website, the public may not be receiving the most accurate information and the issuer may be at risk — both parties lose.”

Best in class

On a more positive note, she says, there are examples of good corporate disclosure on websites. “The same companies are praised by the corporate reporting awards every year as being consistently best in class.” She adds that these companies do use the same stringent process for creating their web pages as for making all their other disclosures under current regulatory requirements. Even so, she says, “many of these exemplary companies do not have accurate, searchable records of the content on their sites and may be exposed to risk in the event of a regulatory inquiry.”

The 2007 corporate reporting awards ranked global energy company Nexen Inc. first for its reporting on the Internet. The judges said that the company “really gave some thought as to how investors access information — and what information investors want to access.” They liked the stock chart interface and the HTML financial statements. “This effective website has great context and strategy. The site does an excellent job including all important content and doing so in an intuitive user-friendly way. The navigation is clean and simple, despite the large volume of content.”

Runner-up PotashCorp was lauded for setting the bar for best practices in the area. “There is an abundance of industry and corporate content. There is also significant depth in virtually every aspect of the content, which gives the user a good understanding of the company. This is very much a benchmark in terms of the depth of content and overall functionality.” PotashCorp was also singled out for its “best practice” approaches in terms of navigation. “The good consistent use of main navigation, sub-navigation and page level tab navigation allows the user to find just about anything.”

PotashCorp’s vice-president and corporate controller Denis Sirois, CMA, says that “we take pride in our transparency, and we continually strive to evaluate best practices in this area.”

In addition to a section on “Why Invest,” news releases, quarterly results, annual reports, investor news, market news and a library of archived material, PotashCorp also discloses its objectives for the coming year, as well as the objectives for the past year and how well those objectives were achieved. “This is a difficult thing to do,” says Sirois, “because we cannot control all of the factors that may influence our success. We think transparency makes our management more accountable and committed.”

But even the winners aren’t perfect, notes Girard. “There is always some possible improvement.”

Understand the audience

Crofton advises that the best place to start an overhaul of corporate disclosure on the Internet is to understand that there are three primary users of this information, each looking for a slightly different set of information:

• Prospective investors, who know little about a company and want to get up to speed quickly on its management team, performance history and future prospects.
• Existing investors who want assurance that they have made the right investment decision. They are looking at current performance against goals and future plans.
• Long-term investors, who are not as concerned with peaks and valleys but want to see a consistent overall growth over the long haul.

For all of them, she explains, the home page is important. “It sets the stage, leading people to the most salient points. They can then focus on those to drill down to the details they want. With larger companies, which may have more consumer or B2B marketing sites, the home page should still offer quick entry points to the investor and corporate index pages, where the most relevant information should be easily accessible. You really don’t want to make it hard for investors to find the information they need.”

Girard adds that the home page should contain links that lead the different types of users to the information created especially for them. “Companies get it right when they put some effort into determining which messages they want to convey to which user groups and then help them find it quickly and easily.” A clear and comprehensive sitemap and a site search feature should be available, along with a help button for those with difficulty finding what they want. By using navigation tracking and different colours for visited and unvisited links, visitors can reference their current position on a website and retrace their steps.

She also recommends “drop-down boxes in which you find key words that will drive you to follow the path to the information you are looking for.” Moreover, some companies are integrating pop-up windows into their annual reports. “For example, if you place your cursor on a graph, a pop-up window opens that will give you additional information about the results in the graph. You can also have pop-up windows provide definitions for specific or specialized vocabulary,” Girard explains.

Engaging communications

A major advantage of Web-based corporate reporting is that the communication possibilities go far beyond that achievable by traditional means. “Technology and interactivity can be used to engage investors and enhance their experience (for example, with Flash movies, videos of interviews with senior management, financial information downloads, charting tools and feedback forms). Technology can also be used to design a website that allows equal access to information and services to all users, including those with visual, hearing, cognitive and motor impairments. It should enable users to control a number of features including the size of the text, layout and navigation.

Crofton points out that a particularly useful function of electronic disclosure is its immediacy. “If, say, your president lets something slip he shouldn’t have in a press conference or webcast, you can take action right away to issue a statement or press release and immediately post it on your website.” She also adds that today’s content management tools allow administrators with little technical knowledge to post those statements and respond to issues without relying on more time intensive external services. And the right solutions ensure they have a documented trail confirming what’s being done.

For the foreseeable future, it is apparent that the online reporting will continue to be driven by its offline counterparts, including the legal and regulatory requirements companies must consider when presenting the information. But, given the current trend toward greater narrative reporting, companies will need to look more critically at non-financial information and provide a clearer indication of aims, objectives, strategy and key performance indicators.

For a website to be truly effective, it must be treated as a communications vehicle in its own right. It is not merely an Internet bulletin board. The information content and reliability should be integrated with technology, not overwhelmed by it. That requires an appropriate use of multimedia, photographs, tables, charts and graphics.

“Websites are changing constantly for the better,” concludes Girard, pointing out that the corporate reporting award winners “are certainly inclined to innovate in their Web communication process.” Some are very careful in identifying their user groups, what their information needs are and then meeting those needs. The winners are also good at exploiting technology for the best and most innovative results. And those are the keys to success. “Use Web technology and navigation tools to make information clear, concise, easy to read and easy to find — but avoid information overload.”

Gundi Jeffrey is a business journalist specializing in writing about the accounting profession in Canada, Mexico and Brazil. She’s a co-founder of, and now a special correspondent for, The Bottom Line.

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