What really counts

By Xavier Bedoret, IDP-C, IDN Belgium Ambassador

In this period of pandemic, the financial statements of companies are shaken by a real storm. However, in analyzing the balance sheet and profit and loss account, are boards and audit committees focusing on everything that really counts?

A company’s accounts grant relatively little space to accommodate intangible assets, namely the value accorded to the commercial brand, the technological advantage, the company’s reason for being and its societal responsibility.

It is generally agreed that these intangible assets add value to the organization and broader society. Financial analysts deem that intangible assets today represent more than 80% of a company’s value. This value becomes apparent, for instance, during mergers and acquisitions, when the purchase price represents a multiple of the target’s own funds.

If the audit committee broadly ignores intangible assets, it is because many of these are not recognized in the company’s balance sheet. In fact, accounting rules, anxious to apply care and objectivity, do not recognize the value of a good reputation, of a brand created internally (for example, the Apple brand does not appear in the company’s assets), of a strong company culture, or of the quality of the company’s management and of its staff.

Certain organizations have nevertheless considered this issue; “L’Observatoire de l’Immatériel”, created in France in 2007, offers companies a dashboard of intangible assets; and the WICI (World Intellectual Capital Initiative) has promoted a method to value intangible assets since 2016. Both organizations believe that the intangible assets of today are the vehicles for value creation tomorrow. Their absence in the balance sheet should not lead to blindly managing the company’s financial strategy.

It is therefore advisable that the audit committee reconciles its analysis of what is in the accounts with the analysis of what isn’t. For the last few years, the board of directors and the audit committee have expanded their scope in order to intervene in the management of non-financial matters such as: business purpose, societal ambition, people satisfaction, disruption management. In order to be able to report meaningfully in these areas, companies must put in place new processes and measurement mechanisms. The audit committee must ensure their reliability.

In doing so, the audit committee has left the strict perimeter of the company accounts to take an interest in the company’s strategy and risk appetite, in its internal monitoring and organization, as well as in its performance and social responsibility.

The audit committee will likely be called upon to build connections between financial and non-financial information, many of which are concerned with more intangible elements.

This tendency has become apparent over the last few years in the publications of integrated reports and of non-financial reports that put the emphasis on companies’ reason for being, on their societal commitments, on the sources of value creation, and on sustainable development. Could the rigorous approach adopted by the audit committee be extended to the non-financial realm?

All interested parties, namely the shareholders, clients, suppliers, employees and lenders, will benefit from a truer investigation into what really counts.

First published in August 2020 here.