EVERY now and then something trivial and bordering on idiocy comes along and everyone picks upon it. This seems to be the norm in the fashion world. A few years
back some fellow wore his/her cap backwards. Before we knew it, it had grown into a fad. The wearing of bandanas and sagging pants by teenage males was a craze three years ago. Lately the fairer sex can be seen wearing big sun glasses.
It would appear that such fads do not develop only in the fashion industry but in corporate boardrooms as well. When it started, it was in the form of an explanation accompanying the publication of results which stated that “inflation adjusted accounts” were the primary accounts. At that time and until recently, it was fashionable to produce both “historical” and “inflation-adjusted” accounts.
But the board commentary would be on the former. Then some genius at one company thought that it would make more sense if the esteemed board commented on the inflation adjusted figures only. The publication of inflation adjusted figures only — with the apparent blessing of the Zimbabwe Stock Exchange — is now in vogue.
Human nature is such that for anything that happens, we have to finger someone, some institution or professional body, as the initiator. In our case of inflation accounting the obvious targets are the accountants, whose association is alleged to have been at the forefront of pushing for the adoption of inflation-adjusted accounts. It is also generally believed amongst the investment community that the accountants, through their representative body, persuaded the ZSE to adopt inflation-adjusted accounts and amend their listing regulations to the effect that the stock market governing body would regard inflation-adjusted accounts as the primary accounts.
Granted, the ZSE in its wisdom and having accepted advice from learned professionals ruled that listed companies should produce inflation-adjusted figures, and for its use, it would regard these as the primary accounts. However, two fundamental questions demand a response. Why are companies, both listed and non-listed, expected to produce financial statements and whose responsibility is it that they do? In terms of corporate governance, any financial statements produced and published by a company are the responsibility of the board of directors. In fact, in order to avoid confusion and as a sort of disclaimer, every annual report contains a statement in which auditors remind shareholders that “the company directors are responsible for the preparation and presentation of financial statements …”
Since financial statements are — probably — the only official mode of communication from directors to shareholders, it follows that the accounts should be “clear and understandable to a reader with reasonable financial awareness, reliable and believable”. The trustworthiness and authenticity of the statements is sometimes compromised by fraud and errors — both deliberate and otherwise — in their preparation and “window dressing” of performance through the use of accounting policies that may not present a true and fair position of the company. The fact that the policies might be permissible by professional bodies is neither here nor there, if the said accounts have the effect of masking information from investors and shareholders, which is the primary purpose for their production.
It is common knowledge that listed companies publish financial statements for the dual purpose of complying with listing requirements and providing information to shareholders. Thus the previous arrangement where companies made public both historical and inflation-adjusted figures was ideal.
Investors would then analyse, dissect, dissemble and re-assemble the accounts of their choice to arrive at their decisions. Therefore, the excuse given by most boards that their production of inflation-adjusted accounts only — akin to wearing the cap backwards —— is in conformity with listing regulations, is rather weak as it does not balance the need to be accountable to shareholders by providing relevant and sufficient information for them to evaluate the company’s performance.
Experience in the Zimbabwean market has shown that shareholders and investors favour historical accounts and would prefer these to the inflation-adjusted ones. There are aspersions as to whether the latter present a true and fair value of the company, particularly in the light of the generally accepted view that the official CPI understates the true inflation rate, sometimes by a wide margin.
On the other hand, it is generally accepted — may be with a pinch of salt as it were — that historical accounts represent what would have transpired in the period under review. This may not be the case with inflation-adjusted figures produced by converting the historical accounts using some index, the trueness of which in our case is in obvious doubt. Hence, the veracity of the statements becomes questionable.
Furthermore, in our local market it is generally accepted that inflation-adjusted accounts are rather lean on information as to be of any use in decision-making. This then means investors and shareholders are at sea in as far as the financial and operational health of the company is concerned.
This trend of producing inflation-adjusted only figures was started by one company. But it seems to have really caught on, with the list growing by the day and is slowly turning into a pandemic. We thus salute the — somewhat unexpected — move primarily by Delta, its former subsidiaries OK Zimbabwe & Pelhams, Tractive, and Ariston not to be taken in by the tide. We hope more and more directors continue to diligently perform their duty of ensuring that financial statements produced by their companies are analysis-friendly and mean something to shareholders and investors alike.