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Should governments be required to file annual reports?

Posting in Finance

Annual report preparation forces discipline upon executives to focus on priorities and risks, and build consensus for corporate action and investor participation. Good for government leaders as well?

While annual reports tend to be slick, finely honed public relations documents, they nonetheless offer some semblance of transparency into the financial state, as well as state of mind, of publicly traded corporations. As required by law, companies open up their revenues, assets, and discuss their strategic directions, as well as the risks they see down the road.

Would it be helpful, then, for a national government to issue an annual report, distilling its finances and risk assessments?

That's the suggestion of a team of open corporate governance advocates, led by Jay Clayton of Sullivan and Cromwell and the University of Pennsylvania Law School and David Lawrence of Goldman Sachs.  In a column in Knowledge@Wharton, they call for creating a vehicle for "honest conversation" between citizens and their leaders, and that vehicle is already used in business: the annual or 10-K report.

As Clayton and Lawrence point out, annual reports provide great clarity to corporate governance. The process of preparing annual reports also helps focus corporate efforts. The annual report is also a valuable communications and strategy tool for non-profit groups. Why not apply the same clarity to the federal government?

Annual reports "must be concise, in plain language and embody personal accountability. The consequences of faulty disclosure include significant fines and, in the case of intentionally false statements, banishment from public companies and prison sentences. The benefits go beyond the distribution of information. The preparation of the reports forces discipline upon senior executives to focus on priorities and risks as they articulate the state of their businesses. The conclusions build the consensus for corporate action and investor participation. Although the system is not without fault, the result has been a legacy of investment, innovation and job creation that has nurtured our nation and changed the world -- a virtuous cycle of possibility and progress."

A national annual report should include "a letter to voters followed by the information that is essential to the country's stakeholders -- such as relevant history, recent performance and prospects, a summary of financial condition, management discussion and analysis, future objectives, anticipated risks, related party-transactions, internal controls (including weaknesses and deficiencies), pension and off-balance sheet liabilities, litigation exposures, and the compensation, benefits and insider purchases and sales of senior officials," the authors urge.

Additional elements -- just as is seen in corporate annual reports -- would also include an auditor's report and all necessary qualifications, and conclude with certifications as to accuracy by the top officials. A sample document is posted at the Wharton website.

Would an annual report work to bring more focus and accountability to government?  Or will it just be another report that gets ignored?

(Photo by Joe McKendrick.)

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Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure