An annual report can be a great calling card and the secret to doing business more successfully, even though Estonian business people aren’t all that active in submitting them. Last year was an exception: the deadline for submission of annual financial statements was postponed by several months and a larger number of the reports came in on time.
In the past, about 60% of companies submitted their annual reports on time, but last year the figure was 71%, says Mart Nõmper, a member of the management board of the Estonian Auditors’ Association and the head of audit services at Grant Thornton Baltic. Although one reason that more reports were in by the deadline last year was the later deadline, Nõmper says a more fundamental consideration is influencing businesses.
A poor report signals weakness in a company
“Companies realised the advantage that on-time submission gives them. If the report is not submitted, data have not been sent to the Tax Board and the company is in tax arrears, the business will not qualify for state support. So reporting became more popular,” Nõmper told the Äripäev radio broadcast “Kasvukursil”. He said that the pandemic has been more of a positive influence for the auditing services field.
Is there a point in reading financial reports for this exceptional year and what to look for? “2020 was a huge financial event and it has certainly had a major effect on the figures for the year. That’s why I have a sense that we shouldn’t look at so much numerical results but also the information disclosed in the notes: how the company has adapted, what sorts of measures it has used, how much the virus affected them. The figures also reveal this, to be sure, but the notes to the financial statements have to be read to gain a full understanding,” said Nõmper.
The investment platform EstateGuru has seen both sides in the reporting process: on one hand, they are under an obligation and have to prepare annual reports themselves, while on the other hand analysing annual reports is part of their everyday operations. EstateGuru’s CEO Mihkel Stamm confirmed this, saying that they don’t underestimate the necessity of annual reports or their benefits for the company itself.
An annual report is a chance to show off
“As a company, we have been submitting annual reports since the beginning, even before we had a duty to do so. We see it as an important tool for increasing our outward trustworthiness. With each year, we have become more precise and explanatory.
This year, it’s even more important to give an indication of how the company actually fared,” Stamm said, adding that they set records last year. “We grew 50 per cent in terms of loan volume and 80 per cent in terms of revenue. So we have some achievements to tout in our reports.”
Nõmper also emphasized that filing an annual report doesn’t have to be seen as an obligation but an opportunity. “Disclosing financial information is a chance to talk about yourself and how things have gone. To talk about yourself to business partners, journalists – you can maintain your leading position in their eyes and signal what you want to talk about,” he said. Doing only the bare minimum required by law will definitely not foster trust in the eyes of investors, on the other hand.
Although big listed companies are already now including more information than required, in future they will have to also document their environmental impact, how they are working to protect human rights, information on business partners and other such content. And they have to do so not in general terms but with verifiable numbers – the auditor must have an understanding of whether all of the information is correct.
Not only balancing income and expenses, but making the world a better place
Mihkel Stamm summed up the necessity of this duty. “Showing that you are a socially responsible corporation can mean additional obligations when filling in reports, but if we really want to change the world, it has to be disclosed somewhere. Auditing is the only possibility for this, otherwise it stays on the level of pretty marketing rhetoric,” Stamm said. For one thing, this prevents companies from engaging in greenwash.
“If you show with your figures that these are the specific actions we perform, that’s the beginning of changes that tie in with the broader vision,” said Stamm, speaking of global changes and making the world more environmentally sound. “Financing is the first real change. As a company, you take responsibility in this process,” he added, saying that the new sections in the annual reports are important in the big picture.
Nõmper explained that although such changes are additional obligations for auditors, he felt that Estonia’s professionals in this sector are perfectly capable of managing it. “The Estonian economic environment is very transparent, and so is auditing activity. The qualities of all of the auditors are highlighted on our supervision website. Each auditor undergoes a regular quality control once every six years or even more frequently," he said.
The Auditors’ Association website also publishes a corporate trust index, which shows how many businesses received unqualified auditor’s reports on their accounts and how many had a qualified report. “When the index was reviewed during the last economic crisis, one-quarter of the audited companies drew a qualified opinion from their auditor. Year on year, the share of unqualified reports has increased. Last year, nearly 90% were unqualified opinions – the quality of preparation of annual reports in Estonia is good,” said Nõmper.
Accountants are confidantes and advisers
Nõmper notes there are two categories of audit findings. First, where the auditor points to a specific misstatement or error. The second type is a disclaimer of opinion - the auditor did not obtain enough information to make an assessment.
“Most qualifications regarding Estonian companies are related to the latter and it does not mean that the companies are doing anything wrong, either deliberately or due to not knowing better. They tend to be related to aspects that are objectively hard to evaluate. For example, it is not possible to verify whether an asset really is worth what it was stated. Or whether a company is sustainable during hard times – often this depends on the future and it is hard to arrive at a certain objective assessment.”
Outsourcing spreads out risks
A good accountant is a big help for a company in preparing an annual report. There is a choice between hiring an accountant or outsourcing. The head of outsourcing at Grant Thornton Baltic OÜ, Anastasia Borovaja, says the reasons for outsourcing have changed a little over time.
“A couple of years ago, there was this view that a small business should outsource because there wasn’t enough work to hire a specialist for their staff. But today, small businesses want to get off on the right foot. They want the rules of play agreed on from the beginning, they want to consult someone. Small businesses today grow at such a rapid pace that their needs also change fast. The person you hire today may not necessarily have the right skillsets for the next five years,” Borovaja said.
Outsourcing also poses a lower risk of knowledge flight. “The classic old-school model of one company, one accountant means all the knowledge is in the hands of one person. If they go their separate ways or something happens to the person, it may mean no one has the knowledge but the company has to keep on operating.”
Stamm related the experience of EstateGuru: they, too, outsourced at the outset, but now they have a chief accountant of their own. “Since we have offices in six different countries, the accountant handles our communications, helps to create a unified approach and is also a directly available adviser for us. But that doesn’t mean that we just disengage from external partners. For example, if we’re in Germany, our chief accountant doesn’t have to know all the details – for that we need local partners,” Stamm said.