Analysts’ evaluation of KPI usefulness, standardisation and assurance

Abstract

Purpose The purpose of this paper is to examine analysts’ evaluations of usefulness of KPIs disclosed by UK corporates. The disclosure of KPIs, both financial and non-financial is driven by legislation in the form of the Companies Act 2006. The paper considers two of the key concerns raised with KPI disclosure: a lack of standardisation (leading to inconsistency of calculation) and a lack of external assurance. Design/methodology/approach A questionnaire was prepared which was used as the basis for semi-structured interviews with senior professional equity analysts. Questions were designed to cover aspects of usefulness and desirability of standardisation to improve consistency and comparability as well as the incremental value of audit firms providing assurance of KPIs. Findings KPIs are indeed a useful supplement to the financial statements in developing a corporate narrative. Analysts highlighted that a significant amount of this information is released to the market in advance of the Annual Report which performs a confirmatory role. Whilst analysts highlight inconsistencies in calculation methods of KPIs they did not feel that a standard calculation should be prescribed. Further they did not feel that assurance over the calculation would be valuable as they perceived that this would remove the flexibility of companies to select the most appropriate measures. Research limitations/implications The paper contributes to the body of research on disclosure by focussing on how the KPI disclosure is used by the intended audience and whether and how the disclosure mechanism may be strengthened. Practical implications The findings provide an interface between theory and practice adding to the body of knowledge on disclosure theory and in particular KPI disclosure and how it is used. This will in turn help the standard setters in ensuring that disclosures enhance usefulness. Originality/value Insight into the actual usefulness of these measures is important to inform this debate on presentation of the corporate “narrative”. This goes some way to addressing the unanswered questions in Healy and Palepu (2001) and the calls for further qualitative research in the area (Watson et al., 2002).