It’s been a while since we returned in this space to the issue of digital financial reporting…
…so let’s do so now via the recent report The Future of Financial Reporting – What Size Do You Want? by Professor Peter Wells and Chartered Accountants Australia and New Zealand. Here’s the executive summary:
- With major economies around the world increasingly adopting digital financial reporting, or XBRL in particular, it is time for financial reporting in Australia and New Zealand to enter the ‘digital age’. In doing so we have the choice of simply accepting it, or embracing it and allowing it to revolutionize financial reporting and redefining the role of professional accountants. Digital financial reporting has potentially significant implications for preparers, auditors, regulators and the users and analysts of financial information. The advantages include:
- increasing the understandability, accuracy and accessibility of financial information;
- making financial information easier for investors to analyze, including comparisons across companies;
- assisting in automating regulatory filings and making this information publicly available;
- facilitating business information processing;
- cost reduction for users of financial reports as they are able to navigate and extract information from financial reports more efficiently; and
- facilitation of more comprehensive analysis of financial reports, allowing enhanced enforcement of existing regulation and more targeted regulation.
- If embraced it will significantly reshape the way in which financial information is used, allowing reports to be tailored to the specific needs of users, allowing the sophisticated analysis of financial information and facilitating complex modelling. This will lead to significant changes in the work undertaken by accountants, moving us further away from the preparation of financial information to the use of information, cementing our role as analysts of financial information and advisers, and underscoring the value of independent assurance. The possibility of more timely reporting and assurance moves closer to reality in a digital reporting environment. The real challenge is not adopting digital financial reporting, but developing the new capabilities required in this environment.
These observations and arguments aren’t by any means new – just as with climate change reporting, we seem to be perpetually mapping journeys to exciting destinations, while unable to take any kind of organized first step. As the report puts it: “Critically, we persist in preparing a single financial report for diverse users with diverse capabilities, sophisticated and unsophisticated users alike – one size fits all. In many ways providing a modern financial report to an unsophisticated user is a bit like giving Macbeth to pre-schoolers.” (as you see there, the document does deliver the odd snappy line). The IFRS Foundation hasn’t ignored the issue, but again, as summed up in a recent speech by IASB member Ann Tarca, seems most comfortable raising questions and noting ambiguities and pitfalls. And it’s true, any specific route ahead would probably be marked by an uncertain mapping of costs and benefits. And so pretty much nothing happens…
Anyway, a big part (but not all) of this conversation focuses on XBRL, mandated in some jurisdictions, but according to the report, stalled in Australia and barely off the ground in New Zealand (just as here in Canada). Here’s another extract:
- For users, digital financial reporting would enable the development of software allowing the preparation of tailored financial reports and appropriate analysis. This might be simplified financial reports with simple analysis tailored to the needs of unsophisticated users, as well as more comprehensive reports for sophisticated users and different types of users. Arguably financial reports as they are currently prepared give pre-eminence to the requirements of shareholders. Whether these are always relevant for debtholders is questionable, and accounting practices in relation to leases and accounting for intangibles are probably good examples. In this regard it should be noted that debtholders typically reformat financial reports, often excluding intangible assets from balance sheets. Currently this is done manually, and digital financial reporting would provide increased accuracy and cost saving. Not surprisingly there is evidence that after the adoption XBRL reporting there is evidence of lower information processing costs for users of financial reports…, increased analyst forecast accuracy…, and improvements in the information efficiency of capital markets…
I would note two inter-connected (and again, not new) points not covered by the report. First, the events of this pandemic year, in which markets have remained weirdly buoyant even while most aspects of the economic world go into reverse, and all recent predictions go out the window, illustrate how the very concept of informed risk-appropriate long-term investing is likely to become more idealistic, if not entirely fanciful. Second, whether or not the wretched Trump is re-elected in a couple of months’ time, the strain of rabid regressive irrationality and ideological capitulation that he embodies won’t entirely die out. The financial reporting profession can’t flourish by obsessively tending its shrinking patch of vintage territory, and it’s well past time to end the fragmentation of corporate reporting. This is why I always come back to the same conclusion, that the IFRS Foundation needs to expand the scope of its influence, certainly in the ways the report talks about, but also by embracing all aspects of non-financial reporting, and beyond…
The opinions expressed are solely those of the author.