With his “Let’s Stay Connected” address to the European Accounting Association Annual Congress, Andreas Barckow delivers one of the all-time most interesting speeches by an IASB Chair.

Rather like identifying the world’s largest gnat, you say? Not at all! I’ll devote the entire space today to some extracts:

• … today, ‘connectivity’ seems to be everything: ‘How does your literature reflect connectivity between ABC and DEF?’ ‘Have you considered connectivity when discussing and deciding on XYZ?’ Connectivity this, connectivity that. One could get the impression that generations of accountants must have completely missed the boat by flying blind on connectivity. What has changed so fundamentally that we cannot spend a single day without having considered connectivity at least once?
• ,,, While evolving terminology may play a role, the heightened emphasis on ‘connectivity’ likely stems from a fundamental shift in how we view the purpose and context of financial reporting itself. Traditionally accountants, modest people that we are, view the financial statements as and at the centre of the corporate reporting universe. If you acknowledged that view, then ‘connectivity’ would not have been a key consideration for you, as everything was considered to be connected TO the financial statements, not FROM the financial statements to some other place or reporting—unless that reporting was viewed as a logical extension of the financial statements, such as management commentary or similar narrative reporting I just mentioned.
• However, that perspective is changing. Whether at the centre or not, financial statements continue to have their place in the corporate reporting world. Users need information about the resources of an entity, the claims held against it, and changes in both such resources and claims to assess the amount, timing and uncertainty of future cashflows and to hold management to account. The information provided through the financial reporting ecosystem is considered relevant and reliable, as it is safeguarded by robust processes and internal controls, and as significant portions of it are subject to an audit and maybe an enforcement. And even if the content provided in the financial statements is mostly confirmatory in nature, as the information has already been digested and acted on by investors throughout the year, I have yet to meet a primary user who would suggest throwing them into the bin. General purpose financial reporting and the financial statements produced from it continue to form the basis for any fundamental investment analysis and for forecasting future cashflows.
• That is not to say that everything in the financial statements is picture-perfect or without limits. Whilst the underlying double book-keeping has a mathematical stringency to it, accounting and financial reporting are more akin to social sciences where requirements are derived based on agreed-upon concepts, principles, norms and conventions. One of these conventions concerns the concept of a ‘reporting period’ that establishes the start and the end date for what gets reported….Anyone interested in what could or will happen after the balance sheet date will have to come back next week or turn to other sources of information.
• Another area where the financial statements remain silent—again, by convention—is by showing impacts and dependencies of what an entity is doing. Financial statements reflect how an entity’s financial position, performance and cash flows were impacted by its own actions and by external events. What we generally do not show in the accounts is how an entity’s doing impacted other parties’ affairs, including wider society, and what relationships an entity’s actions may exhibit in other areas of and within the entity, but beyond financial performance; take the financial impact of expenditure in learning and development on an entity’s human or intellectual capital as an example. People familiar with the Integrated Reporting Framework will no doubt have a déjà-vu here, and entities applying the Framework will often report on exactly these kinds of relationships to the extent that affect the ability of the company to create value for itself—but they do that outside of the financial statements in an integrated report.
• Neither boundary I mentioned—that financial statements are not meant to report on the future or to demonstrate impacts or dependencies—are new. If some people are perceiving the financial statements to be limited as they do not deliver any information in that regard, they ought to be reminded of the statements’ purpose, namely: to inform primary users about the existing resources of and claims against an entity and the changes thereof. In other fora, I have repeatedly said that the financial statements are not an entity’s Encyclopaedia Britannica where users can reasonably expect to find an answer to every question they have about the entity. The boundaries of the financial statements are there for a purpose. Of course, that does not mean that the purpose cannot be changed—as said: financial reporting is a set of conventions. The question is, however, whether the conventions need to be changed, or whether the purpose of financial reporting would not be better served by linking the information contained in the financial statements to information provided through other sets of reporting.

The closing thought of Barckow’s thoughtful and elegantly expressed address is that “conceptually, connectivity should not be viewed as a one-way street” and that we should indeed start thinking about such linkages “where this is both feasible and appropriate.” Perhaps as important though is his apparent acknowledgment that changing technologies and expectations will reduce the relative importance of formal periodic financial reporting (being “mostly confirmatory in nature”) in relation to other forms of real-time (or at least closer to real-time) financial information. It seems to me that this has further implications, reducing the importance of the annual audit, at least the finicky compliance-related aspects of it, perhaps offset by other forms of year-round verification and assurance. But if so, then that’s for another speech…

The opinions expressed are solely those of the author.