The Big Four wants real time reporting

The world’s largest global accounting firms are claiming the historic model of financial reporting could, and should, be radically overhauled through the use of modern technology.

In a report, Global Capital Markets and the Global Economy: A vision from the CEOs of the International Audit Networks, the world’s most influential auditors claim that investors and other stakeholders across the globe want to know more about the “intangibles” (what makes the difference between the balance sheet value and the market value) and how they might plausibly affect how businesses perform in the future. Yet financial statements stubbornly remain backward looking documents. They tell how a company has performed in the recent past with only limited information indicative of future performance.

Enabling technology
The report points to XRBL as an important enabler (see April 2006 issue page 18, for the potential of this tagging technology) and claims that “it takes only a bit of imagination to realise that digitisation and the internet can enable users of company data to customise what information they want and how they want it presented, in much the same way that they are now able to customise the products and services they are now able to purchase”.

The new model should be driven by the wants of investors and other users of company information and the information produced should be forward looking, even though it may be historical in fact. The report cites measures, such as innovative success (perhaps measured by patents recently awarded), measures of customer satisfaction, product or service defects or awards, staff turnover – that are non-financial, but are likely to be predictive of how well a company will perform in the future.

So imagine a manufacturer has flat sales around the world, but has numerous patented innovations in the pipeline. The financial data may suggest a sell recommendation, the non-financials just the opposite. Downloadable from the internet, this would be bite-size Martini reporting – financial information available any time, any place, anywhere. The idea of fixed reporting times – such as quarterly updates and annual reports – does not, claim the auditors, fit into the internet age.

The report says that if such relevant non-financial information were routinely available to shareholders it would provide the executives with powerful incentives to manage their companies in ways that benefit their shareholders, employees, customers and the wider economies in which they operate. The logic is that companies that are facing problems would be more likely to take corrective action sooner and companies whose prospects are brighter than the current financial figures suggest would not be penalised by investors.

If a revised reporting model does emerge, the global firms predict that users are likely to care less about the formats that have historically dominated the disclosure of company information – the balance sheet, income statements and statement of cash flows – and far more about new formats that could be developed by accountants, analysts and users. If such DIY reporting does emerge then auditing would also have to change.

Reliable systems
Users will want to be assured of the reliability of the specific information they choose to access. This means that the audit process will focus on the technology that produces the information and the reliability of the systems tagging the data.

The global firms are offering to host the conversations that would be needed with investors about the details of this new financial reporting model and are calling for it to be a bottom up process rather than one imposed from the top down by a single global standard-setter or regulator. Auditors naturally want to be at the centre of these changes in company reporting.

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