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.
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
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.
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.