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Accounting big four push for financial reporting changes

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The so-called big four global accounting firms, together with two of the major second tier firms, have recently proposed that the current historic reporting of corporate financial results, quarterly or half yearly, should be replaced by real time reporting.

Moreover, they argue that financial reporting should be augmented by disclosure of a wider range of non-financial performance data. Reporting should adopt current technology using deep data mining, data tagging, and internet availability and access.

Information should be available to a wider range of stakeholders beyond employees, shareholders, and employees, such as suppliers, consumers, public and special interest groups. Those seeking access should be able to personalise data.

In specific terms the major accounting firms advocate:

  • Real time reporting rather than periodic historical financial reporting.
  • User customised statements in place of standardised accounting statements.
  • Publication of measures of innovation and customer/service satisfaction to supplement historic income statements.
  • Looser but broader assessment of the value of intangible and other assets to supplement balance sheets.

The accounting profession is probably "flying a kite" at this stage of advancing its proposals. It does not expect universal acclaim or endorsement of its proposals at this stage, either from the corporate or from other public or governmental organisations, who might find themselves under pressure to adopt real time reporting for activities for they are accountable:

  • The past five years have seen major investment in technology systems and procedures to enhance the quality of reporting as a result of extensive additional legislative, regulatory, corporate governance demands as well as new financial reporting and disclosure requirements.
  • Corporations would lose much of their ability to manage the messages which accompany release and reporting of periodic financial and other performance data.
  • There would be concern over the impact on the market price volatility on any listed debt or equity by both corporate management and investors, particularly long-term institutional investors such as pension funds.
  • Legislation would probably be required in some jurisdictions on disclosure of information to stakeholders beyond shareholders and employees. Many corporations still have difficulty in determining the exact nature of their disclosure and reporting obligations, moral or legal, to stakeholders beyond shareholders and employee categories.

The accounting profession is, of course mindful of the new opportunities, which adoption of real time reporting would bring:

  • Advice and assistance with its implementation.
  • Auditing of the systems which provide the information.
  • Auditing through testing and validation of the data which supports the real time reporting.

Equally, there should be major business opportunities for the IT industry in development and delivery and servicing of technology which enables corporations to move towards "the real time reporting utopia".

In fact, many in the industry would contend that the technology exists in terms of extensible business reporting language (XBRL). XBRL is already deployed to provide a more efficient approach to reporting and filing by regulated enterprises.

This is seen as less costly and more efficient both to themselves and the regulated enterprises in the medium and longer term. XBRL brings technical standards to financial regulatory reporting. It enables the regulator to devote more time to analysis and review. Once implemented, further changes in regulatory reporting requirements could be adopted homogeneously, implemented more quickly with lower costs and a more efficient use of resources by regulators and regulated enterprises.

Is the simple solution merely to gradually extend the deployment of XBRL more widely to other forms of reporting and so achieve the objectives? Anecdotally, it is suggested that the corporate world itself is resistant to more widespread adoption of XBRL because they would lose the ability and control over messages that accompany announcements.

Real time reporting would enable individuals and institutions with financial or other forms of stakeholder interest to deconstruct data more easily, publishing their own views and comments through tagging of data. While financial analysts already do this, they are constrained by the quantity, quality and timeliness of information available by corporations.

Even the most skilled, versatile corporate communications departments and PR agencies would be hard pressed to control and manage messages arising from literally almost daily financial and other performance data becoming available. The financial analysts and others, who conduct deconstruction of data, could build a new stream of fee earning analysis from their data deconstruction activities.

Greater financial market volatility could be expected in market prices of a corporate debt and equity. Would this enhance market price transparency? Would it heighten unnecessarily market risk and volatility? Would credit rating agencies seek to re-evaluate the ratings of companies and their debt more frequently. How helpful would this be?

Copyright © 2006, IT-Analysis.com

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