Imagine if you were able to use a simple software package to compare any set of financial reports with any other. What if you could consolidate information at the touch of a button and ensure the continuing integrity of data transferred between different information systems? This is no pipedream.
With accountancy increasingly under the spotlight, common standards for the electronic recording, processing and distribution of financial and other business reports – otherwise known as digital reporting – offer real potential to produce information for better markets.
And accountants aren’t the only ones who will benefit from effective digital reporting – it’s equally relevant to decision-makers at all stages of the reporting supply chain, including the producers of business reports, auditors, financial analysts, investors and creditors.
But a recent report on digital reporting by the ICAEW showed that technology has not yet succeeded in significantly changing the pattern of business reporting. But resistance to change, rather than technological limitations, is holding companies back.
The ICAEW report distinguishes between three levels of digital reporting. Level 1 is where reports are published and disseminated more widely and efficiently, but using the same formats as present (pdfs, for example).
Level 1 reporting has certainly given instant and universal access to financial reports. It has had little impact, however, on meeting the needs of different users of financial reports, improving the quality of investors’ decision-making or increasing transparency. Reporting at this level is standard practice. But attempts to move beyond it are proving hard.
Level 2 digital reporting involves making the information available in a more effective form for analysis. It requires inter-operability between different systems using a standard framework to allow information to be stored, processed and presented for reporting.
Level 2 is capable of delivering real benefits in terms of data reliability and relevance, as well as data being more readily understandable on the basis of greater consistency of interpretation. Our perception, therefore, is that level 2 digital reporting standards are likely to be of more interest to regulators and government agencies whose requirements are underpinned by a definite set of rules.
Level 3 digital reporting – heaven or hell, depending on how you look at it – would see the integration of all aspects of financial and management accounting and reporting. Full drill-down by external users, including regulators, of an organisation’s reports to the underlying detail would become theoretically possible. Whether this would be desirable, and to whom, is another matter altogether.
One of the main snags is, ironically, the same as its main benefit – that standardised digital reporting facilitates inter-operability. Many of the potential advantages can only be achieved if there is a community wishing to inter-operate or if standards have been imposed by a dominant customer or supplier.
Too many companies base their IT strategies on the idea that investments in technology will reduce costs. But the cost savings cannot be identified, nor accurately quantified. Too little attention has been paid to IT as a means of shortening timescales, improving the availability of information for decision-making and increasing flexibility for action on the basis of those decisions. And yet standardised digital reporting has the potential to help companies down this road.
Whatever the theoretical merits of digital reporting, the underlying technology has to be ready. The accountancy profession has for some time been active in internationally promoting a technical standard known as XBRL, created using XML-based frameworks, which can be used to create, exchange and analyse financial reporting information. If there is to be a level 2 reporting standard, XBRL has a good claim to be it.
Digital reporting technology is not yet a driver of significant change in the patterns and the culture of financial and other business reporting. It is, however, an important enabler of such change.
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