Analysis - The risks of online reporting.

Financial reporting on the internet is growing at an exponential rate.

As one might expect, it is generally larger companies that were the first to place financial information on their websites. The range and quality of information available varies greatly, but the largest companies have all of the information that is made available in paper format on their websites, and often more.

A telephone request for an annual report from FTSE-100 companies now often elicits the response ‘it’s on our website’.

Companies place just about everything they print on their websites, and more. It is not uncommon to find share dealing services, web-casts of analyst presentations, and the chairman’s statement to the annual general meeting there, as well as the annual report, summary financial statement, interims, prelims and financial highlights.

Financial information on listed companies has been available for some years now from the Regulatory News Service (RNS) provided by the London Stock Exchange. As of September last year, however, financial information has been made available on the Exchange website.

Similar information in the US and Canada has been available on the web for several years on the EDGAR and SEDAR systems respectively.

The differences between hard copy and electronic information

There are risks associated with electronic information that do not exist with hard copy. These arise from the two main differences between paper and electronic information.

The first difference lies in the fact that paper information can’t be changed once printed. Electronic information can. For example, audit reports can be left on a company website, but the information to which they refer can be altered, legitimately or otherwise. The second difference lies in the use of hyper-linking, which means that users can claim to be misled as to the extent of information audited, because hyperlinks can often take the user far beyond the information audited.

It is not always clear to novice users where the audited financial information (or the company website) stops, and where the unaudited information (or the external website) starts. This issue does not arise with paper.

There currently two common electronic methods for placing financial information on company websites. The first is reproduce hard copy in Portable Document Format (pdf). The second is to use Hyper-Text Mark-up Language (HTML).

There are pros and cons to each. Pdf files are safe to the extent that they are more difficult to alter than HTML documents. And while hyperlinks can be created within a pdf file, there are generally no hyperlinks outside the document. But the pdf format offers little scope for the exploitation of technology and a pdf document amounts to little more than an electronic photocopy.

With HTML documents, there is more scope for utilising the technology available. But there is also more scope for error, and differences in emphasis and interpretation (which can be just as important as the figures themselves).

HTML documents are relatively easy to change, and can be sabotaged. And there have been several instances of auditors’ reports being reproduced with references to page numbers in the hard copy that simply don’t exist in the HTML document. eXtensible Business Reporting Language (XBRL) will be the next important development in this area but it is not, as yet, in wide usage in the UK.

Issues for auditors

So far, no significant action has been reported as having been taken against auditors on the basis of information placed on company websites.

But this is no reason for complacency because litigation is not beyond the bounds of possibility, particularly in the event of a recession, and auditors need to protect themselves.

There have been a number of instances in which companies have placed audited information on their websites, together with audit reports, without telling their auditors. Up until now, there has been no legislation or guidance on the subject requiring companies to consult their auditors, although one would have thought that the auditors might have been informed as a matter of courtesy!

Furthermore, larger companies often provide hyper-links within the information to external organisations; if the links are made within information that has been audited, reviewed or read by auditors, the implication may well be that auditors are in some way associated with the relevant external organisation or the information provided in the link.

But it seems reasonably clear from existing legislation that there are at least potential liability issues. The electronic publication of auditors’ reports represents a risk to auditors that has to be managed in the same way as any other risk – it should not be ignored.

Existing UK legislation

Some existing legislation can be easily interpreted as applying to financial information on the internet.

Broadly speaking, where statutory accounts are published, he relevant auditors’ report must also be published and where non-statutory accounts are published, the company must make a statement to the effect that the information is not the statutory information.

One of the problems here is that research shows that not all companies make the required statements in their paper reports, never mind on their websites.

To protect themselves, auditors really do have to take the view that financial information on websites is potentially more risky than paper-based information, simply because there are no precedents in the area, and they should be looking to make sure that their clients are aware of the required statements for both the paper and website versions.

New UK legislation

The Electronic Communications Act, introduced last year, permits the use of electronic communications between companies and their shareholders, and with Companies House.

An Order under the Act deals with a number issues of interest to auditors.

It allows for companies to be registered online, for example, which will be of interest to company formation agents and company secretaries.

This depends on secure systems and encryption techniques and the primary legislation is in large part about the recognition of digital signatures. Companies House already accepts the annual return and details of changes of directors electronically. The Order also permits shareholders to appoint proxies electronically.

But of most interest to auditors are the provisions of the Order that permit companies to ‘send’ their shareholders the annual accounts, summary financial statements and notices of meetings, electronically.

This, in practice, will mean one of two things. Companies will either email these details to their shareholders, or they will be able to inform their shareholders that the relevant information is available on the company’s website.

This can, in theory, offer large savings to those privatised companies who have a large number of private shareholders (some of them with over one million).

– Katharine Bagshaw is the technical manager at the ICAEW audit and assurance faculty. The opinions given here are her own.

More on the survey can be found at www.accountancyage.com/Business/1113650

WHERE TO GET MORE GUIDANCE The Auditing Practices Board has issued a bulletin to coincide with the publication of the legislation. Bulletin 2001/1 ‘The electronic publication of auditors’ reports’ is applicable whenever a company decides to take advantage of this new legislation. It also deals with situations in which companies do not take advantage of the legislation but continue to publish auditors’ reports on their websites. The APB’s website is at www.apb.org.uk

Guidance which is issued by the Institute of Chartered Secretaries and Administrators not only deals with the logistics of communicating electronically with shareholders, it also deals with certain aspects of electronic presentation, with how audited information should be distinguished from other information, and with directors’ responsibilities for periodic routine checking of the information. This guidance can be round at www.icsa.org.uk, in the publications area of the website

There are a number of detailed guidance documents available on how financial information should actually be presented. One of the most important is a substantial discussion paper on the web-based reporting practices of 660 of the world’s largest companies which was produced late in 1999 by the International Accounting Standards Committee entitled ‘Business Reporting on the Internet’. Look on www.iasc.org.uk under projects

The most recent Company Law Review consultation document (Modern Company Law for a Competitive Economy: Completing the Structure – November 2000) suggests that companies over a certain size might be permitted, or required, to file electronic accounts, and that a searchable database might be created at Companies House. It also seeks comments as to whether certain companies should be required to publish their financial statements on a website. Information about the Company Law Review can be found at www.dti.gov.uk/cld/review.