Financial Reporting Needs to Embrace the Digital Revolution
In his 2016 blog post “The Message is the New Medium: Digital Reporting and Fintech,” John Turner, CEO of XBRL International, talked about how various sectors of the economy were blindsided by the coming of the digital revolution. Dramatic examples included Kodak’s failure to diversify into digital imaging and the collapse of HMV when they neglected to take up streaming and digital music services, such as Spotify.
The digital revolution has also created many efficiencies. Turner notes that in the Netherlands if you provide your bank with standardized, tagged data instead of a spreadsheet or PDF you are likely to get a cheaper loan.
In a similar vein, the financial reporting community needs to embrace the digital revolution and seek ways in which data, data analytics, and technology can bring about greater efficiency in many ways for all parties in the financial reporting chain. Russ Golden, chairman of the Financial Accounting Standards Board (FASB), said at the 2016 AICPA National Conference on Current SEC and PCAOB Developments that “Technology gives us our greatest opportunity to improve financial reporting.”
Investors and Analysts Win when Technology Is Used in Financial Reporting
Our recent study Data and Technology: Transforming the Financial Information Landscape examines the current financial reporting process from end to end — from the capture/collection of data; their management, analysis, and use in the production and presentation of financial reports; to the audit of those reports.
We studied the use of technology in the delivery of financial data to all parties in the information supply chain. We also assessed the inefficiencies in the system and the ways that data, data analytics, and technology may potentially improve or even transform that process. Finally, we examined financial information consumption by investors, regulators, and other users.
CFA Institute research showed that the use of data and technology can result in a more effective and efficient overall financial reporting process in which investors and analysts receive more transparent, better-quality information on a timely basis.
Investors want structured quantitative data not bound by the document the information is presented in, along with management’s explanation of the results, which tends to be both quantitative and qualitative.
In the report, we outline the various benefits of structured data for investors:
- Improves financial statement accuracy
- Improves productivity
- Increases opportunity for higher returns
- Allows for better risk management
- Empowers the analyst
We gleaned this list from various sources, including from comments made by R. Harold Schroeder at an XBRL conference and a US Investor Forum as well as from an article by Pranav Ghai and Alex Rapp in Accounting Today, “Value of XBRL for Financial Analysis.”
With the availability of technology to sift through data and crunch the numbers, investors could be in a better position to perform faster and better analysis. When some of their finite resources are freed up, analysts can not only research more companies but also take a closer look at the companies they already follow, which would support better-informed investment decisions. Greater efficiency with higher-quality investment decisions is a win-win for capital markets. Structured data could also make it easier and less costly for investment firms to cover small- to mid-cap companies.
Digital Technology Provides Other Benefits Too
Structured data could also allow for better risk management. Ghai and Rapp, mentioned earlier, cite the example of the rising value of the US dollar in global exchange markets in 2015 and how currency exchange rates will continue to be a powerful force in corporate earnings in 2016:
XBRL gives financial analysts the power to understand how exchange rates might affect various sectors and companies more precisely. You can still take an “all filers” view of exchange rates and find that a stronger dollar is shaving a few cents off earnings per share at US companies. But you can also easily sub-group those filers by industry, or even by individual company—and then discover that the 10 businesses suffering the largest losses in cash thanks to exchange rates are all pharmaceutical or health care firms. The average firm lost $0.04 per share on their cash position, and Johnson & Johnson suffered the most in 2015 with a pinch of $0.11 per share.
We presented the results from our Data and Technology: Transforming the Financial Information Landscape report during a 60-minute XBRL US webinar.
We explored how technology, such as the XBRL data standard, can be harnessed to reform the financial reporting process end to end and highlighted key findings:
- How technology can be used to enhance the analytical process
- The importance of financial data for investment decision making
- Recommendations for regulators and standard setters about how to improve the quality of corporate disclosures
- Additional ways structured data would augment the usefulness of reported data, such as in the management discussion and analysis and earnings releases.
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