Accounting and Auditing

Today’s World Demands Enhanced Business Reporting

The globalization of business is shrinking borders and expanding the needs of investors and shareholders. Often, small companies also have a global component and are concerned about sustainability as well as profitability. The historic financial reporting framework simply isn't sufficient any more. What is needed is an enhanced business reporting system that responds to the global marketplace and brings financial reporting up to date with cutting edge technology.

That message was delivered by Barry Melancon, president and CEO of the American Institute of Certified Public Accountants (AICPA), at a recent meeting of the Council of the International Federation of Accountants (IFAC). During a panel discussion with other global financial leaders, Melancon explained why embracing enhanced business reporting systems is critical.

A New Framework Needed

Almost half of the AICPA’s 350,000 members play key roles in both public and private companies as CEOs, CFOs, controllers, internal auditors, and staff accountants.  These CPAs produce financial statements and reports used by shareholders, lenders, regulators, and investors, also set organizational strategy. By capitalizing on their experience and activities, AICPA has driven the development of a new reporting model and championed the technology that supports this new framework.

In his testimony before the U.S. House Committee on Financial Services in 2006, Melancon explained, “The existing financial reporting model provides a solid foundation, but the profile of today’s companies has changed. The nature of their assets, how they are managed, and the performance indicators that senior executives routinely use underscore the need for a model that focuses not only on financial information, but also on a range of contextual and non-financial information that provides an enriched understanding of company performance, values, strategies, and potential.”

The current framework provides reasonable consistency in corporate reporting, but it doesn’t reflect new factors that must be taken into account when determining company value. Past financial performance is just one part of a set of much broader data required by today’s diversified financial community. Expectations for corporate financial and other business information include increased accuracy, accessibility, and transparency, as well as non-financial information that is useful to investors such as intellectual assets, strategies, and potential.

Business Reporting Models of the Future

During the IFAC meeting, Melancon noted that control is shifting from information providers to information users. The financial community, he notes, has not yet embraced this new paradigm. This change, will come when investors take a more active role, demanding more relevant and timely information, instead of leaving it up to public companies to decide what they see and when. Companies have been slow to change their reporting formats and media, although the world around them has changed significantly. Information provided by companies has always been printed, delivered by mail or messenger, and prepared annually or quarterly. Today, the financial world moves at a much faster pace than in the past.

“We take virtually instantaneous communications for granted,” said Melancon.  “Global markets can respond immediately to rapidly occurring and reported external events. This has led to a persistent demand for increasingly detailed information, transparency, and a much greater need for companies to communicate with customers and investors and vice versa. Printed reports about things that have already occurred, delivered by mail, are increasingly irrelevant today. Digitalized information is increasingly the norm.”

Today’s financial reporting world, he said, requires four critical elements:

• Heightened communications between investors and a company
• More and varied information than is currently available
• Immediate answers to what investors need and
• Reduced complexity and heightened transparency

Melancon described AICPA’s efforts in the area of Extensible Business Reporting Language (XBRL) as what financial information consumers need in a fast-moving global marketplace. 

XBRL and EBR are the Answer

The Enhanced Business Reporting (EBR) framework makes information easier to use by making it possible to create useful classifications, such as taxonomies for value drivers, non-financial performance measures, and qualitative information. XBRL is the technical engine that drives this new reporting system.

“Companies that provide relevant, neutral, verifiable, and complete information gain increased access to less expensive capital,” Melancon explained. “It also enhances credibility with stakeholders and provides capital markets with a steady flow of timely, comprehensive, and accurate information.”

XBRL is a language for the electronic communication of business and financial data. XBRL allows for “tagging” (like barcoding) standard financial reporting elements, such as cash and accounts receivable, so they are machine-readable by diverse software applications and can be automatically published, downloaded, and analyzed. These tags also carry key contextual information, such as the currency, time-period, and nature of the data.

“XBRL enables more efficient, accurate, and reusable reporting of financial and non-financial information,” said Melancon. “XBRL can also be used to tag accounting policies and other text-based or narrative disclosures to make them more relevant. It also eliminates the need to re-key information. ”

When data is tagged in XBRL, users can easily find a particular piece of information without having to scan large sections of data, as is traditional with paper-based filing. The standard formats of XBRL enable the exchange of data between different software applications. Investors, analysts, and business managers can easily access information from multiple sources and download that information directly into spreadsheets and models for analysis. As a result, people put their energy into analysis, not data accumulation, validation, and entry.

XBRL has received support from Christopher Cox, SEC chair. A year ago, the SEC made a significant financial investment in modernizing their electronic data gathering, analysis, and retrieval system (EDGAR) platform to enable XBRL filing, and contracted with XBRL US Inc. for the development of U.S. financial reporting taxonomies for the public domain. Those taxonomies have now been completed and soon will be released for public review and comment.

“The SEC’s support has put XBRL implementation in the U.S. on the fast track, and will help the U.S. catch up with implementations in Asia and Europe,” noted Melancon. “EBR and XBRL will provide investors with what consumers in other areas have been demanding and getting; namely; enhanced information, increased choice, new technology that enhances and expands markets, more efficient markets, better pricing, and less ‘us-vs.-you’ feelings between companies and their customers/investors. The profession has a lot to be proud of in leading this revolution of business reporting.”

For more information about Enhanced Business Reporting, visit www.ebr360.org.  To learn more about XBRL, visit www.xbrl.us.

Article courtesy of the American Institute of Certified Public Accountants