The accounting revolution will be digitized

Smart devices have transformed our lives in many ways and solved problems we didn’t know we had. As a new technology emerging in the 1980s mobile or cellular phones were mainly about two people communicating while out and about. Only science fiction would have imagined the devices in our pockets today that can help us navigate to almost any point on earth, connect and influence social networks of billions, communicate signs of life during crises and so much more. This makes me wonder what digital capabilities the professional accountants of 2060 will look back on with a similar sense of ‘duh’, but which now seem futuristic or out of reach.

A 2D, static annual report format in paper or pdf is not that different to the papyrus on which Egyptian scribes reported on the royal inventories more than 7,000 years ago. Genuine innovation calls for a fully digitized reporting format, where the financial and sustainability information presented by companies can be consumed and analysed in whatever format the user decides suits their unique decision-making needs.

Digital reporting uses a common language or ‘taxonomy’ to attach ‘tags’ to each item being disclosed. This means the information can be presented and analysed in a dynamic way, for different purposes and users. For instance, simplified, basic information presented at a high level for main street, Mum and Dad investors; much deeper detail drawn directly into the analytic systems applied by professional analysts or fund managers. The language of digital reporting allows all of this to be drawn from a consistent data set, without the need for clunky manual coding or text recognition.

Like smart devices, digital reporting holds potential to tackle some of the most intractable problems in financial and sustainability reporting, as well as some we probably haven’t even thought of yet. This includes new ways of dealing with the communication and structural challenges of reporting both non-financial and financial information to an increasingly diverse range of users. Digital gives companies more control over the quality of their reporting without the errors that can result from manual transcription of pdf reports by third party data services. Better, more reliable data reduces cost of capital.

Looking a bit further forward, digital reporting also has the potential to open new dimensions in accounting in areas where the thinking has, up until now, been constrained by the need to fit on paper. Accounting methodology and standards appear to have to hit a conceptual dead end on a widening scope of judgments in reporting to deal for example with intangibles, fair value, and shifting economic context. Erring toward conservatism has meant less meaningful financial statements, but opening the gates to more abstract accounting judgements can mean less reliable reporting or even lead to moral hazard.

Digital reporting might just provide the new paths needed to overcome this continuum that has plagued accountants, standards setters, regulators and auditors for years. Timelier, if not real time, reporting reduces the need for and reliance on big, hairy, annual accounting judgements—the ones you read about in the papers and hear about in inquiries when it’s all gone wrong.  Digital could also provide the means of reporting multiple different reasonable assumptions or ranges of judgement for users to consider in an intuitive way, giving them back decision making and analytical power.

As of now, these ideas seem to raise more problems than solutions – what about accountability for judgements? How can this possibly work when reporting and auditing are at a point in time, not real time? How do you regulate it? These are valid questions that seem almost insurmountable from today’s vantage point. But it’s a bit like if you had tried to imagine and probe how a mobile phone navigation app would work at a time before wi-fi or the internet was invented. Moving to a digital accounting language is just the first step to unlocking these possibilities, but it is an essential one.

A large and growing majority of the world's major capital markets have adopted digital reporting. However, fragmentation is also emerging as jurisdictions introduce their own reporting languages or local adjustments to the global taxonomy published by the IFRS Foundation. For some major jurisdictions a meaningful adoption of digital reporting across public reporting remains elusive. Both Australia and New Zealand have stepped up discussion and efforts toward adopting digital reporting, including an endorsement from Australia’s parliament at the profession’s urging, however this is yet to be translated into concrete outcomes.

The approach to assurance of digital reporting is also in its infancy. Some jurisdictions have implemented limited assurance requirements, others have none. Widely accepted, dedicated standards and methodologies that would bring the same level of assurance we’re used to on a wet signed financial report are yet to be developed for digital reporting data sets. Importantly, the International Auditing and Assurance Standards Board has adopted on its work program “exploring the need for assurance standards related to XBRL, and developing a pronouncement”.

Lack of understanding is one of the most significant challenges to the adoption of digital reporting, and one of the main arguments against a mandate has been the costs associated with implementation. This has led to a chicken and egg situation -- companies are not adopting digital as users or markets aren’t asking for it, and users aren’t asking for it because companies are not doing it so it’s not actually clear what the value is. The same factors can end up playing a role motivating jurisdictional differences and fragmentation. Traversing these challenges calls for:

1. Education and awareness building – both on the benefits and costs amongst preparers, business and directors
2. Robust two-way engagement of the profession with users and intermediaries including exchanges, and platform providers
3. The ability for regulators and exchanges to accept digital filings, and a willingness to mandate digital reporting as a required format
4. Focused regulatory cooperation to promote convergence and avoid fragmentation worsening
5. Focused efforts from the auditing and assurance profession and standards setters together with capital market stakeholders to develop a global approach to assurance

As a new era dawns on corporate reporting with the establishment of the ISSB, the move to digital reporting is now more pressing than ever. Making sense of financial and non-financial reporting with an assortment of information that doesn’t fit neatly into the closed system of an accounting equation, demands a more powerful means of communication. The accounting revolution is coming, and while it may not be widely televised (or streaming), it will be digitized.