Digital reporting: The way forward for financial reports

When it comes to financial reporting, the Portable Document Format (PDF) has many advantages, but flexibility is not one of them. Retrieving data from PDF documents for analysis can be a slow process, for both internal and external users of financial information. 

In the US and several other jurisdictions, financial reporting has moved into the digital era. But Australian companies have yet to go down that path.

A large part of this relates to the regulatory framework, says Claire Grayston FCPA, policy advisor – audit and assurance with CPA Australia.

“In the US, corporate financial statements are filed with the Securities and Exchange Commission (SEC) using eXtensible Business Reporting Language, known as XBRL,” she says. “This has been mandatory since 2009 following a period of voluntary XBRL filing. 

“The SEC publishes financial statement data sets extracted from all registrants’ financial statements lodged to help users analyse and compare corporate disclosure information over time and across registrants.”

In Australia, digital reporting is voluntary. The Australian Securities and Investments Commission (ASIC) has accepted lodgement of digital financial reports since 2010 and has encouraged filing in XBRL form. It has made its support clear in public statements and in private discussions. However, no entities have taken up the option. 

Since 2015 ASIC has accepted digital financial reports using inline XBRL (iXBRL), an open standard that enables a single document to provide both human-readable and machine-readable data. This would be accepted in place of a report in PDF format.

David Hardidge FCPA, technical director with the Queensland Audit Office and an expert in the digital reporting field, notes that the Australian corporate sector has been quiet on the subject.

“As XBRL was being developed in the US there were corporate leaders advocating its use, because they could see the benefits to their stakeholders,” he says. 

“We have not seen that in Australia. Successful adoptions overseas have been mandatory, although sometimes there has been a voluntary period. ASIC, and bodies like CPA Australia, have ensured that XBRL is capable of being adopted in Australia. 

“But adoption is obviously not going to happen by itself. We now need legislative change. We should be concentrating on listed entities, or possibly disclosing entities.”

Challenges still to overcome

One of the obstacles to widespread adoption of XBRL in Australia is cost. 

Ram Subramanian, CPA Australia’s policy advisor - reporting, says, “Entities have to choose either to fully integrate XBRL into their accounting systems, or prepare financials normally, as they always do, and then tag the final set of information using XBRL taxonomy. 

“The latter approach appears less expensive, but lacks the benefits of a fully integrated digital reporting system the former approach offers.”

Another practical consideration is the need to address potential for inconsistent XBRL tagging, particularly around note disclosures with free-form text.

On the industry-wide level, Subramanian says, there needs to be a sufficient number of technology providers who offer XBRL-enabled software to prepare financial reports using Australian Accounting Standards taxonomy.  A lack of choice around technology solutions can drive up the cost and deter progress. 

The way forward in Australia

“In Australia, the underpinning idea is that financial reports are mainly for investors,” says Grayston. “If there is no legal compulsion, businesses are often reluctant to incur any cost for which they cannot easily measure the benefits. 

“The benefits of digital reporting extend beyond investors. It provides readily accessible and more timely information for researchers, regulators and other stakeholders.

“Presumably, Australian companies which are listed in the US or subsidiaries of US-listed companies, or companies that file reports in other countries that require reports in XBRL format, will be preparing financial statements in XBRL format. The technical capability is there, and supporting software is readily available. It is not as if XBRL is particularly new or radical.”

Singapore, for example, has required filing with the Accounting and Corporate Regulatory Authority using XBRL templates since November 2007. There is a comprehensive set of guidance documents on preparing and filing statements, as well as on applying for exemptions. The Singapore system is generally seen as successful. 

“We need to learn from overseas experiences,” says Hardidge. “For Australia, that includes a viewer, and free access to the XBRL lodgements. The current system of requiring interested people to pay over A$40 per XBRL document is not going to work well.”

Not everyone in the financial sector in Australia would support a mandatory shift towards XBRL filing. Investment research houses, for example, might see that a key part of their business offering - their capacity to draw information from PDF documents – would be undermined if investors and other stakeholders could easily access information for themselves. 

However, there is no real evidence that this happened in overseas jurisdictions when XBRL filing was introduced. External users, including regulators and researchers, found considerable benefits through the comparability of format, and through the capacity for machine reading. Because XBRL allows computers to read the financial statements, there is a reduction of costs to research houses which allows them to focus more on value-adding analysis.

Another aspect of the issue stems from the Australian Government’s “modernising business registers” initiative, which will see financial report registers moving from ASIC to ATO next year. This is likely to add momentum to the push for mandatory XBRL filing, as it may tie in with broader ATO strategies of data matching to ensure tax compliance.

CPA Australia position on digital reporting

CPA Australia has long been an advocate of digital reporting, and called for mandatory digital reporting in its submission to the Parliamentary Joint Committee (PJC) on Corporations and Financial Services Inquiry into the regulation of auditing in Australia. 

The PJC supported the submission by recommending digital financial reporting in their interim report; the final report is scheduled to appear in December.

Specifically, CPA Australia recommended “mandating electronic lodgement of financial reports and other information with ASIC using XBRL or iXBRL format and removing ASIC registry fees for access to corporate information would enable greater transparency, comparability and facilitate analysis on a timelier basis, thereby reducing laborious and costly manual analysis.”

Grayston says: “We expect and hope that the government will take up the PJC’s interim report recommendation to move towards mandatory digital financial reporting. Even if they do, we cannot predict how long it would take to introduce the necessary legislation or regulations or the implementation period, which may well be staggered for different reporting entities.

“However, digitisation of the operation of businesses is being accelerated by the pandemic crisis so that might contribute to a realisation of the value of digital financial reporting. We are hoping for its introduction sooner rather than later.”

She also believes that the uptake of digital tools is gaining momentum with auditors as the tools become more affordable and accessible. 

“At the moment, sifting through PDF documents is a laborious task. Compare this to the US, where the SEC provides freely accessible data sets for all financial information lodged. It makes analysis much easier.”