At a glance
By Gary Anders
Australian companies have had the option of lodging digital financial reports with the Australian Securities and Investments Commission (ASIC) since 2010.
However, doing so is voluntary. Under the Corporations Act, all companies must still lodge PDF and/or paper financial reports through ASIC’s lodgement portal.
Yet digital financial reporting is now mandatory in many countries, including in 14 of the G20 nations, including the US, the UK, France and Germany.
Australia, by contrast, has no immediately apparent plans to make digital financial reporting mandatory.
That’s despite a Parliamentary Joint Committee Report on the Regulation of Auditing in Australia recommending in 2020 “that the Australian government take appropriate action to make digital financial reporting standard practice in Australia”.
To date, while having the option available to them, it is understood that no Australian company has chosen to lodge a digital financial report with ASIC.
The mechanics behind digital financial reporting
Digital financial reporting has evolved over time through the development of a standardised eXtensible Business Reporting Language (XBRL), with considerable input from the global accounting community.
XBRL is used by companies to tag the content of their financial reports, which can then be read using computer software, allowing in-depth analysis of a company’s financial accounts and its performance.
There is also a more sophisticated variant, iXBRL (Inline eXtensible Business Reporting Language), which has been developed so tagged financial reports can also be viewed in a human-readable form using popular web browsers.
Financial reports prepared in either XBRL or iXBRL can generate financial data for electronic analysis much more quickly, and on a more consistent basis, and remove the need for manual data extraction of data from paper-based reports.
As such, being able to readily access data in a digital format offers substantial benefits to companies, regulators, accountants, auditors, as well as to investors and professional capital markets participants.
Doing more with information at hand
“Digital financial reports allow users to slice and dice the information in different ways to get a much better understanding of what’s in the financial accounts,” says Ram Subramanian, senior manager reporting and audit policy at CPA Australia.
“It also allows the preparers to provide more detailed, richer information, so they can tell their own story while also complying with relevant laws and accounting standards, which can be digitally consumed.
“It allows users to readily find the information that is useful to them without having to read the whole report from cover to cover,” Subramanian adds.
“They can actually use digital tools to interrogate or investigate information that is being presented digitally, and then to choose what they need for their own decision-making purposes.”
Another key benefit for users, on a macro-economic level, is the ability to use these digital tools to compare the financials of companies within sectors, and across different sectors, to identify patterns.
“This allows for better benchmarking and better visibility into the performance of companies within a sector or even across sectors,” says Subramanian.
Investment businesses, for example, instead of being limited by human resources, can use digital financial reporting to cover entire markets, because all the information is immediately accessible to them in machine-readable format.
Australian Accounting Standards Board (AASB) chairman Dr Keith Kendall adds that digital financial reporting can also benefit company regulators.
Presently ASIC conducts its audit quality analysis by taking a sample of the corporate market and then uses the sample to identify potential problem areas before conducting a more specific investigation.
“That first step could be knocked out by being able to collect market-wide information, which is a more effective use of taxpayer resources in conducting surveillance and compliance activities,” Dr Kendall says.
“The AASB is actively investigating the prospect of adopting digital financial reporting in Australia. We recently undertook a public consultation on this issue, in light of the recommendations of the Parliamentary Joint Committee Report on the Regulation of Auditing in Australia.”
Bringing about change in financial reporting
CPA Australia believes that Australia’s voluntary regime is limiting the uptake of digital financial reporting, and that it should be made mandatory for listed companies.
“In countries where voluntary approaches have been adopted, uptake has been limited unless linked to firm expectations that a mandate will be forthcoming in the future,” according to a recent research report by CPA Australia into the adoption of digital financial reporting.
Subramanian says mandating digital financial reporting seems to be the only way to make it happen.
“It’s a bit of a chicken and egg situation. If you don’t mandate it, what we’re learning from experience is it’s not happening.”
He says Australia is at risk of being left behind by other G20 nations by not adopting a technology-based approach to financial reporting.
“Although it’s obvious, one of the things we need to keep in mind when considering the shift to digital financial reporting is that Australia is part of the global economy,” he says.
“Financial reporting is an important tool for investors, both within Australia and outside Australia, to understand what happens with Australian companies.
“It isn’t justified to leave financial reporting back in the 20th century when everything else has moved on to the 21st century.”