How is financial reporting set to improve?
The quality and content of financial reporting can be a point of some contention in the corporate sphere. What information is most pertinent to the reader? Are short-term results less valuable than future forecasting? How do the figures tie into the business plan?
ICAS is a key voice in the improvement of financial reporting, offering guidance on professional judgement, insight into regulatory requirements as they develop, and calling for a reduction of extraneous work. But how will these and other trends continue to change financial reporting practices in the future?
These are three of the main factors we predict will evolve financial reporting:
Data analytics have come a long way in recent years. As more information moves online, data pools grow and analytical software has many more sources of information to draw from. This trend will continue to make data analytics practices more accurate and insightful.
The evolution of artificial intelligence (AI) is also set to have a profound impact on how financial data is compiled into a report. Natural language generation (NLG) software, in particular, has potential to help focus on the meaning of data, rather than simply displaying it.
Robert Dale, Chief Technology Officer at UK-based AI developer Arria, explained: "A common theme you hear when you talk to people in finance is that they are drowning in data, but starving for information. It’s been said to be banks’ biggest weakness: they have all this data, but they have no hope of making sense of it.
"We’re now at the point where it’s quite simply beyond human scale, and so if we want to have any chance putting that tsunami of data to good use, there really is no alternative to using NLG to understand and explain it."
A report from KPMG found that: "Companies in a number of countries have complained that their annual reports (including their financial statements) contain too much information. Standards setters, including both the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB), have taken note of these concerns in their disclosure initiatives, which aim to improve the presentation and disclosure of information in financial reporting."
IASB has specifically called for better communication in financial reporting in order to improve the structure and clarity of reports. As these projects move forward, many of the conclusions drawn about 'best practice' are likely to become regulatory requirements.
Financial reporting is part of a bigger picture of corporate reports that can often be unfit for purpose. As an informative tool for investors and stakeholders, a report should be clear, logical, accurate and complete.
The factors that decide what information is most relevant is largely decided by the business plan of the company in question and CAs have an integral role to play in reshaping the approach to reporting as a whole.
KPMG highlight six key areas where improvement is needed:
- Giving investors the information they need;
- Keeping report content clear and relevant;
- Long-term views using operational KPIs;
- Setting practical KPIs that align with strategy;
- Deeper analysis of strategy;
- Risk analysis of what the future holds.