When an economic crime occurs, there is a domino effect on the immediate stakeholders such as the employees and the investors of the company, the industry to which it belongs, and the entire country.
In December 2017, South Africa stared at a major compliance crisis when Steinhoff, one of the top 10 listed companies on the Johannesburg Stock Exchange (JSE), admitted to accounting irregularities. The share prices of the company plunged (The company lost more than R100 billion in one day’s trading) leaving the shareholders and employees in a lurch.
This incident was compared to US’ Enron saga by leading publications across the world. The signs of potential fraud were already brewing as German authorities suspected it back in 2015. The company had inflated its value and hid its financial instability for years. However, it took two years for it to come out in public.
Steinhoff is not a one-off incident. Scams like the recent VBS Heist set off alarm bells about impending compliance scandals waiting to explode
The Global Economic Survey published by PwC reported the economic crime in the country to be the highest in the world – a whopping 77%! South Africa has taken its leap toward digital financial reporting with the CIPC iXBRL mandate with an aim to improve the quality of financial reporting.
The message was loud and clear – there was an urgent need to improve the process of financial reporting to avert such dastardly incidents from happening in the future.
The need for standardization in financial reporting
The Companies and Intellectual Property Commission (CIPC) is responsible for regulating the business environment and boosting investors’ confidence. Every quarter, the CIPC selects and reviews a sample of Annual Financial Statements (AFSs) and Financial Accountability Supplement (FASs) for compliance and sends notices to those who do not adhere to the financial recordkeeping and reporting provisions mentioned in the act.
Here are some interesting numbers;
- With 1.8 million active entities under the purview of CIPC, reviewing such a large volume of AFSs was quite a herculean task.
- KPMG study shows that an average annual report contains 165 pages,
This means that the CIPC has been receiving millions of pages of financial data every year in PDF format, which is an unstructured format for data reporting. Going through millions of pages every year is just impossible, even if the CIPC had an army of people with them.
To address this challenge, the CIPC introduced a more structured format of financial reporting named Inline XBRL (iXBRL). With this new format, the CIPC would receive data in a structured manner quickly and accurately.
How will iXBRL benefit the regulators?
Recently, countries like the Netherlands and Australia adopted XBRL to improve their compliance. While the Australian tax office alone saved AUD 1.1 billion by moving to XBRL reporting, the SMEs in the Netherlands witnessed a decrease in time taken to credit applications by four days when data was submitted via the XBRL standard.
Taking cues from success stories worldwide, the CIPC passed a mandate on July 1st, 2018, making it mandatory for all qualifying entities to file their AFSs in the iXBRL format.
To ensure that the AFSs data is on par with the International Financial Reporting Standards (IFRS), the CIPC has released its taxonomy based on IFRS standards. They have also introduced a validation engine (the implementation was done by IRIS) on their filing platform that automatically verifies if the AFSs comply with the basic rules.
The move to iXBRL is multifold; here’s how it will help the CIPC:
- Detect Fraud: With the support of iXBRL, the CIPC can validate the AFSs quickly and reduce the scope of errors committed due to human errors.
- Reduced effort and time: The CIPC will be able to save time on calculating and scrutinizing each AFSs individually.
- Improved operational efficiency: The CIPC will be able to utilize their saved time comparing the data they receive from the filing to determine the trends in each sector and the economy as a whole.
The road ahead
The CIPC is committed to improving the compliance reporting standards and curbing the instances of corporate fraud. The onus now lies on the businesses to cooperate and adhere to the mandate to curb instances such as Steinhoff and VBS Heist from happening in the future. XBRL reporting may not solve all the problems, but it would help in identifying early signs of fraud.
As XBRL evangelists, IRIS has helped many business registries, stock exchanges, and central banks implement XBRL across 22 countries. We believe with different countries adopting XBRL as a standard for digital financial reporting, there would be more tightened regulatory norms and early detection of frauds and malpractices.