Financial reporting is no more a painstaking, manual process. That is because in recent years software solutions have streamlined reporting procedures with the use of features and functionalities that allow hassle-free collaboration over a cloud environment. Financial reports are not only easier to create, but also of a higher quality because financial reporting teams spend less time on seemingly meaningless, repetitive tasks such as data entry and re-entry. They have more time to focus on operations that add value to the reporting process.
Moreover, financial reporting has gone digital in several geographies through the use of a structured data format known as XBRL or eXtensible Business Reporting Language. The XBRL format has revolutionized corporate reporting by helping companies create documents that computers can ‘understand’. Inline XBRL (iXBRL), a more advanced format, allows computer-readable tags or code to be embedded into HTML documents. The resultant xHTML document is visually appealing (like a webpage) while also allowing users to analyze the underlying machine-readable data.
Digital financial reports have also helped data quality. Data in a computer-readable format can be ‘validated’ before a document is filed with the regulator, greatly minimizing the possibility of errors. However, the digital format and the validation process do not guarantee documents without errors. This means companies preparing digital documents need to ensure that ‘quality’ is part of the equation. This also means there is an incentive for high-quality digital financial reporting.
What Can Affect Digital Reporting Quality?
Let us understand how XBRL reporting works before we address what can affect the quality of digital reporting. XBRL reporting requires machine-readable elements or labels to be placed against the financial data in a document. Those elements need to be selected out of a taxonomy, which is a collection of such elements. A few market regulators such as the US Securities and Exchange Commission and the European Securities and Markets Authority (ESMA) allow companies to form entity-specific elements or custom elements in case they do not find matching elements in the taxonomy. Such custom elements are also known as extensions.
One of the biggest issues affecting the quality of XBRL reports is the excessive or unnecessary use of extensions. Companies end up creating extension elements indiscriminately. Other issues affecting XBRL report quality include calculation errors and the usage of incorrect signs (positive and negative). We have dealt with XBRL errors in an earlier blog post.
We now explore some of the benefits of high-quality digital financial reporting.
High-quality Digital Financial Reporting Can Be A Differentiator
Public companies in the United States and the European Union region are required to prepare financial disclosures in the iXBRL format. When a large pool of companies complies with a digital reporting mandate, it is the quality of reporting that acts as the differentiator. When XBRL reports have errors, their analysis cannot be effective. XBRL data is used by regulators, credit rating agencies, analysts, third-party data providers, investors, academics, and others. A company filing low-quality XBRL data risks its reputation as an entity worth investing in, especially when the markets equate errors with problems in management or internal controls.
High-quality Digital Reporting Enhances Data Analysis, Comparison
Since digital financial reporting allows data to be reconfigured, reformatted, and repurposed the way users want, it enhances complex analysis and comparison of information across entities. Regulators, credit rating agencies, analysts, third-party data providers, investors, academics, and others can obtain XBRL data in a form that suits their function. Since structured data is of high quality, the analysis need not be delayed by processes to clean up the data. The digital format also offers the stakeholders numerous ways to slice and dice the data based on their requirements.
High-quality Digital Financial Reporting Can Improve Decision-Making
High-quality digital financial data that is devoid of errors perfectly conveys the financial condition of a company to all stakeholders. Contrast this with data that has errors and does a poor job of presenting a company’s financials. For instance, if a company uses extension elements indiscriminately, its disclosures cannot effectively be compared with those of its competitors. In such a case, if a peer company furnishes high-quality digital data, it would end up receiving more attention from investors, analysts, and data aggregators. If a sector-wide analysis needs to be done, the stakeholders might prefer to use that company’s financials as a base. Stakeholders would prefer to make informed decisions based on sound data.
High-quality Digital Reporting Can Improve Stakeholder Communication
Since XBRL is a machine-readable language, the reporting process is aimed at helping computers understand the information being dealt with. There can be no room for ambiguity in the process. When corporate reporting teams attempt to create data that ‘speaks’ to the machines, they end up communicating the data more effectively to their stakeholders. XBRL documents also pass through a validation process that ensures the data is technically sound before it is made public. The format also lets companies add value to their stakeholders by digitally presenting entity-specific information in their documents.
High-quality Digital Financial Reporting Can Lower Cost Of Capital & Credit
There are multiple levels at which reporting in the XBRL format lowers costs. Firstly, XBRL lowers information processing costs by making it easier for analysts, investors, and other stakeholders to access complex financial information. It also lowers the time taken for financial information to be factored into stock prices. High-quality digital information has more takers. Analysts and third-party data aggregators would more closely follow companies that are known to present high-quality information. This would mean an increase in analyst coverage and, consequently, investor interest in the company – leading to a lower cost of capital.
Here’s a case in point: In January 2015, the Dutch multinational banking and financial services corporation ING Group announced discounts on loan and credit applications for its small and medium enterprise customers in the Netherlands. The SMEs only had to submit financial statements in XBRL format through the Dutch Standard Business Reporting (SBR) platform.
Convinced about the benefits your company can have due to high-quality digital financial reporting? Start your digital reporting journey today with a commitment to quality. Start with IRIS CARBON®.