The future of financial reporting: how companies get information from their balance sheet to investors will include a combination of new technology and old simplicity.

Author:Kramer, Leslie
Position:Cover story

Financial executives often decry the amount of information they are being asked to provide regulators each year, with many contending the regulations and methods used for reporting that information have become too burdensome and costly.

The flip side to that argument is that firms that fail to provide transparent and easy-to-understand annual reports may risk losing high-level investors who have become weary of complex company reports that are sometimes too good to be true.

Regulators, too, are continuing to insist companies' financial reports serve to illuminate rather than cloud a corporation's true financial health. While much is being done by government entities and advocacy groups looking to improve the way public companies file their 10-Ks and annual reports, the jury is still out on whether any of these changes will eventually take place.

One thing that regulators, corporations and investors can all agree on is that the current state of corporate filing needs to be updated.

Following the collapse of the tech bubble in the early 2000s and the accounting scandals that ensued at companies such as Enron and WorldCom, the SarbanesOxley Act of 2002 was passed in response to a directive from Congress.

"At the time, there was the idea that things needed to be cleaned up, independent of company boards and auditors," says Craig Lewis, professor at the Owen Graduate School of Management at Vanderbilt University, and a former chief economist of the U.S. Securities and Exchange Commission (SEC) (serving from 2011 to 2014). One of the requirements the SEC had under Sarbanes-Oxley was it would review every public filing at least once every three years.

Unfortunately, the markets unraveled again only a short time later. In 2008, the Bemie Madoff Ponzi scheme served to shine a glaring light on the unprecedented amount of fraud that had taken place, unnoticed by regulators, for years. The mortgage crisis that unfolded that same year also illuminated the fact that many investors had purchased financial products tied to subprime mortgages that they, and apparently the rating agencies, didn't understand.

To respond to the crisis and the lack of transparency in the markets, the SEC initiated new requirements that firms must abide by when filing their statements each year. The XBRL Compliance Initiative was enacted in 2009 as part of an effort to make the filing of company data more accessible and usable to the average investor. It mandated that a standardized format be used by all public companies when reporting their financial results, and that a system of tagging company data be implemented.

Since that time, regulatory bodies and industry advocates are continuing to push for the development of new and better methods of reporting and for better tools to be used by agencies reviewing company financials. The hope is that these changes will not only help regulators identify fraudulent behavior or inconsistencies in reporting, but will also help move the industry to a more transparent model that will better serve corporations and the investors they are competing for.

A Push for Electronic Filing

One specific area that industry experts would like to see improved is the SEC's Electronic Data Gathering Analysis and Retrieval (EDGAR) system. EDGAR is currently a form-based disclosure database that companies must fill out to complete their filings each year. The problem is that it still relies on paper or PDFs, as opposed to being run electronically. The system is outdated, according to William Lutz, emeritus professor of English at Rutgers University. "If you walk down the hallway and go through the SEC's Corporate Finance Division, you will see all these cubicles of staffers reviewing piles of printed 10-Ks," says Lutz. "The use of paper to review filings now seems prehistoric," he says.

Lutz, director of the SEC's 21st Century Disclosure Initiative from 2008 to 2009, says he has talked to many executives in the corporate world who agree with his anti-paper stance. "I will never forget talking to the CFO of one of three largest corporations in world, and he told me that the only time their numbers are on actual paper is when they send their reports to the SEC. That's because in the corporate world, everything is electronic and digital," notes Lutz.

There are software systems being used today that allow executives to send data to and from various business units within the corporation to be reviewed or amended electronically. It all can be done through the use of a dashboard, says Lutz. These systems allow data to be summarized and manipulated in any...

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