Digitalfinancialreportinghelpsreducerisk

whereinvestorsaren’trelyingondisclosureby

professionaljudgementalone.

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Digitalfinancialreportinghelpsreduceriskwhereinvestorsaren’trelyingondisclosurebyprofessionaljudgementaloneByAdv.RoryVollerThe Chartered Financial Analyst (CFA) Institute, a global association of investmentprofessionals, recently found that investors can perform faster and better analysisinvestment decisionswith digitised financial reporting tools. The CFA research,which isalsooneofthemostrespectedinstitutionsforethicalconduct,alsofoundthattheuseofdataandtechnology“notonlyresearchmorecompaniesbutalsotakeacloserlookatthecompaniestheyalreadyfollow”.This isan important insightforSouthAfricaespecially inthe advent of the fourth industrial revolution. These developments mean that all localindustriesmustbeattheforefrontofthedigitalrevolutionorriskbeingleftbehind.

LocalinvestorsarepartoftheCFAthroughtheCFASocietySouthAfrica.Inordertoalignwithinternationalbestpracticesandensureeffectiveimplementationoftheirmandateasprescribed in Regulation 30 (5), the Companies and Intellectual Property Commission(CIPC) will soon be launching the eXtensible Business Reporting Language (XBRL)electronicreportingmechanism.

XBRL is not only aimed at reducing risk for investors when analysing companies but itbringsCIPC,whichiscurrentlyreceivingAnnualFinancialStatementsinaPDFFormat,intothedigitalage.Inarecentarticle,MohiniSinghdirectoroffinancialreportingpolicyatCFAInstitute, says theuseofdataand technology in financial reportingcan result inamoreeffectiveandefficientoverall financial reportingprocess inwhich investorsandanalystsreceivemoretransparent,better-qualityinformationonatimelybasis.

In her view, backed by CFA research, Sign highlights that “investors want structuredquantitativedatanotboundby thedocument the information ispresented in, alongwithmanagement’s explanation of the results, which tends to be both quantitative andqualitative”. While this research strengthens the investment case for the CIPC’sintroduction of XBRL, it is Singh’s observations that digital financial reporting not onlyimprovesproductivity, financialstatementaccuracy,andopportunitiesforhigherreturns,butalsoallowsfor“betterriskmanagement”.

InFebruarythisyeartheCIPCstartedapilotphasefortestingfilingsviaXBRL.Morethan100largeJSElistedcompanieswereinvitedtobepartofthepilottestphaseandtrialthefunctionality of theCIPC’s portal for uploading of AFSs via XBRL.Of thesemore than 50companies participated by successfully submitting close to 100 different sets of testfilings.

Afterthecompletionofthepilotproject,itwillbecomecompulsoryforqualifyingreportingentities to have XBRL-capable software to compile Annual Financial Statements data inXBRL format and according to the CIPCs published taxonomy from 1 July. All qualifyingentitiesoperatinginSouthAfricawillberequiredtosubmittheirlatestavailableapprovedandaudited financial statementson the firstdateof submissionapplicable to them.Thisstructured data is aimed at making it easier and cost effective for investment firms tocoversmalltomid-capcompanies.

Giventhecomplexitiesofthefinancialreportingenvironment,digitalfinancialreportingnotonly helps reduce risk where disclosure no longer relies on professional judgementalone, italsohelps tomanage risk.The roleofauditorshasalsocome to light inSouthAfrica pertaining to their professional judgment in the course of their work. Auditors –where XBRL is concerned – prepare the financial statements to be filed for theircompanies. It is no surprise that the Independent Regulatory Board for Auditors hasintroduced mandatory audit firm rotation to enhance auditor independence in order toimprovetheirprofessionaljudgment.Astheprofessionalswhopreparethesestatements–auditorsapplyprofessionaljudgementtointerpretethicalrequirementsandInternationalStandardsonAuditingforthemtobeabletomakeinformeddecisions.

XBRL could not have come at a better time where recent gaps in financial reportingstandards have been exposed in one of the country’s major companies, SteinhoffInternational.A2016studytitledattheBucharestAcademyofEconomicStudiestitled:Theimportanceofprofessional judgementapplied inthecontextofthe InternationalFinancialReportingStandards, found that “judgmentsmadebyaccountingprofessionalsmightbechallengedbecauseofthenatureoftheirprofessionalresponsibilitiesandtheflexibilityoftheexistingregulatoryenvironment.”

“Thecurrentconcerninthefieldofaccountingregulationsistoavoidthesubjectivismasmuchaspossible,inordertoreflectandprovidereliableandtransparentinformation,bymaking appropriate use of the professional judgement. Regulation can improve thefundamental principles of the accounting theory, by pointing out what the accountingshould be”, thepaper found. The studyhighlighted the role “trust in a principles-basedaccountingframework.”

“The quality and integrity of the judgements made give rise to correct numbers beingreflectedinthefinancialstatementsand,thereforethetrustintheoperationofprinciples-basedaccountingstandardsincreasesoncemoreifthesuitablemethodsofvaluationandclassificationareappliedconsistently”.ButasPranavGhaiandAlexRappco-foundersofCalcbench,afinancialdataandresearchfirm that relies on XBRL, wrote in Accounting Today, “XBRL gives financial analysts thepower to understand how exchange ratesmight affect various sectors and companiesmoreprecisely.”

GhaiandRapp–basedinNewYork-gaveanexampleofhowXBRLhelpsmanageriskbytaking a look at some of the risk factors associated with China and how investors canwork around them in their analysis of companies based in China. “A crucial issue foranalysts evaluating risks and opportunities related to China is to understand both themagnitudeofacompany’sinvestmentinChina,andhowitischangingovertime.Nowthatcompanies tag theirsegment-leveldisclosures inXBRL, finding thatanswerbecomesaninstantaneous exercise”, the two wrote. For South Africa, XBRL not only improvesregulatory effectiveness it will replace the limitations of manual sample analysis onindividual statements and enable improved high-level understanding of business in thecountry. By revolutionising theway reporting entities submit Annual Financial StatementstheCIPCisbringingthecountry’sentitiesintothedigitalrevolution.

Adv.RoryVolleristheCommissioneratCompaniesandIntellectualCommission(CIPC)