Wednesday, October 18, 2017

Data Standards are Needed

There's an old saying that figures don't lie, but liars figure. Whether one agrees specifically with this saying, the fact is it draws out an important issue about numbers. They can bury many subjective elements under the appearance of objectivity. It's an old problem with statistics too. The same statistics can be used, for example, for different purposes in the political arena. An unemployment rate of 8% can be considered bad from the view point of the number of people out of a job, but good if it was 10% for all of the preceding year. Context is everything.

Cathy O'Neil made a similar point in her book "Weapons of Math Destruction". She pointed out that not only is data subject to mis-representation of the facts, but the algorithms used to analyze them can similarly embody biases in point of view that the analyst may not even be aware of. There are lots of biases available in our world.

She goes on to say that we should address this issue with development of proper standards in presenting data and the related algorithms. This may need to be approached on an industry basis. We have long had standards in presenting traditional financial information (such as balance sheets and income statements) but not so much when we talk about financial information presented in non-traditional format. That's why we need something like eXtensible Business Reporting Language.

This issue with data standards must be addressed when we talk about using data, perhaps particularly big data, for decision-making purposes. The use of data without standards can be very misleading.

Tuesday, September 05, 2017

How Companies use Social Media for Corporate Reporting

The use of websites for corporate business and financial reporting by large public companies is well established. What is less established but a significant part of such reporting is the use of social media.

A recent (but still unfinished) study of 100 public companies shows some interesting facts about the use of social media. For example, it shows that most of them reference some social media from the Investor Relations section of their site. They have links, for example, to Facebook, Twitter and others. These references act as a clue that the social media being referenced are being used for more than general corporate purposes, such a marketing and significant non-financial events.

Following through those links, shows that many of them do use those social media referenced for the disclosure of information that would be of interest to investors.

The study shows that the use of Facebook, Twitter and LinkedIn are evenly split among the companies and are the most used social media. The types of information used for these media are basically the same, and include items like earnings releases, dividend declarations, major acquisitions, and other major financial events.

The inclusion of earnings releases is particularly important, as such releases are known to be a major determinant of stock market price changes and by inference a signifiant element in investor decision-making.

Youtube follows next in frequency of use, and is a vehicle for such events as CEO and CFO presentations, annual meeting presentations and other noteworthy events.

Instagram and Google+ follow, each with about a third of the useage of the leaders, but may be growing, particularly Instagram.

The use of social media for financial and business reporting for investors is growing and is now a significant part of corporate reporting. No doubt its use will evolve, just as the use of websites has done.

Wednesday, August 16, 2017

Standard Business Reporting Makes Sense

SBR (Standard Business Reporting) is a strategy concept that, at its root, is very simple. It involves eliminating duplication in reporting. Governments have been finding it very useful for reducing costs, both for themselves and for the organizations that report to them.

Essentially, SBR involves identifying all duplication in reporting requirements, standardizing those requirements, where possible, and then eliminating the duplication. For example, a national government normally has agencies to collect income tax information, statistical information and, in many cases, regulatory information.

Each of these agencies will usually collect information like sales, payroll expense, net income, etc. That means the filers must submit the same information to each of the agencies. Each filing costs them money. If the duplication were eliminated, their filing costs could be reduced substantially. If you think about it, there are many different kinds of information collected, and duplication in many of them. So the savings can be very large.

Of course, the items being collected by different agencies might be defined differently, so the duplication may not be exact in some cases. For example, net income for tax purposes maybe different than net income for statistical purposes. This is where standardization comes in. The definitions can be standardized so that elimination of duplication is possible. Sometimes this is straightforward; other times, it cannot be done, whether because of legislative constraints, or administrative constraints in one or more of the agencies. But often it can be accomplished, perhaps by identifying common elements to those items, as long as the standardization is diligently pursued.

Once standardization is accomplished to a satisfactory degree, the items of information can be collected by a data collection agency, working in cooperation with the agencies involved, so that the data only needs to be collected once, thus achieving the objective of making life simpler and less expensive for the filers and cutting red tape.

Numerous governments around the world have been implementing SBR. The most notable are Australia and The Netherlands, both of whom have achieved considerable savings. New Zealand has implemented SBR and most recently, the State of Indiana reported beginning an SBR effort. Other governments have conducted exploratory or preliminary work, including Denmark, Sweden, Finland, Turkey and Poland, among others.

The starting point for implementing SBR is to identify the information items being collected by a government and then exploring the ability to standardize and eliminate the duplication. This is the core of the effort and is a big job. Then a technology needs to be selected that is good for transmitting information among different platforms and computer systems. XBRL (extensible business reporting language) is most often used for this purpose, but there are alternatives, including XML, JSON, even Excel. This is a significant decision that needs to take into account the advantages and disadvantages of each technology. There are advantages and disadvantages of each.

SBR is an ongoing significant activity, but the benefits are likely to exceed the costs. It makes a lot of sense. More information is available from the SBR websites of Australia and The Netherlands.


Friday, August 11, 2017

How Companies Use their Websites for Financial Reporting

For about twenty years, public companies have been using their websites for financial reporting purposes. Initially, they placed their financial statements and perhaps a few other elements of reporting on their sites. It was regarded as a very peripheral activity. The printed reports were the prime vehicle of financial reporting. In 1997, some companies did not put anything on their websites for financial reporting.

Since then, the use of websites for financial reporting purposes has increased dramatically. Now it is a major part of a company’s financial reporting activity; some say the main part.

The information presented on websites now includes not only the financial statements, but also everything that would be included in the annual report and in addition, some interactive elements like data banks and Excel financials. For several years, companies simply put on their websites the same information they out into their paper reports, thinking it would be used the same way.

But this thinking has changed. Most companies now recognize that the nature of the web as a medium of financial disclosure is very different from that of paper. Besides the ability of the web to present interactive material and multi-media, people use the web differently. Paper tends to be read sequentially. The web, decidedly not. Web users click on the information they want. They want it fast – within a click or two. No wading through tables of contents, indexes and menus. As a result, the companies realized that organization of the information and the ability to navigate it was of paramount importance.

Recently, there has been a move beyond websites into social media. Twitter is a favourite for providing quick items of disclosure. It is widely expected that this trend will grow. LinkedIn and YouTube are also often used to convey financial information. Often, you will see the YouTube videos on the websites as well.

The emergence of data analytics and big data has begun to have some influence on website disclosure. Already, companies are including data groupings as separate disclosures, complete, in some cases, with data analysis tools. This is a far cry from the days of rigid financial statements, opening the world of financial disclosure to user-created reports, wide ranging data analytics and increased user judgement in determining information relevance.

Website disclosure of financial information is changing the nature of financial reporting. This area will continue to evolve, probably quite quickly.

Tuesday, August 08, 2017

Blockchain Useful in Accounting Control and Reporting

Blockchain has the potential of being very useful in a collaborative environment, which is increasingly common in business. There are many aspects of a business where people from different parts of the business need to work together for a common purpose. An example is the workings of the supply chain, which affects an organization from the point of purchase to the ultimate sale of the product. Along the way, people in purchasing, production, manufacturing, logistics, finance, marketing and sales need to have access to information about the flow of goods and the related financial aspects of the processes.

Blockchain is essentially a centralized database, that utilizes cryptography to protect the data from being changed and also facilitates the sharing of the information in a transparent and open manner. The sharing of the information becomes more viable because of the protection against change that the cryptography provides. And the data can provide a clear record of the flow of data and money throughout the supply chain. Another way it is usually described is as a distributed ledger technology, which means that transactions are recorded but are immediately available to others in the blockchain. So any changes can be detected by any of the participants. This reduces the chances of unauthorized changes being made.

Because blockchain offers a means of management control of goods as well as money, it is not only potentially useful for control purposes but also for reporting purposes. With blockchain, a vast array of information can be available on the transactions within the supply chain, including the people involved in those transactions, dates, quantities, products and other aspects of the transactions and assets involved.

Use of blockchain for accounting purposes is in its infancy, but the recognition of the power of this technology is beginning to be recognized more broadly.

There are various good references to follow up on in this area. Deloitte released a very good paper that provides a great overview. It can be found here.

Wednesday, July 19, 2017

Future of Technology based Corporate Financial Reporting

 There are several trends in technology that point the way to a new era in the field of financial reporting to investors.

The present method – financial statements drawn up in pre-conceived form, according to accepted standards, evolved out of the joint merchant ventures, principally in Italy during the 14th and 15th century. At that time, ships would depart with a load of goods for sale, financed by a group of investors and then when they returned, would split the profits, as reported to them by the accountants keeping records of the revenue, expenses and profits of the venture.

Although financial reporting has changed tremendously over time, (and expanded to include reporting on going concerns, rather than just particular ventures, which has led to some of the most intractable issues in accounting) at some levels, it has changed very little. Financial Reporting still revolves around the financial statements which still involve the profit and loss statement, balance sheet and various notes to enable them to be understood.

More recently, we have begun to see changes arising from inclusion in the reporting process of other forms of data, sometimes quite a variety – financial data points, production data, even environmental data. The idea is that investors can use technologies, including current analytical tools, to analyse the data and gain enough insight to form a basis for their decisions.

This trend has manifested in part through corporate websites, many of which have included in their Investor Relations Section such items as data banks and data tools. There has been some take up on these disclosures, but it has been slow. The tools remain a bit limited for serious analysis.

However, this is changing rapidly with the advent of Artificial Intelligence, which, along with Natural Language Processing, is being used as the core of some new tools for financial analysis. Some are even useful for working with big data, including identifying useful data to analyse. Also, these tools can be used to analyse the massive amounts of data that exist even in conventional annual reports, which extend to hundreds of pages of complex data. Few investors and even serious analysts sit down are diligently read all of these reports anymore; they use tools that draw out what they want. AI fits the bill beautifully.

For the companies doing the reporting, this is a game changer.  Data just needs to be made available and the investors and analysts will do the rest. Financial statements will not be eliminated, they will just be part of the data. In fact, this has already happened. Just look at the IR section of any big public company’s website.

That leads us to a second point. Much of the data now available is not amenable to electronic evaluation. Much of the reporting is still done on the assumption that someone is actually going to read the reports. This is a prime area where reporting has not changed since the 14th century. Perpetuation of the paper-paradigm way of thinking.

The fact is the data being reported needs to be in electronic form. Sometimes just excel spreadsheets will suffice. But this is very limited to numbers and modern reporting is so much more than numbers.

The data needs to be not only electronic but in a standardized form that can be read by other computers using a variety of analytical tools. Throughout most of the world the use of XBRL has been expanding to meet this goal. Canada stands out as one of the few countries that has not done this. The US, China, most other Asian countries, Russia, India, all use XBRL. In 2020, the European Securities and Markets Authority (ESMA) will require all European countries to use XBRL for their reporting. Many already do so.

So, in this new world of financial reporting, we have large amounts of structured and unstructured data being reported by companies, key elements of which are in standardized form and AI being used to identify and analyze the pertinent data for particular investor and business decisions. This is the direction of financial reporting. Very different from the 15th century. And the 20th.