The C words – complexity and chaos or clarity and communication are at the root of the Global Accounting Alliance’s (GAA) latest report – Making Financial Reporting Simpler and More Useful (The Way Forward). People seem to think that financial reporting is too complex, there is not enough clarity and that existing standards, as they evolve guided by committees of blind watchmakers, are contributing to the chaos. The GAA ends the report with this statement:
It is a question of human behaviour. The continual urge to add more and more refinements and additions to the financial reporting process has to be curtailed. There has to be an active effort to remove elements which are now either unneccesary or have been found wanting.
Financial reports have become Maslovian examples of ’self-actualization’ carried to extremes (are you lost yet?)
The GAA aims to ‘nudge’ all the players in the financial reporting debate to make the necessary changes. Now I don’t know about you, but when people nudge me I tend to elbow them back and the next thing you know, the whole bar is on its way to A&E.
The report, based on a series of international round-table events, makes interesting reading with a cup of steaming Bovril in hand. Warren Buffett is presented as the Val Doonican of financial reporting. You can almost hear him singing the Jim Reeves hit ‘Welcome to my world’ from his cosy armchair as he spins another year of stellar performance in the ‘narrative’ of his annual report.
But XBRL gets short shrift.
“We just dump things in”, said one panellist, “and standard-setters don’t think about it as a communication”.
Evidently some view XBRL as a kind of financial landfill that doesn’t smell quite right and seems to be getting bigger all the time. According to the ‘inventor’ of the IFRS XBRL taxonomy, “More and more numbers by themselves are not terribly useful”. A Brit way of saying ‘XBRL sucks’. And another example of mixing up content (numbers) with context (tags). Numbers on their own aren’t that useful whereas tagged numbers can be. But let’s not go there again.
For me, a couple of the panellists hit the nail on the head, with their ‘reporting as communication’ observations:
“Don’t look at financial reports as a compliance document”, he suggested, “look at them as an informational document”.
and
For Bob Herz, the starting point was reiterating that financial reporting was a means of communication between companies and the providers of their capital.
And today, capital means more than just money. We have ‘brand’ and ‘intellectual’ capital for example. Drawing in many more stakeholders (i.e. more than just financial investors) who expect to be communicated to.
For me, the way to simplicity in financial reporting is to apply the Hyman Roth communication test: If it communicates something of interest to a report stakeholder it’s in. If it doesn’t it’s not. Now I’m going to take a nap. Coppola was such a great movie maker wasn’t he?
Tags: GAA
