The Best Writing Yet on Intangibles from AICPA

I have read the latest white paper by Amy Pawlicki for the AICPA Assurance Services Executive Committee with great care and interest. The title is The Shifting Paradigm in Business Reporting and Assurance.  Here are the highlights.

The shift to the knowledge economy is driving changes in how companies report their results. Pawlicki says:

The primary factors driving change in the reporting and assurance model include the shift from the industrial age to the knowledge age; advances in technology, globalization, and market reactions to lack of transparency; and new social structures. Arising out of these forces of change as analyzed in this paper, a common theme is the recognition that the current reporting and assurance model is inadequate for the effective allocation of capital in today’s global markets. And yet, the standards, technology, and tools exist to automate and enhance reporting and assurance so that they have a positive impact on market performance.

Corporate reporting will go real-time. Pawlicki quotes SEC Chairman Cox:

At a time when we have 24-hour news—and even 24-hour pizza delivery—why are we still living by the 10-K and the 10-Q? If investors are going to be responsible for the growth of their investments, for picking which funds to put into their 401(k) nest eggs, they’ll need user friendly, responsive numbers that are easily accessible.

XBRL is the enabling technology of next generation reporting. The move is underway to require all public companies to tag all their submissions to the SEC using XBRL (eXtensible Business Reporting Language. In the US, this transition is already underway and it will be completed in just a couple years.

While XBRL is an important step, it does not improve the quality of the information being reported. This is the part that interests me. Here Pawlicki ties in the work being done by the Enhanced Business Reporting Consortium (EBRC). Their latest framework for voluntary disclosure of of key business information as a supplement to financial statements includes categories: business landscape, strategy, resources and performance.

Resources that need to be reported are almost all related to intellectual capital: human, relationship and structural capital. The guidelines suggest that all key processes be detailed, including those for strategy, internal, products/services, external and governance.

The accounting profession is going to have to create “continuous auditing” to support these new reporting paradigms.  This is a very interesting aspect that makes me wish that my father (a dedicated auditor who loved talking about the challenges the knowledge economy created for accounting) were here to discuss with me.

Sarbannes Oxley is actually a first step in this direction. This legislation has forced corporations to focus on creation and strengthening of the processes the provide assurance on internal reporting. This kind of approach can and will be applied to external reporting over time.

The critical path milestones will go from technology (especially XBRL) to improved information flows (starting with enhanced business reporting) to improved assurance.

Most of this will happen in the next five years. Yup. That’s what is laid out in this paper. I know most people will doubt it. But when you read Cox’s comments above and you think about where we are with our economy today, you realize that the time for change has arrived.

Are you ready?