Real-time reporting: A future necessity?
Accounting standards and practices have increased as practitioners found ways to establish a more uniform method of reporting. Despite the variety of areas covered by these standards, developers share one common thought. “Accounting is about providing timely, useful information to decision makers” (Davis 2002). Times are changing and accounting standard modification is needed to keep up with these changes. Investors are still demanding “timely, useful information” (Davis 2002), but the definition of timely appears to be changing. A new concept regarding financial reporting has been unveiled over the last few years. This concept is called real-time reporting and involves the presentation of a company’s financial information almost instantaneously. Even though real-time reporting seems to be a growing trend, will it satisfy the need for usefulness in financial reporting? In order to make this decision, an investigation into the many ideas surrounding real-time reporting is needed.
Developments in the electronic age are bringing about changes in the way financial information is being reported. In 1993, the Securities and Exchange Commission (SEC) “began to mandate electronic filings through its Electronic Data Gathering, Analysis and Retrieval System (EDGAR)” (Rezaee 2002). The intent of this system was to provide timely information to investors. Five years later, the SEC established Rule 14 of Regulation S-T, which required “all paper format filings to be submitted electronically, absent of hardship exemption” (Rezaee 2002). It was soon discovered that EDGAR was a good idea but needed some work. In fact, users were limited to the amount of data they could retrieve. Shortly after this problem was discovered, potential solutions were presented. The first was called Hypertext Markup Language, or HTML. HTML controlled “the way information is displayed” (Rezaee 2002). However, HTML appeared to be rather ineffective because it did not “recognize content” presented in the information (Rezaee 2002).
Another solution, called XML, was presented in 1996. It was “a set of rules for designing text formats that allows data to be structured and makes it easy for a computer to generate data” (Rezaee 2002). Once again, this solution contained downfalls. Apparently, XML allowed “too much flexibility to be used successfully” (Rezaee 2002). In 1998, the American Institute of Certified Public Accountants, or AICPA, began developing XFRML. This solution eventually evolved into the Extensible Business Reporting Language, or XBRL (Rezaee 2002).
The emergence of XBRL appears to be a practical solution to the efficiency and effectiveness of reported information. In essence, XBRL is “a digital language of business” (Rezaee 2002). This program allows for the “standardization of processes, data storage, and data retrieval” for those companies participating in the expansion of information technology (Rezaee 2002). XBRL is a platform which standard-setters, including the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB), will present their standards. According to these two organizations, XBRL “reduces the cost of producing business and financial reports” (Rezaee 2002). The cost reduction occurs because the data is automatically formatted to be comparable to other data as soon as it is entered. Then, a user can easily compare financial information among different companies. By standardizing the data, XBRL allows users “to gather the data just once and then use it many different ways for regulatory filings” and “financial statement preparations” (Rezaee 2002). The purpose of this program is to create uniformity and transparency of reported information. If this program can create transparency, less possibility exists “for mismanagement and fraud” (Rezaee 2002).
Many benefits exist for those who implement XBRL. Not only will it “ensure the integrity and credibility of the company’s financial information,” but it will also reduce costs associated with producing financial information (Rezaee 2002). However, companies with limited web accessibility may endure extra costs by using XBRL because they must purchase the hardware and the software. In this case, outsourcing may be beneficial (Davis 1999). Another benefit of XBRL includes the ease with which it can be integrated into “existing financial and accounting software” (Rezaee 2002). It allows government reports to be efficiently and effectively reported in a timely manner. The greatest benefit of all is that financial information only has to be entered once, and it can then be formatted into any form (Rezaee 2002).
As more companies become familiar with the concept of real-time reporting, a greater quantity of financial information will become available on the web. An increase in regulatory financial disclosures is already occurring. Reporting disclosures on the web is easy for the company and the investor to utilize. Annual reports are also being reported on the web. In fact, the Public Register’s Annual Report Service advertised over 2,292 online annual reports as of November 2002. This number is expected to increase over time (Davis 2002).
The use of real-time reporting is widely gaining acceptance. The Securities and Exchange Commission is slowly moving toward accepting XBRL-based filings, and the number of companies implementing real-time reporting is growing steadily (Davis 2002). This growth in popularity is especially evident in larger corporations. Some of these corporations are even disclosing their financial statements “within a month of the end of their fiscal year” (Cheney 2001). In fact, “these legal documents may be in public view only hours after the books are closed” (Cheney 2001). Real-time reporting must then be taken a step further by allowing management to use it to make decisions. This step is not happening yet. Currently, management is using daily, weekly, and monthly performance reports to make business decisions (Disclosure 2003). However, this process could change with the creation of a place where the same financial information can be obtained by executives, managers, accountants, and users (Fleischman 2000).
Management will be able to make business decisions based on a more timely representation of financial information. Real-time reporting saves time by deleting a step in the accounting process. Prior to real-time reporting, accounting transactions needed to be posted to the general ledger. Depending on the size of the company and the amount of transactions that occur daily, the posting of these transactions could take a while. With the implementation of real-time reporting, this step is eliminated. Transactions are simultaneously posted as they are entered. This simultaneous posting is also a benefit at the end of a period. Real-time reporting “permits zero closing time for transactions at the end of the accounting period” (Fleischman 2000). One problem with this statement is that even if immediate transaction posting and closing occurs, adjusting entries will always need to be made. These entries will still take time.
Certified Public Accountants see another potential problem with this seamless method of recording transactions. In the case of an audit, a proper trail of transactions is needed. If certain steps of the transaction process are skipped, the audit trail may be less reliable (Fleischman 2000). A positive side is present when discussing audits as well. Real-time reporting allows for a continuous audit of a company’s financial position to occur. This also requires the “specialized skills of audit personnel to monitor information electronically” (Kepczyk 1999). Despite the possible lack of an audit trail, real-time reporting seems to be beneficial in the posting of transactions and continuous monitoring of financial information.
Another aspect of real-time reporting is the idea of time entry. Time entry would aid a company with the billing process by requiring “time and expense information to be entered as it occurs” (Davis 1999). This entry “makes it possible to bill faster and to review, manage, and control work more efficiently” (Davis 1999). Another aspect is the idea of event-based billing. Event-based billing means that a bill is created as soon as the work is done. This type of billing speeds up the billing process and allows an earlier receipt of payment (Davis 1999). Time entry and event-based billing are just a few additional benefits of real-time reporting.
Advocates of real-time reporting hope this concept will be a future requirement. However, this change in financial reporting would also mean a slight change in the responsibilities of a Certified Public Accountant (CPA). According to an article by Gary Fleischman, “Client/server Financial Reporting: A Primer for Accounting Professionals,” the CPA would be acting more as “an analyst who devotes additional time to activities such as cash and financial management, capital budgeting, and tax and investment planning” (Fleischman 2000). Contrary to Fleischman’s article, most CPAs take on these responsibilities already.
Even though the usefulness of real-time reporting is evident, accounting organizations have taken little action regarding its development. The AICPA has established the need for an increase in “the frequency of reporting,” but has not moved much beyond that (Castellano 2002). The SEC is starting to require XBRL for certain financial filings, but this is just a small step. The increase in corporate scandal means that a change in financial reporting is needed. Real-time reporting is part of that solution. Under this method, revenues and expenses can be updated every day. The frequency of this reporting will make it harder for a company to inflate earnings or hide losses (Seligman 2000). Real-time reporting will greatly increase the usefulness of financial reporting for both internal and external users of financial information.
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