This article was first published in the November/December 2013 UK edition of Accounting and Business magazine.
The rate at which listed companies generate data is all but immeasurable. Every second of every day, gigabytes of information are thrown up by all kinds of corporate systems, from granular customer transactions and loyalty data through to spot foreign exchange rates and on to logistics data tracking deliveries and inventory levels. Then add in all the social media feeds – which are ideally situated to act as barometers of consumer opinion. If there is one channel all this eventually flows through – in one form or another – it’s the corporate financial reporting process.
But in the world of ‘big data’, here is the quandary: data flows like water in an enormous river system, but financial reporting acts like a dam, releasing controlled quantities of information only periodically – annually at worst, perhaps half-yearly, and rarely more often than quarterly.
Is this good enough these days? Seemingly not. ACCA’s third major research paper into the institutional investor landscape – Understanding investors: the road to real-time reporting – found that there is a significant level of demand for ‘real-time’ reporting. That is, rather than simply publishing financial statements every three, six or 12 months, companies are starting to come under pressure to provide information continuously.
But why? ACCA’s research is quite emphatic: professional investors say that real-time information would improve their understanding of corporate performance and improve the investors’ ability to react quickly. More tangible benefits are that investment returns would be enhanced, investors say.
Not too surprisingly, such an emphasis on what’s going on now rather than what happened in the past financial quarter would increase markets’ focus on the short-term over the long, and then financial volatility and instability would both rise. However, companies may find such costs are worth paying. The investors surveyed believe that companies that would be able to provide real-time information are those that have more robust corporate governance and are more likely to attract investment from institutions. Real-time reporting would, in short, be a competitive advantage in the capital markets.
This raises an intellectual challenge: moving towards a new concept of corporate reporting would, investors think, provide benefits to companies and benefits to their shareholders. And yet, financial market volatility and instability are detrimental to companies and investors. It’s not immediately obvious how we can square that circle, nor whether regulators and auditors would be able to cope with the torrent.
Would the flood of data mean a loss of accuracy? Or the disclosure of information helpful to competitors? It may be too early to say, but it is not too early to engage in the debate. Even now, we see companies under pressure to report more quickly, for example by accelerating the closing process between period-end and the results announcement, or by reporting Christmas sales figures early in the New Year, even when those figures have not been audited.
Data at their fingertips
Corporates and their managers certainly benefit from having more information and having it much faster.
‘In today’s environment, business agility is just as important as a long-term strategy,’ says Ankita Tyagi, a research analyst for the Financial Management and Governance, Risk and Compliance practice at Aberdeen Group, in the report. ‘With the economic crisis, [top-level executives] feel as if they cannot just sit back, wait and react. They need to be proactive.’
Tyagi adds that, as finance functions play more prominent roles in the corporate hierarchy, they are ‘looking for real-time information for cashflow and price monitoring, financial planning, risk management, back-office functions, accounts payable and receivable, and even payroll’.
Social media is significantly changing the type or mix of information that is useful to corporates. ‘From a technology perspective, most information, whether it is financial data or operational metrics, can be manifested in, or near, real time,’ notes Julie Harris, business development manager at Pureapps, an Oracle Platinum Partner, in the report. ‘Look at what is happening with social media; these things can be farmed, analysed and turned into useful and informative business information very quickly.’
Is there such a thing as too much data? Are you not likely to lose sight of the wood for the trees? Andrew Davies, a senior partner at EY’s Financial Accounting Advisory Services, issues this caution in the report: ‘There will always be data junkies that want to have more and faster information, but just having a lot of data at your fingertips is not enough; you need to make sure you are using it wisely.’ To do that, KPMG’s head of audit Tony Cates adds: ‘Companies need to ask some questions: what information is useful? Who needs to know what? How frequent do updates need to be?’
Just as the corporate appetite for faster data aids decision-making, so, too, does the more prompt publication of financial data help investors make their decisions. Investor demand for a faster pace of reporting has found support from regulators: the SEC now requires companies to file quarterly reports within 40 days and annual reports within 60 days.
‘With developments like big data and the widespread use of analytics, company finance departments and management teams are using real-time data internally,’ says ACCA director of policy Ewan Willars. ‘And yet there is a huge gap between these up-to-the-minute operational processes and what is being reported and assured externally.’
In practice, the best companies are reporting within 30 days, and some within just 10. Meanwhile, stragglers can take as long as 90 days, by which point the data is deemed too historical to be useful.
Tim Barker, head of credit research at Old Mutual Global Investors, believes that companies should be encouraged to reduce the time between their period end and the publishing of their results. ‘At the moment, the market doesn’t penalise slow companies, but I would like to see that happen,’ he says in the report.
But Chris Higson, associate professor of accounting practice at London Business School, questions whether there is a real benefit in pushing hard on this. ‘Suppose that companies close their books and publish their results one day after the end of the financial year instead of one month after,’ he says in the report. ‘The questions we need to ask are: Why would that be useful and to who? Is there a social benefit?’
Companies should avoid taking refuge behind such words, however: the balance of opinion clearly tips to those who believe that companies that are able to close their books most quickly are those that have better processes and control systems, and which are therefore regarded by investors as having better governance.
Conversely, companies that do not match the average closing time are thought to be unable to provide their own management with the right data in a timely fashion – raising doubts about their ability to make decisions. ‘The longer a firm takes, the more it says that either they’ve got skeletons in the cupboard or that their systems are inefficient,’ says Rohit Talwar, a futurist and CEO at Fast Future Research, in the report.
To be fair, though, inefficiency may not be the main reason why a company is slow to report. Complex businesses operating in many jurisdictions, or having long-term contracts that need to be properly valued, might also struggle with a fast-close environment.
Read all about it – now
Investors, used to nanosecond reporting in financial markets, extend their demands for real-time reporting to companies. A ‘halo effect’ would be bestowed upon on companies that are able to make the shift towards real-time reporting. But notes of caution are struck: ‘Investors never ask for less information,’ says KPMG’s Cates. ‘They always complain about too much extraneous detail in financial statements, but they never tell me to remove any notes. They always want to be able to discard the information themselves.’
While the survey data points very clearly towards a demand for real-time reporting, Robert Talbut, chief investment officer of Royal London Asset Management, says it is important to consider an investor’s focus. ‘For longer-term investors like us, the prospect of real-time information offers no benefit at all,’ he says. ‘But, if you were to ask momentum investors whose livelihood is based upon high turnover and trading mentalities, they may well see the benefit in more and more reporting, because that provides further opportunities for trading activity and mispricing to occur.’
It is intriguing that most investors want faster reporting while, at the same time, most also have concerns about fostering greater ‘short-termism’, more volatility and – more disturbingly, perhaps – an increase in the cost of capital for companies. Faster reporting thereby increases the performance demands placed on companies. As for the regulators, real-time reporting comes with extra responsibilities that they may simply not be prepared to take on with their current tools and resources. ‘If they’re taking data in real time, and they miss something or something goes wrong, then they get the blame,’ says Talwar. ‘Unless they have the capacity to deal with it, they won’t want it.’
Some investors are concerned about the price paid for faster data: ‘At some point, you have to consider whether the need for fast information is outweighed by the fact that some of the information may be inaccurate,’ says Samantha McConnell, chief investment officer, IFG Pensions, Investments and Advisory Services, in the report. It is notable, therefore, that investors say in the survey that they would be willing to pay for more real-time reporting to be audited, giving greater confidence about its reliability.
McConnell notes, however, that, while assurance needs to be given that the figures being issued are correct, ‘The market is quite a leveller and market prices tend to move way ahead of the fundamentals,’ she says. ‘By the time you’ve got your assurance, the market is priced on something else.’
However, that argument can be swayed by the type of information: investor demand for assurance takes precedence over their demand for speed when it comes to general financial information and liquidity.
For emerging opportunities and profit warnings, however, their priority is speed. Regarding the assurance model, EY’s Davies notes: ‘How would auditors give an opinion on moving data? For example, would they fix it at a point in time? I think you would have to go through some very radical changes to audit methodology, audit opinions and the infrastructure needed to perform an audit at all.’
The forces of technology, competition and the sheer pace of business are compelling companies to rethink how they use their internal information. Whether or not those same forces are driving financial reporting towards real-time provision, there seems little doubt that external reporting is on a one-way path towards faster information provision. Along the way, investors, companies, regulators and auditors will need to enter into debate as to what the ultimate goal should be, what is achievable and how much it will cost.
Andrew Sawers, journalist and former editor, Financial Director