What IROs Need to Know About Financial Reporting Systems

Financial reporting software has become a pervasive tool for automating the preparation of disclosure documents at U.S.-listed public companies and dual listed Canadian issuers.

While this technology ‘solution’ has obvious advantages for financial reporting teams, the same is not always the case for IROs, who sometimes find it difficult to extend the technology into applications that they use.

In this issue of IR focus, we examine the origins of financial reporting systems, the value they bring and the challenges they pose for IROs.

Financial Reporting System Origin

In its earliest form, financial reporting software was designed to help public companies manage their financial data across different reporting platforms. In this case, the word platform refers to items such as a financial statement, an MD&A and an earnings release. These platforms quote the same financial data, so a change in one must automatically result in the same change in all others. Rather than forcing a financial reporting team to remember to manually alter each disclosure document, a linked reporting system automates the process.

In 2009, market demand for financial reporting software accelerated substantially due to the introduction of the electronic reporting format standard known as eXtensible Business Reporting Language (XBRL). At the risk of overusing acronyms, XBRL is a subset of XML, which is a free, open and universally preferred technology standard used to exchange business information over the Internet.

Today, the U.S. Securities & Exchange Commission (SEC) and more than 30 regulators in other countries require public entities to provide financial statement information in XBRL as a service to investors and data aggregators. As a result, the preparation of financial statements and related disclosure documents in these reporting jurisdictions became much more onerous and demanded more sophisticated software.

While such software is used in Canada, and the reporting process has grown more onerous, Canadian issuers still do not have the same need for automation because XBRL is not mandatory here. Ten years ago, the Canadian Securities Administrators decided instead to adopt a voluntary XBRL reporting system. That system is still in place and a simple search of SEDAR shows that Lululemon Athletica, Luminex Corporation, Igen Networks Corp. and UR Energy Inc. are among a handful of companies to XBRL file.

The SEC has not yet approved an XBRL taxonomy for IFRS, so Canadian 'foreign private issuers' reporting in IFRS are not required yet to report using XBRL.

In countries where the XBRL standard has been implemented, it has proven to be somewhat transformational for sophisticated users and aggregators of financial data. Rather than having to rely on static, ASCII or HTML text-based information, the investment community now has a dynamic, electronic record available to extract and compare the financial data issued by public enterprises across industries and countries. For investors and analysts who wish to do a data deep dive, XBRL is an enabling tool.

XBRL also gave a big assist to software providers. More than 10 such providers operate today and it’s thought that at least 5,000 companies in the U.S. use some form of XBRL-enabling financial reporting system. Depending on the number of software licenses that are purchased, the annual cost of such systems can be approximately US$30,000. Onboarding fees in year one can add between $10,000 and $20,000.

The Value of Financial Reporting Software

For these fees, the value proposition is compelling. Since the software connects directly to a company’s underlying accounting or consolidation system and then pulls the general ledger data into regulatory documents (think 10K and 10Q annual and quarterly filings), the need for manual data entry is eliminated. Also eliminated are mechanical errors and version control issues across disclosure platforms, along with plenty of hours that were previously associated with regulatory document preparation. As time is of the essence in financial reporting, the advantage of this software is evident.

The Challenges

There are, however, challenges in using financial reporting software. In fairness, several are related to the XBRL process itself. For example, under XBRL, the financial reporting team must ‘tag’ each piece of financial data using a taxonomy standard set by regulators. A tag is an identifying mark for a line item from a financial statement such as ‘revenue’ or ‘cost of goods sold’ that can be read by a computer. Tagging allows the information to be extracted and used interactively by investors. If a tag is not properly applied, a filing can be rejected. Due to the complexity of this process (some issuers report that initial tagging requires 200 hours of prep time even with powerful software), accounting firms offer specialized consulting services to help design internal processes and controls for ongoing tagging. Some companies choose to rely on service providers to tag finished statements, but by buying financial reporting software, XBRL capabilities move in-house for better control.

Another issue that IROs hear about is that regulators did not, at least at the beginning, enforce high quality data. As a result of giving issuers certain leeway to customize tag taxonomy, there was a proliferation of codes. Roughly speaking, there are 14,000 tags employed by public companies in the U.S. today, up from perhaps 9,000 when XBRL was introduced. Without standardization, XBRL data is not comparable across companies. This situation has more recently been remedied with greater enforcement. This, too, was not a software issue.

A third item was that the SEC required issuers to file traditional and XBRL versions of information separately. In 2016, the SEC remedied this situation by announcing it would allow companies to use Inline XBRL on the premise that it will reduce complexity for filers. The SEC now has a mock Inline XBRL viewer that members of the public can use to explore the functionality of an EDGAR filing (link below).

As for the software itself, the knock against it is that it is not easy to use, particularly for non-accountants. While some IROs have relevant accounting expertise, many do not. Either way, and despite significant user interface advancements in the past few years, the learning curve on such systems is steep. Most, if not all, software providers offer online training or in-person boot camps to reduce the learning curve, but IROs are often not among invited attendees as they are not entering or managing financial statement data (lucky them!).

The Rub For IROs

Herein lies the biggest challenge for IROs: financial reporting software was not developed with their needs in mind. One of the earliest examples was when IROs sent financial reporting system-generated earnings releases to newswire providers. What normally took minutes for a newswire to prepare took hours because the XBRL tags appeared in all financial tables and needed to be removed. Those early problems were subsequently fixed with new releases of software, but they demonstrated that some program developers had not consulted with all potential users to develop foolproof solutions.

Another challenge IROs report is that it is difficult, in some cases, to use financial reporting systems to populate commonly used (by IROs) Windows®-based software platforms such as PowerPoint. In creating investor presentations, IROs still resort to a manual data entry process. In part, this may be because the investor relations team has not received proper training in financial reporting system software, but some IROs say it’s because the software does not easily interface with the Windows®-based programs they use. Either way, it leads to frustration and inefficiency. Some software providers state that they have overcome this problem, but experienced IROs believe it’s important to consider interoperability before a reporting software system is acquired.

IR At the Technology Table

One of the very best pieces of advice from experienced IROs is to seek a seat at the table when the financial reporting team is considering the purchase of a reporting system. This will ensure your views and application needs are considered (and hopefully respected) when a vendor request for proposal is developed and competing software is assessed. Serving as part of such a steering committee will also help the IRO to become better acquainted with the software systems available and the training and support that come with the license.

Like every other type of software, financial reporting systems themselves are not static; developers are constantly working to upgrade their products, add functionality and find new users. IROs would be well advised to learn about the technology roadmaps the various financial reporting system makers are following to see if the needs of investor relations appear somewhere on the horizon.

While XBRL filing may not be part of your company’s future, it is possible that financial reporting automation is, at least in some form. For that reason, IROs would be well served to keep tabs on related technology advancements and ensure that they are in the loop when tech decisions are contemplated by their reporting teams.

Where To Get More Information