Reengineering Business Reporting Creating a Test Bed for Technology Driven Reporting

Abstract

Building on the work originally done for the Enhanc ed Business Reporting consortium of the AICPA, this paper develops a test bed for innovation in business reporting. As with flying test beds in aviation, the object is to explore the impact of new technologies and techniques rather than to create a product intended for immediate implementation. The starting point of our analysis is that if the financial repo rting system was being built from scratch today, it would look very different, taking into account f undamental changes in the two drivers of financial reporting: First, the dominance of market making by professional investors, which includes such intermediaries as pension and mutual funds, which is how most ordinary individuals interact with the market; Second, the r eduction in the variable costs of disclosures to technology-enabled firms, while time taking a broad er view of the cost of reporting to include the opportunity cost to the firm from faulty disclo sures and the cost to professional investors of having to extract the data they need from statement s that were not designed for their needs. Taken together, the consequence of these two changes is that a system being designed today has to rethink the entire process by which financial da ta held by the firm is translated into decision relevant information by users. This process takes p lace both within the firm and outside of it, with a handover of financial statements taking plac e at the boundary between the firm and its users. Given these changes it is time to ask whethe r the location of that handover boundary point is still appropriate: whether the firm should conti nue to aggregate and condense information extensively before releasing it, or whether sophist icated users would prefer to have access to more information in closer to its raw format so tha t they can manipulate and aggregate it as they