Financial Reporting: An Internet Clearinghouse

The creation of accounting transactions has been changed from a manual to computerized recording. In many operational applications the accounting entries are generated as a byproduct of the underlying transactions (such as sales), thus making it possible to shorten the existing delays in creation of accounting data. Under this method it is possible to issue financial statements monthly or weekly, as opposed to the presently used quarterly and annual periods. Many corporations already generate such financial reports for their internal use, but not for external purposes. Corporations provide the Security and Exchange Commission (SEC) with more detailed and supplemental information, in addition to the financial reporting, including sales of their stocks by their officers. Corporations also disclose substantial facts in their press releases and conferences with financial analysts. They are obligated to disclose this information to their shareholders. But how to do it quickly and in a way that small investor could obtain this information at the same time as the institutional investors? It would be advisable to distribute financial reports via an electronic clearinghouse. This method would permit an instant access to the reports and assure that these documents cannot be modified. In the following paragraphs we will review the existing reporting frequency contrasting them with the needs of investors, and describe the generation of accounting transactions. Next, the proposed method of collection and distribution of financial reports as well as their possible analyses by a central electronic clearinghouse will be discussed. Finally, we will explore the need for changes of the attestation standards, describe how to assure the integrity of distributed electronically financial statements, and propose sequence of implementation of the new distribution. 1 EXISTING REPORTING FREQUENCY VS. INVESTORS NEEDS During the last decades we experienced great improvements in the areas of data communication and telecommunication. News about events around the world are delivered almost instantly. Similarly, financial news are distributed with minimal delays. With the fast growth of the securities trade there is a growing need for fast and reliable financial information. The basic reliable source of financial information is presently provided by the financial reports. Corporations listed on American exchanges are obligated to provide all its shareholders and potential investors with annual audited and quarterly un-audited (but reviewed by auditors) reports. In many European and Asian countries listed companies are required to provide only semiannual and annual reports. Markets usually respond very quickly to the results presented on financial reports. And so, a report with a lower than expected earnings of few technology companies in the year 1995 and 2000 resulted in a dramatic drop of stock prices of the entire technology industry. Although more frequent reporting would not prevent the recent accounting frauds committed by several corporations, but it could potentially speed up the discovery of the problems since it is more difficult to manipulate reports a dozen times a year then four times. The existing frequency of reporting was established in the pre-computer era. One may assume that such reporting periods were the most feasible frequencies at a time of manual time-consuming preparation of reports. Today's investors must wait until the end of a quarter to learn about financial results, or for an occasional release of earlier estimates of corporate earnings. Such information is immediately absorbed 397 M. Gottlieb M. and Stavrovski B. (2004). FINANCIAL REPORTING: AN INTERNET CLEARINGHOUSE. In Proceedings of the Sixth International Conference on Enterprise Information Systems, pages 397-402 DOI: 10.5220/0002602703970402 Copyright c © SciTePress by the markets, resulting very often in significant changes of security prices. It becomes clear that institutional and individual investors would like to make use of more frequently released financial information. Such information would be most beneficial for individual shareholders since mutual funds and investment houses often obtain information directly from corporations between the reporting periods. Actually, the annual financial reports are delayed more than a quarter from the end of the annual accounting period. It takes several weeks to proof and print these reports, then distribute them by mail. Most of annual financial reports reach the investors in the month of March of the next year. In the summer of 1996 the American Security and Exchange Commission (SEC) adopter a rule permitting the use of the electronic media delivery in compliance with the information delivery requirements of the federal securities law. The term “electronic delivery” refers to transmission of information via facsimile, CD-ROM, electronic mail, electronic bulletin boards, Internet, or computer networks. SEC also issued interpretive guidance on the use of electronic media by broker-dealers, transfer agents, and investment advisors for the delivery of information to their customers. In the year 2000 SEC issued regulation requiring listed companies to make their financial releases available to shareholders at the same time as they become available to investors. In the following paragraphs we will try to argue that it is possible to greatly increase the frequency of financial reporting without a significant increase in the preparation effort. Also, a method for the electronic delivery of financial information will be discussed. 2 POSSIBILITY OF PAPERLESS ACCOUNTING In the early stages of the computerized era it was easy to be convinced that we are approaching the so called "paperless society," where the use of the paper for the commerce would be greatly reduced. Ironically, computers, with their vast ability of printing reports and documents, increased the paper usage. It is assumed that paper usage will grow at least until the end of this decade (Rifkin, 1995, p. 450). What are the reasons for such an increase in paper usage despite the fast growing computerization? Essentially, paper is preferred by readers. Reading from a computer screen is not convenient. Paper is accessible and easy to read. Only during the last few years has significant progress had been made in transferring documents electronically within a company on the organization's network, usually local area networks (LAN) and between companies and individuals on wide area networks, mainly via INTERNET. Still, these links for retrieval and transmission of documents are awkward to use and require technical skills. Since security issues are still plaguing computerized networks, the users are reluctant to make themselves dependent on computerized documents. At the same time the printing of computerized data in a high resolution and even color hard copy is getting easier and cheaper. The largest maker of printers "Hewlett Packard is shipping monthly almost 1 million laser and ink-jet printers" (Rifkin, 1995 p. 47). Despite this paper glut the base for electronic transactions is being expanded. Banks and software companies are introducing the second time around, easier systems for electronic banking. The proliferation of PC's and increased ease of use of INTERNET has drawn over 100 million estimated users, as of year 2000. The internal electronic mail system is used by virtually all large companies and institutions. The document imaging technology, which converts paper documents into digital form, makes significant inroads into insurance, banking, and other paper intensive industries. And for years some operations, such as electronic money transfers, have been for the most part "paperless." Another application that could operate in a similar manner, without paper is financial reporting. Several large corporations, such as General Motors or Microsoft, post their financial statements on their Web sites. Although this information may be helpful to investors, the usage of such sites may be cumbersome to investors since each site is organized in a different fashion making the search time consuming. Furthermore, such sites may post only financial statements and skip the supplemental information, such as the SEC fillings. A shareholder having twenty stocks will have to access twenty sites, sometimes several times if the reports were not released yet. The clearinghouse would have a send emails informing registered shareholders that their companies reports were posted or just email the financial reports and the supplemental information. This way every shareholder, small or large, will have an equal opportunity to review financial reports as soon as they are released. 3 PROPOSED METHOD FOR DISTRIBUTION OF FINANCIAL REPORTS Accounting is a prevalent computerized application in ICEIS 2004 SOFTWARE AGENTS AND INTERNET COMPUTING