4thWorld Continuous Auditing and Reporting Symposium
April 18th and 19th, 2002
Salford University, Greater Manchester, England
Please note - this paper is currently in draft form. All comments gratefully welcomed and acknowledged. Please do not quote without authorization.
Sunday, 22 April 2018
The Audit of Corporate Reporting on the Internet :
Challenges and Institutional Responses
The use of the Internet technology for corporate reporting is now a well-established activity in many countries that have developed securities markets (Lymer and Tallberg 1997; Deller, Stubenrath, and Weber 1999, Pirchegger, Schader, and Wagenhofer 1999; IASC 1999; Trites 1999; FASB 2000). From a supply perspective, it is now effectively a rule that any large corporation in the world wishing to build an international profile or tap international sources of funds must have a corporate Website that includes an investor relations component. From a demand perspective, investors increasingly rely on corporate Websites for periodic and annual financial statements and also for press releases, speeches, investor conference calls as well as links to product and other information. This range of corporate reporting is part of the complex web of mandated and voluntary disclosure to stakeholders (FASB 2000, 2001).
Whilst the use of the Internet is widespread, the regulation and creation of standards specifically aimed at Internet Financial Reporting (IFR), and particularly at the audit of such reporting, is limited (IASC 1999). This is not to say regulation in this area does not exist, as we shall see in this paper, but that what does exist is not in a focused form as would most easily support development of this area. This paper addresses one are of these standards – the role of the auditor in the provision of online financial information.
The role of the external audit in the promulgation of corporate financial reporting has been challenged from a number of perspectives including scope, coverage and technology. Such issues include the role of the audit function associated with IFR, the validity of the traditional boundaries of the audit function, and the appropriateness, and use, of the audit report associated with IFR. In this paper we describe and analyze these issues. Notwithstanding the recognition by the audit standards bodies that further guidance to auditors is needed, the paper concludes that the actual pronouncements so far made by the various bodies around the world reporting fall short as a response to the challenges that arise from current and future Internet technologies. We argue that particularly difficult issues will soon need to be dealt with as a direct result of the growth of online reporting activity and from current and forthcoming Internet technologies. We point in particular to the way in which users interact with IFR Websites, and the implications of this interaction, on what we term “information component” technologies such as the XML-based eXtensible Reporting Business Language (XBRL). We propose a set of institutional, standards setting and technological solutions to these issues. At the same time, we recognize that these solutions are partial only and that much research is required from both natural- and design-science perspectives (March and Smith 1995).
The remainder of this paper proceeds as follows: in the next section we set out some background to IFR and set out a range of issues that have been addressed in the literature on IFR. In Section III, we review and critique the relevant professional pronouncements on auditing and assurance of IFR. In the following section we point to a number of gaps we perceive between these pronouncements and both current and future IFR technologies. In this fourth section we also point to some technological solutions to these gaps and do so in the context of XBRL. In Section V we place these issues in the context of a continuous assurance rubric and in Section VI we make some concluding comments and examine a future research agenda.
The reporting of corporate performance has undergone a critical change in the period since the beginning of commercial use of the Internet some years ago. IASC (1999, 53) describes three stages in the way in which corporations use the Internet for business reporting. In the first stage corporations use the Internet solely as another distribution channel for their existing printed financial reports. Typically in this stage a corporation provided annual reports only, in HTML or Adobe Acrobat format. In the second stage, corporations move to disclose their information in a form with which Web browsers and search engines can readily interact. Finally, in the third stage, corporations provide not only the standard information that could be expected in a printed report, but also provide enhanced or expanded information that could not cost-effectively be produced in a print format. They may also provide interactive tools with which to analyze the information.
Over the three plus years we have seen many corporations moving along this three-stage process. Many corporations have developed detailed Investor Relations Websites containing a wide range of corporate reporting information, of which the financials are now only a relatively small part. The low cost of information provision and widespread availability offered by new Web technologies such as RealAudio has not only changed the reporting of existing types of information, but also enabled corporations to increase the range of information made available without significant increases in delivery cost. Investor relations sites now regularly contain not only annual reports, but also quarterly reports, corporate press releases, corporate presentations, white papers and links to product information, analysis tools, stock/share tracking facilities and often other features.
Whilst the annual financial statements and the audit report now play an arguably less important role in the tapestry of information transfer between corporations and stakeholders than they may have done so in the past, they continue to play a central role in maintaining the quality of such information flow, as pointed out by Arthur Levitt, recently retired Chairman of the SEC (Levitt 1999). The manner by which audit reports are transmitted to users in an IFR world remains a worthy matter for research and for professional endeavours. A fact clearly demonstrated by recent corporate failures (such as Enron) and the market/public reaction to these failures.