Digital financial reporting: An Australian failure
A failure to adopt digital financial reporting has left Australia stuck in the 20th century.
Way back in February 2020 (yes, even before COVID-19) the Parliamentary Joint Committee on Corporations and Financial Services issued its interim report on the Regulation of Auditing in Australia. One very significant recommendation was the development of a digital financial reporting (DFR) capability in Australia. But this was hardly a novel or blinding insight!
All major economies in the world have moved to require DFR. In the US it has been mandated for SEC registrants since 2009, quickly becoming the desired format for financial statement users. From 2010-2015, financial information on the EDGAR database maintained by the SEC was accessed 2.3 billion times, with over 90 per cent of these by computers (robots). This couldn’t occur without digital financial reports.
In the UK, Companies House now requires DFR by all companies large and small. Even more striking, this month the UK Financial Reporting Council released a viewer allowing users to more easily access databases of financial reports. And it's free!
In the European Union DFR has been mandated since January 2020, while other major economies and markets where DFR is now mandated include Japan, South Korea and Singapore. Collectively, countries mandating DFR represent over 90 per cent of global market capitalisation. The rest of the world has moved financial reporting into the 21st century. But in Australia, we remain well and truly stuck in the 20th century. Why?
The benefits of DFR for financial market participants are well-documented and unchallenged. The technology is readily available and inexpensive. A taxonomy to support DFR in countries following International Financial Reporting Standards (this includes Australia) is issued by the International Accounting Standards Board. The format of digital financial reports is simpler now iXRL, a second-generation technology, has evolved.
One might expect Treasury to have been alert to the importance of DFR. An absence of reliable and accessible financial information creates the risk of Australian capital markets being overlooked by international investors. Under the ASIC Act, the Financial Reporting Council in Australia is supposed to provide oversight of financial reporting to minimise the cost of capital for Australian firms. At its December 2021 quarterly meeting, the FRC “provided in-principle support for mandatory digital financial reporting, and indicated it would work with ASIC and the AASB”. It is now 2025 but we can’t find any evidence of resulting actions in subsequent meeting summaries.
Then there is ASIC. Financial reporting, a fundamental component of efficient and effective capital markets, seems to have fallen off their radar. We challenge readers to try to identify responsibility for this area on the ASIC website. Periodic rumblings by a commissioner about areas of accounting are not a substitute for pro-actively leading such a fundamental development as DFR. Yet DFR has the potential to ‘revolutionise’ the way financial reports can be reviewed, including by ASIC!
Is anything ever going to happen to bring Australian financial reporting into the 21st century? If talking about something made it happen, then we would have a first-rate DFR system in this country. But talk, in this case, truly is cheap.
We urge whoever the government might be after May this year to engage seriously with regulators and preparers from other parts of the world who have overseen and participated in the successful implementation of digital financial reporting and make something happen! It has the support of the accounting profession and preparers but cries out for appropriate regulatory leadership.
A child born in February 2020 (the release date of the PJC Report) would have started school last month. We fear those same children will be university graduates before the government, Treasury, the FRC and ASIC get off their collective hands and do something about making digital financial reporting happen in Australia.
Professor Peter Wells and Professor Stephen Taylor, UTS Business School, University of Technology, Sydney
