Is financial reporting still relevant?

Technology, and all its facets, has become central to research on whether corporate financial accounts are still important to investors in their decision processes.

A lively panel discussion at CPA Congress Melbourne on the future of financial reporting explored how a rapidly-changing business environment heavily influenced by technology –from cloud computing to cryptocurrencies – is driving the need to keep accounting standards relevant.

Audited financial accounts remain relevant to investors in their investment decisions, but to what extent they will do so into the future was a hot topic of debate at CPA Congress Melbourne.

Technology, and all its facets, has become central to research on whether corporate financial accounts are still important to investors in their decision processes. The answer depends on who you ask.

Professor Feng Gu, chair and associate professor, accounting and law at the University of Buffalo School of Management, said his research in the US showed accounting standards had not kept up with financial information needs of investors in business built on technological changes and innovation.

Accounting standards behind the times

Gu is co-author, with Professor Baruch Lev, of the controversial book The End of Accounting and the Path Forward for Investors and Managers, which argues there is a growing mismatch between reported financial information and US company share prices, with financial reporting not adequately reflecting corporate investment in R&D and intangible assets.

He told CPA Congress that company accounts were less relevant and now accounted for only 5 per cent of the information used by US investors in their decisions. Analyst and media reports, and management earnings forecasts, were much more relevant and reliable than audited accounts, he said.

However, Michael Davern, professor of accounting and business information systems at the University of Melbourne’s Department of Accounting, argued that audited financial accounts remain highly relevant to investors, and are complemented by all the additional information that is now available.  His views are backed up by CPA Australia-funded Australian research.

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New technology and accounting

Davern told the audience that Australian accounting standards had kept pace with technological change.

“Yes, we do have new technologies and those technologies are radically changing the world, but we don’t expect them to radically reinvent the fundamental economic principles of demand and supply and the way markets operate,” Davern said.

“So, why should we expect them to radically change the fundamental accounting principles that underlie what we’re doing in those standards?

“Yes, we need new standards to try and deal with some of the particulars of the complex situations that arise, but to say that they’ve lost relevance and to throw them all out would be a big mistake, because those underlying principles, they’re what we’ve always valued. They haven’t changed.”

Message to market

Australian Accounting Standards Board (AASB) member Alison White, a partner at Deloitte, said that as businesses become more complex, a challenge is how they convey their messages to the market.

“Those disclosures need to be simple and relevant to the business. That’s something that Australia has done very well.

“From our perspective Australia is really lucky that, together with international accounting, we have principle-based accounting as opposed to rules-based accounting,” White added. 

“That is why our standards have been able to stand the test of time, and that’s why we’re still able to produce financial statements that are relevant to our environment because we are using those principle-based standards.

“There is always something to do. But one thing that’s really important to remember is that if we change accounting standards too often that actually creates instability in the economy.”

Read next: Are financial statements still useful?

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December/January 2022
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