FINANCIAL REPORTING ON THE INTERNET

1
Internet Financial Reporting
By Pak-Lok Poon, Ph.D., CISA, CQA, MIEEE, MACM,
David Li, MBA, CPA, and Yuen Tak Yu, Ph.D., MIEEE, MACM
he Internet has spawned a marketing revolution, providing an innovative way for
communicating with and selling to consumers around the globe. Undoubtedly, the nature of the
products and the customer base of a firm will affect how this e-marketing approach is being
performed on the Internet.1 For the typical business-to-consumer (B2C) type of e-commerce, firms
mainly focus on the marketing of their “products” to “consumers”. In the past few years, we have
seen a new marketing application of the Internet Internet Financial Reporting (IFR). IFR refers to
the use of the firms’ Web sites to disseminate information about the financial performance of the
corporations. In this new approach, firms are using the Internet to market their “companies” to
“shareholders” and “investors”. In IFR-firms (that is, firms that have implemented IFR), the
marketing activities are no longer limited to the products, and the firms’ Web sites are not solely
dedicated to ordinary consumers.
T
The implementation of IFR has created new challenges to management and internal auditors who
are responsible for establishing and reviewing the necessary controls, respectively. This article serves
to initiate some discussions on this matter. Based on studies in the US, the UK, and Ireland by others
and our recent survey in Hong Kong, we identify some key issues that management and internal
auditors should attend to if their firms have implemented IFR or are going to do so.
Internet Financial Reporting in the US, the UK, and Ireland
Ashbaugh et al. have performed a survey study that involved a sample of 290 firms in the US
between November 1997 and January 1998.2 Their study produced the following major findings:
(a) Whilst 70% of the samples were IFR-firms, the financial information reported by these firms
varied substantially in the timeliness of online reporting, and hence its usefulness.
(b) The usefulness of a firm’s IFR depends on how easy it is to access the online financial
information, the amount of this information reported, and whether users can download or
analyze this information.
Ettredge et al. have also reported in 2001 the findings of their study of IFR in the US.3 They
have analyzed a total of 203 Web sites. Their study suggests that the selection of the financial data
2
items to be reported on a firm’s Web site was determined by the relative sophistication of the firm’s
particular user base. The number of professional stock analysts that follow the firm was positively
associated with relatively objective, more extensive information, such as same-day stock prices. On
the other hand, the number of retail investors (individuals investing for their own accounts) was
positively associated with relatively subjective, more abbreviated information, such as discussion of
the advantages of owning the firms’ stock that contains management interpretation. (It was assumed
that retail investors were generally less financially sophisticated.)
A survey of the top 50 firms (in market capitalization) in the UK by Lymer
4 in 1997 found that:
(a) 60% of the samples have implemented IFR.
(b) The most common financial information on Web sites was unaudited interim accounts, which
appeared in 57% of the IFR-firms. A plausible explanation is that firms attempted to
distribute the latest information available about their activities.
(c) 96% of the IFR-firms made their online financial information available not farther than one
hyperlink from the home pages of their Web sites. This high level of accessibility indicated
that IFR-firms considered the information to be of significant interest to visitors to the sites.
In Ireland, a similar study by Brennan and Hourigan in 1998 involved 91 public companies listed
on the Irish Stock Exchange, together with 15 commercial semi-state companies.5 They found that,
on average, 65% of the samples were IFR-firms. In addition, they revealed that:
(a) The location of online financial information was not always obvious. For example, in some
IFR-firms, the financial information was inappropriately placed in the press release area.
(b) In many sites, the related Web pages are not connected by means of hyperlinks. The
provision of hyperlinks for related Web pages would, of course, be very useful in navigating
among related online financial items.
(c) The format and contents of financial information were generally not adapted to the new
reporting medium. Most firms organized information in “pages” rather than “screens”, and
users had to scroll back and forth through large volumes of data to assemble information.
Internet Financial Reporting in Hong Kong
Motivated by the growing popularity of IFR in the western countries, we have performed a
survey study in April 2002 with an aim to better understanding the current IFR implementations in
Hong Kong,6 which is one of the prominent financial centers in the world. It would be of interest to
know how well developed the implementation of IFR has been in Hong Kong, where the use of the
Internet to disseminate financial information is presently on a discretionary basis.
3
We surveyed firms that were the top 100 stocks listed in the Stock Exchange of Hong Kong
Limited (in terms of average market capitalization in the past 12 months and aggregate turnover for
the past 24 months). These 100 firms constituted the Hang Seng Index (HSI), which is a well known
barometer of the Hong Kong stock market.
Our major findings are:
(i) Amongst the 100 firms studied, 94 of them have established their own Web sites whereas the
remaining 6 have not. Of the 94 firms with established Web sites, 87 have provided online
financial information of various types and extent. Even considering the difference in time
periods between our study and those surveys
25 described in the previous section, the
percentage of IFR-firms in Hong Kong (87%) is still at least comparable to that in the US
(70%), the UK (60%), and Ireland (65%). Table 1 exhibits the percentages of IFR-firms
across some major types of industrial sector as defined by HSI. The table indicates that IFR
implementations are popular across all types of industry under study.
* * * Insert Table 1 here * * *
(ii) The online financial information provided by the 87 IFR-firms includes annual reports,
interim reports, annual or interim results, real-time share price movements, and historical
dividends per share. Table 2 shows the distribution of each of these five types of information
in the IFR-firms. The table indicates that the three most common types are annual reports,
interim reports, and annual or interim results. This point is in line with finding (b) by Lymer
4
regarding the popularity of the dissemination of unaudited interim accounts in firm’s Web
sites. Additionally, the provision of interim reports and results, and real-time share price
movements, as shown in Table 2, suggests that many IFR-firms have realized the importance
of timely online reporting, which largely affects the usefulness of the reported financial
information (see finding (a) by Ashbaugh et al.
2 ).
* * * Insert Table 2 here * * *
(iii) Following on finding (ii), our study reveals that most of the annual or interim reports/results
are incorporated into the firms’ Web sites in PDF format. A plausible reason for this is that it
requires a minimal effort for producing the online electronic version based on the hardcopy
version. This practice, however, will diminish the usefulness of a firm’s IFR. According to
finding (b) by Ashbaugh et al.
2, the reported financial information would be more useful if it
4
is arranged in a format that facilitates subsequent data analysis (for example, by recording the
information in an electronic spreadsheet).
(iv) In general, the higher the net profit the firm has, the higher is the chance of this firm to
implement IFR. For example, for all the selected firms whose net profits are below 500
million HK$, only 76% of them have implemented IFR. In contrast, for those whose net
profits are 500 million HK$ or more, about 96% of them are IFR-firms.
(v) The market capitalization of a firm is not observably correlated to whether the firm has
implemented IFR. However, if we consider IFR-firms alone, those with larger market
capitalization tend to provide more types of online financial information in their Web sites.
For example, only about 44% of the IFR-firms with market capitalization less than 2,000
million HK$ have provided annual reports, interim reports, and some other types of financial
information in their Web sites. On the other hand, for those IFR-firms with market
capitalization exceeding 20,000 million HK$, this percentage increases to 81%.
(vi) Many sites do not hyperlink pages, and the format and contents of financial information are
not specifically designed for the Web. This observation is consistent with findings (b) and (c)
by Brennan and Hourigan.5
Some Important Issues
Undoubtedly, IFR will become more and more popular worldwide. In November 1999, a team of
academics have prepared a discussion paper entitled “ Reporting on the Internet” for the
International Accounting Standards Committee (IASC).7 Similar initiatives related to IFR have also
been made by the US Financial Accounting Standards Board (FASB).8, 9 The major purposes of these
studies were to determine the kind of corporate (including financial) information firms are reporting
outside of financial statements, and to cast new light on the exciting possibilities and problems of the
Internet and technology on the corporate reporting universe.
The IFR implementation by firms creates new challenges to management in charge of
establishing the control framework, and to internal auditors in charge of reviewing the controls.
Lymer
4 has argued that, fulfilling the apparently straightforward model of IFR (firms provide and
users use), in practice, leads to many complex issues in four aspects: (a) what to report, (b) when to
report, (c) how to report, and (d) who is responsible to report. Based on the previous surveys
described above
25 and our study, we list a number of important issues that management and internal
auditors should pay attention to in relation to IFR, as follows.
5
What to report: The “coverage” and the “depth” of IFR have to be considered. Important
issues in this aspect include:
(Coverage) What types of financial information the firm should report online? Our study
has identified five common types of online financial information, namely annual reports,
interim reports, annual or interim results, real-time share price movements, and historical
dividends per share, as shown in Table 2. Are these types of financial information
adequate and sufficient for the variety of expected users? If not, what else should be
reported?
(Depth) Should objective or subjective financial information be reported? It has been
suggested that the relative sophistication of the users should be considered.
3
(Depth) Are users provided with features to “drill down” into reported information to
remove layers of aggregation? These features would support multiple presentations in
accordance to the use of the information. From an auditing perspective, where data can be
disaggregated to their constituent components, the auditing of GAAP faithfulness becomes
irrelevant.10 This is because the data can instead be manipulated through various GAAP
filters to produce accounts in any GAAP that may be required.
When to report: The frequency and time of reporting will depend on the type of financial
information reported. Some important issues are:
Should the interim results be reported on a quarterly or bi-annual basis?
Should the annual report (that includes the auditor report) be provided online immediately
after the completion of the annual audit exercise?
How long should the financial performance data be posted to the firm’s Web site after the
data have been officially released via the press?
How to report: In his executive statement 11, the Chief Executive of Companies House argues
that information should be delivered in such a way that customers find it most convenient to
receive and use. To achieve this end, management and internal auditors should consider the
following issues:
Are users able to download the online financial data in a format that facilitates subsequent
analysis (for example, in the form of an electronic spreadsheet)?
Is the financial information placed in the appropriate section in the firm’s Web site?
How deep from the home page of the Web site do users have to navigate in order to
retrieve the relevant financial information?
6
Is the online financial information arranged in an appropriate screen format to avoid the
need for the users to unnecessarily scroll back and forth through large volumes of data?
Are the Web pages that contain the online financial information inter-connected via
hyperlinks?
Should the eXtended Reporting Language (XBRL) be used for IFR? XBRL
makes use of the eXtended Markup Language (XML) to facilitate the sharing of business
reporting information. (XML allows information to be “marked” in such a way so as to
encapsulate not just numbers or sequences of words for display, but as objects containing
information numbers and words with attached meaning and context.10 )
Who is responsible to report: The people or the business units in the firm that are involved in
IFR will have an impact on the accuracy of the reported financial information. Typical issues
are:
Who is/are responsible for deciding which financial information should be posted online?
Who is/are responsible for posting the online financial information?
Who is/are responsible for verifying and approving the online financial information?
Conclusion
This paper has reported how IFR has been implemented in the US, the UK, Ireland, and Hong
Kong. Without doubt, the growing popularity of IFR will continue in many countries and cities, after
firms have realized the many advantages associated with it. It will be risky for the management and
internal auditors in a firm to ignore IFR. Indeed, in the interest of the users of financial information,
management and internal auditors have to provide their expertise to ensure that the electronic forms
of reporting produce quality financial information. This paper serves to initiate some discussions on
this matter, and lists some important issues that management and internal auditors should pay
attention to in relation to IFR.
Acknowledgement
The study described in this paper is funded by a Departmental General Research Grant (project
code G-T348) from the Hong Kong Polytechnic University. We are grateful to P.F. Chan and A.
Tung for their help in collecting the survey data.
7
Endnotes
1 J.W. Palmer and D.A. Griffith, “An Emerging Model of Web Site Design for Marketing,” Communications
of the ACM, vol. 41, no. 3, March 1998, pp. 4551.
2 H. Ashbaugh, K. M. Johnstone, and T. D. Warfield, “Corporate Reporting on the Internet,” Accounting
Horizons, vol. 13, no. 3, September 1999, pp. 241257.
3 M. Ettredge, V. J. Richardson, and S. Scholz, “A Web Site Design Model for Financial Information,”
Communications of the ACM, vol. 44, no. 11, November 2001, pp. 5155.
4 A. Lymer, “The Use of the Internet for Corporate Reporting A Discussion of the Issues and Survey of
Current Usage in the UK,” The Journal of Financial Information Systems, 1997.
5 N. Brennan and D. Hourigan, “Corporate Reporting on the Internet by Irish Companies,” Accounting
Ireland, December 1998, pp. 1821.
6 The study is funded by a Departmental General Research Grant (project code G-T348) from the Hong Kong
Polytechnic University.
7 A. Lymer, R. Debreceny, G. L. Gray, and A. Rahman, Reporting on the Internet. The International
Accounting Standards Committee (IASC), November 1999.
8 Electronic Distribution of Reporting Information. Financial Accounting Standards Board (FASB),
January 2000.
9 W. S. Upton, Jr., and Financial Reporting, Challenges from the New Economy. Financial
Accounting Standards Board (FASB), no. 219-A, April 2001.
10 R. Debreceny and G. L. Gray, “The Production and Use of Semantically Rich Accounting Reports on the
Internet: XML and XBRL,” International Journal of Accounting Information Systems, vol. 2, no. 1, pp.
4774.
11 Companies House, The Register, issue no. 31, Autumn 1996.
Pak-Lok Poon, Ph.D., CISA, CQA, MIEEE, MACM,
is assistant professor of the Department of Accountancy at the Hong Kong Polytechnic University. Before
joining the academic community, he was the Computer Audit Manager of Cathay Pacific Airways Limited.
Pak-Lok holds a Ph.D. degree in software engineering from the University of Melbourne. He is a Certified
Information Systems Auditor (CISA) and a Certified Quality Analyst (CQA). He is also a member of the
Institute of Electrical and Electronics Engineers Incorporated (MIEEE) and the Association for Computing
Machinery (MACM). His main research interests are IS auditing and control, e-business, software quality
assurance, and computers in education. His articles have appeared in the IS Audit and Control Journal, the IS
Control Journal, as well as various software engineering journals. He was a co-recipient of the Michael
Cangemi Best Book/Article Award from the Information Systems Audit and Control Association in 2001. His e-
mail address is [email protected]
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