With live reporting, there is a strong possibility that ridiculously large $13 billion settlements paid by JPMorgan can be avoided and root causes of such events can be nipped in the bud. Maybe that’s why Jamie hates cryptocurrency.
The first quarter of every year is usually the most stressful for finance teams and auditors of listed companies. Companies are required to submit their annual financial statements endorsed by auditors to report their annual performance to shareholders.
Auditors are utilized to analyze financial statements and provide an objective opinion on the fairness, accuracy, and quality of the statements - all combined to produce an audit report. This feedback is issued after ensuring compliance for each financial statement with the financial reporting framework as per ISA 700- Audit report guidelines.
An endorsement by the auditor is not enough; the company also issues a statement of internal controls over financial reporting, reports of independence of key management personnel and additional internal safeguards. These reports are all aimed at monitoring and growing the corporation in a controlled way.
However, policy makers have handicapped businesses from growing. Regulatory requirements and tax policies have driven up the cost of business, driving corporate capital abroad, noted JPMorgan Chase CEO Jamie Dimon in a recent comment to CNBC.
To understand what the issues are with this it is useful to examine the reporting requirements needed.
There are two forms of reporting – management reporting which is internal, and statutory/financial reporting which is external. The evolution of accounting software has enabled management to get live management reporting where all functions of an organization can be linked in an Enterprise Resource System.
Statutory reporting, however, has not evolved so much. While ERPs have helped the financial reporting process, disclosure requirements are extremely time-consuming and require large resourcing to execute properly.
Statutory reporting requires a lot of input from the auditor, as they are required to exercise their judgment on the financial statements prepared by management.
Auditor judgment is particularly critical in areas where estimation is involved, such as accruals of expenses. These are time-consuming exercises and are currently feasible on an annual basis.
Areas of estimates, despite being audited, leave room for financial manipulation as noted in this Harvard business review article. The article discusses how auditors are willing to let management get away with over provisioning to a certain extent, effectively consenting to allow reporting of lower profits.
In the current scenario, real-time reporting would make life extremely difficult for both auditors and companies. It would drive up costs and require a huge investment in human resources.
The best current example of live reporting is of banks, whereas per the Federal bank reporting manual, banks are required to submit financials from frequencies ranging from daily to annual. Because of this and the technical expertise required to audit banks, audit costs are usually higher than other businesses.
The evolution of blockchain technology has optimists believing that live reporting will be possible, with an integration of both the regulator and the auditor to the system. While initially, the infrastructure costs might be high, in the long run, this technology and foundation will drive costs down. It is essential that the three key stakeholders mentioned above are on the same page.
For more details on this groundbreaking development visit Auditchain.com.
