Applying Disruptive Technologies to Audited Financial Statements
Janek Ratnatunga · 2016
IntroductionA financial statement audit is the examination of an entity's financial statements and accompanying disclosures by an independent auditor. The auditor's report must accompany the financial statements when they are issued to the intended recipients. The principal recipients are the shareholders, especially of listed companies where the audited financial statements are attached to the Annual Report of the company. In today's economy, much of the shares in listed companies are held by large shareholder investment groups such as pension funds. However, there are a significant amount of ordinary (retail) shareholders. Both these shareholder groups depend of the information provided in the financial statements for managing their portfolios.Audits have become increasingly common as the complexity of the two primary accounting frameworks, Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), have increased; and because there have been an ongoing series of disclosures of fraudulent financial reporting by major companies.The problem is that Audited Financial Reports, that have not changed in their presentation format, or in their method of delivery, since the dawn of the industrial era or the age of the corporation (about 1850) when tangible assets such as land and machinery were the engines of growth. As a result, the Balance Sheet still shows that it is mainly these tangible 'non-current' assets' that drive business value.Financial Statement PresentationToday's big businesses are knowledgeeconomy companies such as Google, Apple, Facebook, Microsoft, Uber, Air BB directors' reports; operating and financial reviews and increasingly corporate social responsibility (CSR) reports.Some listed companies around the world do present their Financial Statements in the Excel format on their corporate web-pages, but without any equations, only numbers. Therefore, before any analysis can be done, all the equations have to be inserted at appropriate places (e.g. the addition of all current assets into a 'Current Assets' sub-total, that itself then has to be added to the 'Total Assets' total). Further, all links to the numbers appearing in the Notes will similarly need to be inserted. This is despite the fact that the final Profit & Loss account and Balance Sheet would have most likely have been done on a package (e.g. SAP, Oracle Financials, etc.) that can be downloaded as an Excel file with the equations).A majority of companies, however, provide only paper (or pdf) based Annual Reports. Once received in paper (or pdf) form, or as part of a printed and bound document, very little analysis can be done with these audited financial reports.Financial Statement AnalysisIf the intended recipients want to analyse the reported numbers beyond the operating and financial reviews provided in the Annual Report itself; they would first need to re-key the numbers in the profit and loss (PL balance sheet (BS); cash flow (CF) statement and 'notes to the accounts ' into excel spreadsheets. …