The 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, there has been 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 no longer are limited to the products, and the firms' web sites are not dedicated solely to ordinary consumers.
The implementation of IFR has created new challenges for management and internal auditors who are responsible for establishing and reviewing the necessary controls, respectively. This article serves to initiate discussions on this matter. Based on studies in the US, the UK, Ireland and Hong Kong, key issues that management and internal auditors should attend to if their firms have implemented or plan to implement IFR are identified here.
Internet Financial Reporting in the US, the UK and Ireland
In a 1999 article in Accounting Horizons, the authors discussed a survey that involved a sample of 290 firms in the US between November 1997 and January 1998.2 Their study produced the following major findings:
While 70 percent 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.
The usefulness of a firm's IFR depends on how easy it is to access its online financial information, the amount of this information reported and whether users can download or analyze this information. A 2001 article in Communications of the ACM reported the findings of another study of IFR in the US.3 It analyzed a total of 203 web sites. The study suggests that the selection of the financial data 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 a firm's stock that contained management interpretation. (It was assumed that retail investors generally were less sophisticated financially.) A survey of the top 50 firms (in market capitalization) in the UK by Lymer 4 in 1997 found that:
Of the samples, 60 percent have implemented IFR.
The most common financial information on web sites was unaudited interim accounts, which appeared in 57 percent of the IFR firms. A plausible explanation is that firms attempted to distribute the latest information available about their activities.
Of the IFR firms, 96 percent made their online financial information available not farther than one hyperlink from their web sites. This high level of accessibility indicated that IFR firms considered the information to be of significant interest to their site's visitors. 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 percent of the samples were IFR firms. In addition, they revealed that:
- The location of online financial information was not always obvious. For example, in some IFR firms, the financial information was placed inappropriately in the press release area.
- On many sites, the related web pages were not connected by means of hyperlinks. The provision of hyperlinks for related web pages would have been useful in navigating among related online financial items.
- The format and contents of financial information generally were 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 western countries, the authors of this article performed a study in April 2002 to better understand the current IFR implementations in Hong Kong.6 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.
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) were surveyed. These 100 firms constituted the Hang Seng Index (HSI), which is a well-known barometer of the Hong Kong stock market.
The major findings were:
Among the 100 firms studied, 94 of them have established their own web sites, whereas the remaining six have not. Of the 94 firms with established web sites, 87 have provided online financial information of various types and extent. Considering the difference in time periods between our study and the previously described surveys , the percentage of IFR firms in Hong Kong (87 percent) is still at least comparable to that in the US (70 percent), the UK (60 percent) and Ireland (65 percent). Table 1 exhibits the percentages of IFR firms across major industrial sectors, as defined by HSI. The table indicates that IFR implementations are popular across all types of industries under study.
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 Lymer7 regarding the popularity of the dissemination of unaudited interim accounts on firms' 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.
Most of the annual or interim reports/results were 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. As stated earlier in the findings of the UK study, the reported financial information would be more useful if it were arranged in a format that facilitates subsequent data analysis (for example, by recording the information in an electronic spreadsheet).
In general, the higher the net profit the firm has, the higher the chance the firm can implement IFR. For example, of the selected firms whose net profits are below HK $500 million, only 76 percent of them have implemented IFR. In contrast, of those whose net profits are more than HK $500 million, about 96 percent of them are IFR firms.
The market capitalization of a firm is not observably correlated to whether the firm has implemented IFR. However, if only IFR firms are considered, those with larger market capitalization tend to provide more types of online financial information on their web sites. For example, only about 44 percent of the IFR firms with market capitalization less than HK $2,000 million have provided annual reports, interim reports and other types of financial information on their web sites. On the other hand, for IFR firms with market capitalization exceeding HK $20,000 million, this percentage increases to 81 percent.
Many sites do not hyperlink pages, and the format and content of financial information are not specifically designed for the web. This observation is consistent with the Ireland survey.
Undoubtedly, IFR will become increasingly popular worldwide. In November 1999, a team of academics prepared a discussion paper titled "Business Reporting on the Internet" for the International Accounting Standards Committee (IASC).8 Similar initiatives related to IFR also have been made by the US Financial Accounting Standards Board (FASB). 9, 10 In large part the purposes of these studies were to determine the kind of corporate (including financial) information firms report 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. Lymer11 has argued that fulfilling the apparently straightforward model of IFR (firms provide, users use), in practice, leads to many complex issues in four aspects:
- What to report
- When to report
How to report
Who is responsible to report Based on the previously described surveys, a number of important issues to which management and internal auditors should pay attention follows:
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 should the firm report online? This 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.12 - 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 with 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.13 This is because the data can be manipulated instead 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 biannual basis? - Should the annual report (which 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 released officially via the press?
How to report: In his executive statement,14 the chief executive of Companies House said 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 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 on the firm's web site? - How deep from the home page of the web site do users have to navigate to retrieve the relevant financial information? - 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 interconnected via hyperlinks? - Should the extended business 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 as to encapsulate numbers or sequences of words not only for display, but also as objects containing information, numbers and words with attached meaning and context.15)
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?
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 of 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 discussions on this matter, and lists important issues that management and internal auditors should pay attention to in relation to IFR.
The study described in this paper was funded by a departmental general research grant (project code G-T348) from Hong Kong Polytechnic University. The authors are grateful to P.F. Chan and A. Tung for their help in collecting the survey data.
1Palmer, J.W. and D.A. Griffith, "An Emerging Model of Web Site Design for Marketing," Communications of the ACM, vol. 41, no. 3, March 1998, pp. 45-51
2Ashbaugh, H., K. M. Johnstone and T. D. Warfield, "Corporate Reporting on the Internet," Accounting Horizons, vol. 13, no. 3, September 1999, pp. 241-257
3Ettredge, M., 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. 51-55
4Lymer, A., "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
5Brennan, N., and D. Hourigan, "Corporate Reporting on the Internet by Irish Companies," Accounting Ireland, December 1998, pp. 18-21
6The study is funded by a departmental general research grant (project code G-T348) from Hong Kong Polytechnic University
7Lymer, A., 1997
8Lymer, A., R. Debreceny, G. L. Gray and A. Rahman, Business Reporting on the Internet, The International Accountings Standards Committee (IASC), November 1999
9Electronic Distribution of Business Reporting Information, Financial Accounting Standards Board (FASB), January 2000
10Upton Jr., W.S., Business and Financial Reporting, Challenges from the New Economy, Financial Accounting Standards Board (FASB), no. 219-A, April 2001
11Lymer, A., 1997
13Debreceny, R., 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. 47-74
14Companies 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 Hong Kong Polytechnic University. Before joining the academic community, he was the computer audit manager of Cathay Pacific Airways Limited. Pak-Lok holds a doctorate in software engineering from the University of Melbourne, Australia. His main research interests are IS auditing and control, e-business, software quality assurance and computers in education. He was a co-recipient of the Michael Cangemi Best Book/Article Award from ISACA® in 2001. His e-mail address is email@example.com.
David Li, CPA
is lecturer in the department of accountancy at Hong Kong Polytechnic University. Prior to joining the university, he had worked in the industry for more than 10 years. One of his major work experiences was in the implementation of enterprise resource planning systems. He graduated from the University of Iowa with a master of business administration in corporate finance, and the University of Texas at Austin with a bachelor of science degree in computer engineering. He is a member of the American Institute of Certified Public Accountants (AICPA) and the Hong Kong Society of Accountants (HKSA). He also is serving as a member of the Information Technology Committee of the HKSA. His e-mail address is firstname.lastname@example.org.
Yuen Ta Yu, Ph.D., MIEEE, MACMK
is assistant professor of the department of computer science at City University of Hong Kong. His research interests include software engineering, software testing, e-commerce and computers in education. Yuen Tak received his bachelor of science degree in mathematics and certificate in education from the University of Hong Kong, his master's in computing and his doctorate in computer science from the University of Melbourne. He was a co-recipient of the Michael Cangemi Best Book/Article Award from ISACA® in 2001. His e-mail address email@example.com.