Materiality Beyond Paper-Paradigm Financial Statements
Twenty years ago or so, J. Frank Brown (1), then PricewaterhouseCooper’s Global Leader, Assurance and Business Advisory Services, said this about the state of reporting and assurance in the Preface to the book The ValueReporting Revolution:
“Clearly, we need a more expansive, flexible approach to corporate reporting and auditing. One that acknowledges that the world has grown more complex and demanding. One that recognizes that in today’s world, aggregative, reductive methods alone do not impart a solid understanding of value, opportunity, and risk. A new approach must be forged through creative discussion and intense debate among all parties involved, worldwide. Doing that will require leadership.”
A few years later, many of the same contributors put out Building Public Trust, building on the first book. And there have been sparks of leadership in bringing together the stakeholders to discuss what reporting is necessary and helpful for stakeholder decision making. I have not seen parallel efforts related to assurance on new reporting.
IAASB standards do take a broad point of view of things, even if still focused on “financial statement” audits. ISA (International Standard on Auditing) 320: Materiality in Planning and Performing an Audit is an important starting point. ISA 320.3 speaks to “reporting frameworks” providing a “frame of reference” “in determining materiality for the audit”. Without such a discussion, certain characteristics are provided by ISA 320.2 to provide the auditor with such a frame.In my words:
1. Would misstatements individually/in aggregate reasonably be expected to influence economic decisions?
2. The size, the nature, or both may be relevant.
3. The needs of the many outweigh the needs of the few.The topic of materiality has been raised in the Committee of European Auditing Oversight Bodies (CEAOB) guidance for auditors related to the European Single Electronic Format (ESEF) (2) Accountancy Europe has likewise delivered a briefing paper related to Independent Assurance on the European Single Electronic Format. (3)
Related to XBRL, and in particular Inline XBRL (iXBRL), I have started with a four-layer model.
1. Content – what is reported, in print, online, within HTML, within XBRL2. Visual Presentation (HTML) – how is the content offered to people
3. XBRL (or metadata-oriented/database) – how is the content offered to machines4. Inline additions to HTML and XBRL (the intersection of XBRL and HTML, and additional artefacts not considered in layers 1-3)
This is a proxy for materiality as part of any data-oriented or metadata assisted reporting beyond the paper paradigm.The guidance for Europe seems to be focused on the “black box” … the Inline XBRL is not itself important, just the HTML for people, and the resultant XBRL instance document that is transformed from the Inline XBRL. But people can make judgements on the Inline XBRL itself.
Where will decisions be made based on more than the HTML and the resulting XBRL instance? What is UNIQUE to iXBRL?Will specific visible text without metadata behind it (because it is duplicated visibly and tagged elsewhere, or included in the hidden section) be an issue?
What are the needs of the many in layer 4 NOT encompassed in layers 1-3?
(1) I believe Mr. Brown is currently Managing Director and the Chief Operating Officer at General Atlantic, a global growth equity firm he joined in 2011.
(2) https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/191128-ceaob-guidelines-auditors-involvement-financial-statements_en.pdf
(3) https://www.accountancyeurope.eu/wp-content/uploads/191217-ESEF-assurance-paper-FINAL_update_2.pdf
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