Tomorrow’s Audit Opinion – Confidence, Confidence Game or Confidence Levels?
The audit opinion is largely perceived as black and white, go and no-go. But most decision makers understand that waiting for black and white confidence may give you information too late. American political and retired four-star general Colin Powell is noted in decision-making circles as remarking that a decision made after having 70% confidence means the window of opportunity has already started to close.
More financial professionals than I may have expected had an interest in physics as part of their higher education. I began not as a business person but as a math and science person, and started my undergraduate career as an astrophysicist major. My favorite prof was a top top quark guy, the boss of the boson. I suppose it is no surprise, therefore, that I might apply something from the world of physics to the world of accounting.
As I continue through my list of goals I had (and still have) for XBRL and related technologies from my August 18 post, one of them definitely came from the parallel world of the sciences: to enable stochastic assurance with varying materiality, permissible risk and other attributes.
Today, there are four basic types of audit opinions: unqualified/unmodified, qualified, adverse and disclaimer (AS 3101, ISA 705, AU-C 705). There’s not much room for confidence levels. If you hear about a political poll or a laboratory study, they will report it with a margin for error … you can have a margin of error of plus or minus 3% at a 92% confidence level.
This is where the physics comes in. I started expounding in 2006 the idea of looking to physics for a parallel to the move from periodic business reporting to real-time/continuous reporting. I likened it to the challenge faced a century ago by Classical Physics as science was going quantum. When you moved subatomic, Newton and Maxwell and the other pillars didn’t stand up. And so folks like Albert Einstein, Niels Bohr, Max Planck, Werner Heisenberg, and Erwin Schrödinger arose.
In the new subatomic world of physics, the introduction of probabilities was essential. Can it be applied to better deal with business reporting? If you lock down the Balance Sheet, you’ve lost the performance …
And so the idea that XBRL could be used to note different confidence levels on different components of a business report for more frequent/continuous/real-time reporting is born.
Do you want to rely on this Accounts Receivable balance? Today, you can rely on it with a confidence level of 73%, plus or minus 15%. In a month, it will be 79%, plus or minus 8%, when we’ve seen if there’s been any push back and the payment came in. In three months, it will be 87%, plus or minus 3%.
And XBRL-communicated assurance would make this possible.
Other questions left behind, other than can this be a possibility:
In the absence of other forces, could data continue its course from transaction to end report at the speed of business? Was information friction the primary force acting on that data? And was force related to materiality, risk and the severity of rules?
I was not able to come up with the counterpart of (an electrical flow has an associated magnetic field, and vice versa) for the flow of business data. But I have a feeling there is one.
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