May 10 2017

A pair of accounting professors has written a paper proposing a way to communicate accounting complexity.

The new measure would use interactive tags in Extensible Business Reporting Language, or XBRL, format, the technology now required by the Securities and Exchange Commission for financial filings.

The professors, Rani Hoitash of Bentley University, and his brother Udi Hoitash of Northeastern University, leveraged XBRL financial statement filings to construct a measure of Accounting Reporting Complexity. They propose that the disclosure of more accounting information captured by XBRL tags reflects greater accounting complexity. The paper will be published in a forthcoming issue of The Accounting Review, published by the American Accounting Association.

“The preparation complexity of the financial reports increases with the number of disclosed accounting concepts because preparers need to collect, categorize, store, and analyze more information and this process requires broader and more in depth knowledge of authoritative accounting standards,” they wrote.

The researchers predicted that as complexity rises, preparers and auditors will struggle to produce credible financial reports because they will be more likely to make errors or incorrectly apply accounting principles. They discovered that higher accounting complexity leads to more financial statement restatements, further internal control problems, longer delays in filing financial statements, and increased audit fees. Their research demonstrates that accounting reporting complexity can undermine the quality of financial reports filed with the SEC.

The professors believe their new measure of accounting complexity could prove beneficial to a number of different constituencies. The measure can be used internally by firms, corporate boards, and audit committees to weigh the complexity of their own firm relative to similar firms in the industry. That information can then guide the allocation of enough resources to the accounting function to control financial reporting risk, helping firms avoid negative financial reporting consequences.

The new measure could also be used by auditors during the risk assessment process and fee negotiation process, especially around new client acceptance decisions. Investors could especially benefit from using such measure as an index of the reliability of the reported numbers and to assess the relative difficulty to predict future firm performance. That can help investors make better choices that fit their risk appetite.

[Accounting Today]