ESEF Quality Series: Getting the Quality of your ESEF Reporting Right – A Step by Step Guide

November 23, 2020by Team IRIS CARBON

High-quality financial disclosures don’t just make for good corporate governance or good regulatory compliance. They also help companies earn a higher market value for themselves.

The positive correlation between the quality of financial reporting and a company’s market value has been well established by a number of studies – across geographies, time periods, and company sizes.

While being on the right side of market perception is something most companies want, maintaining quality in financial statements is easier said than done. And not necessarily because getting top quality means paying top dollars. More often than not, it is simply because companies haven’t used the tools, processes, and standards that are now so freely available and easy to implement to up their game on their financial reporting quality front.

Of course, there are several elements that contribute to the quality of financial reporting – completeness of reporting (whether good news or bad), accuracy and consistency across the information reported, readability, and easy navigability of financial reports, to name a few. Quality cuts across many of these elements and reports are categorized as good quality or bad based on a perception of where they stand on these attributes.

Against the backdrop of the European Securities and Markets Authority’s (ESMA) new ESEF mandate for the reporting of annual financial statements in a digital format called inline XBRL, IRIS conducted research to baseline the quality of annual financial statements of European listed companies, and understand if the XBRL standard that ESMA had mandated could be leveraged by firms to raise the quality of financial reporting.

The research was focused on two aspects of quality of financial reports that XBRL could measure i.e. accuracy and consistency of financial reports

To conduct this research, IRIS selected a sample of 708 listed European firms, across 27 countries and 27 sectors, with a well-balanced representation of large, medium, and small firms. Based on the latest available annual report for these firms, the IRIS research team used the ESMA taxonomy to map the primary financial statements of these companies – income statement, balance sheet, cash flow statement, and stockholders equity statement – to iXBRL format (simulating the scope of the ESEF Phase 1 mandate).

50 XBRL experts worked on the research project for over 10,000 cumulative hours – and over 101370 data points from these annual reports were mapped to XBRL. This meant that these data points could now be read by machines.

XBRL-based validation rules were run on this now converted digital data.

The summary findings of the 2020 IRIS Research Study on Quality of Annual Reports of EU Listed Companies are:

  • 10 % of companies had numeric errors in their primary financial statements
  • 74 % of these errors were basic totaling mistakes
  • A surprisingly significant 61% of the companies which had errors were mid and large-cap (defined as firms with market cap > 100 mn Euro as on June 1, 2020)
  • Two-thirds of the firms with errors had been audited by one of the Big 4 accounting firms.

One simple fact that emerges as an outcome of this study: The mere act of converting a financial report into a machine-readable standard like XBRL can positively impact its quality. Because the data can be easily validated – and what ESMA intends as a benefit to regulators can actually be leveraged by companies to benefit themselves as well.

Against this backdrop, we focus both on the learnings from the IRIS Research Study and on the ESMA ESEF iXBRL mandate to draw lessons and provide practical tips on how companies can increase the quality of their financial reports easily.

Watch this space for our upcoming article on The Power of Software, where we will discuss how you could wield technology to help you achieve quality in your financial reporting.

To Access the Complete IRIS Research Study or to Get a Quality Assessment of your Annual Report.