Navigating vs. Searching

The information highway is being sold to us as delivering information, but what it's really delivering is data. Numbers, bits, bytes, but damned little information. Unlike data, information has utility, timeliness, accuracy, a pedigree. Information, I can trust...What's missing is anyone who will say hey, this is no good. Editors serve as barometers of quality, and most of an editor's time is spent saying no.

(From a New York Times interview with Clifford Stoll)

Accounting is a science which aims at the systematic presentation of business facts...

(From Higher Accountancy, Principles and Practice, Henry Parker Willis, 1916)

Some see value in the ability to search electronic information for particular words or ideas. That is an advantage, to be sure, but any simple word-processing program can search. The user who searches a bank's annual report for, say, derivative, will find the word in dozens of places. The search, however, provides data. Mr. Stoll's transformation from data to information is missing. Navigation tools, in contrast, are the 1990s answer to Mr. Willis' vision of accounting as a "systematic presentation." They can connect the pockets of data together an allow a company to provide a coherent business story.

The Financial Accounting Standards Board (FASB) recognizes the importance of technology in the future of financial reporting. We know that integrated data systems have revolutionized internal reporting. But when we look at financial information on the Internet's World Wide Web (WWW), we are reminded of one of Stoll's observations in his book Silicon Snake Oil. He compares a session on the Internet to a dinner of cheese curls. You aren't satisfied when you finish, and you spend a long time in the exercise.

There's no doubt that the Internet has changed the delivery of financial information. If you need a company's annual report on a Sunday night, you can probably get it from the company's web page. Failing that, there is always the Securities and Exchange Commission's EDGAR database. All of this is an improvement, to be sure, but a PC is an awfully expensive mailbox. The information you receive is usually an exact reproduction of the printed annual report, but harder to read. With very few exceptions, nothing has been added.

That's not to say that there isn't potential. There is power in the web beyond the "gee whiz" reaction to speed and data. At its best, the web provides an organizing principle that can add value to business reporting information and enhance its usefulness to users. Preparers have the opportunity to integrate the several elements of a business-reporting package. Users can then navigate the package, following the discussion of interesting topics from one section to the next and capturing key information in forms adaptable for later use.

The State of the Art

Most of the business information currently on the web reproduces the printed form. Unfortunately, many web presentations are less useful than their printed cousins. People who use the web for serious information searching often save what they gather for later use. This is especially true of financial information, which finds its way into analysts' reports, graphs or an individual investor's collection of background material. Of course, anyone can simply print out the information as it appears on web pages, but that negates all of the advantages of having the information in electronic format. It truly reduces the PC to a glorified (but fast) mailbox or fax machine. The simple act of saving financial information from the web can be a daunting task. A user who seeks financial information on the web will find that it comes in several formats: Hypertext Markup Language (HTML), text files, portable document files (PDF) and proprietary format or spreadsheet files.

Many companies that provide financial information on the web limit the user to the information one sees on the screen. That information uses HTML or filename.htm—the lingua franca of the Internet's WWW and the first line of web information. HTML files are a combination of text and graphics designed for use by web browser programs like Netscape Navigator™ and Microsoft Internet Explorer™.

For all the power of HTML, though, a saved HTML file is the least useful way to capture financial information for future use. If a company publishes its financial statements as a graphic image, and many do, the result will never be as crisp and easy to read as the printed annual report. The information must be re-entered into other programs by hand—just as with the old-fashioned printed copy. Even worse, most browser programs save the text in an HTML file without the graphics. The user needs add-on software to save and recall text and graphics together.

Of course, the user can turn to the SEC's EDGAR service, where filings are delivered as text files. Text files (filename.txt) contain information in its most basic form—the letters, characters and spaces in "ASCII" format without embellishments. Any word-processing program can read a text file. However, the plain format makes for difficult reading, and table alignments and spacing can be erratic. Transferring numerical data (like balance sheets) from text files to spreadsheet programs is almost as cumbersome as entering the data by hand.

Some companies offer users the option of downloading all or part of the financial information in a PDF format (filename.pdf). These files contain information, like an annual report, in a format produced by the Adobe Acrobat™ program. The Acrobat Reader is freely available on the web, so any user can view documents in this format. Acrobat files can incorporate dynamic features, including links that allow a reader to jump from one point in the document to another. A user can transfer data to other programs by cutting and pasting, but again, the process is cumbersome.

Some companies offer users the option of downloading information in word processor and spreadsheet files. These files contain information in proprietary format designed to be used with specific programs, although many programs can read some of their competitors' file formats. With the financial statements in spreadsheet format, a user can combine statements from several companies for easy comparison. A few companies allow readers to download financial statements in spreadsheet format, and it has become popular for reporting the details of asset-backed securities. At least one vendor offers users the ability to capture financial statements from EDGAR in spreadsheet format.

Enhancing the Information

There is more to the Internet than speed and accessibility. Many companies have excellent websites with animated graphics, videos and sound. Those features enhance the look and feel of information, but they don't make business reporting more useful. To increase the usefulness of financial information, preparers and auditors must use the web's power to integrate information from several sources, to provide navigation through the information, and to make information portable.

The typical annual report is a collection of required sections (like financial statements and management's discussion and analysis) and company information (like the president's letter). A user who is interested in a company's inventory, its capital budgeting plans, or its use of derivatives will likely find the topic discussed in several of those sections. The user must read through the entire report, lest he or she miss a key point that is in one section and not others. Users quite reasonably complain about the sheer size of the annual report or SEC form 10-K, but worry about any data that might be removed from those reports.

The web offers companies an opportunity to knit together or integrate the several sections of an annual report by providing "hyperlinks." The user then has the ability to efficiently navigate through the report with an eye to the topics he or she finds useful. For example, one annual report includes the following passage:

...elsewhere throughout this Management's Discussion and Analysis of Results of Operations, Financial Conditions and Business Environment and in Note 21 to the Consolidated Financial Statements.

Anyone who has surfed the web knows that the underlined passage, usually in blue, is a hyperlink. The user points the computer mouse to the link, clicks the button, and the link takes the user to Note 21. Few companies provide this sort of integration between named sections of the annual report, but the advantage to the user is obvious. Now reading the electronic report is easier than reading the printed report. A simple click on the hyperlink jumps the reader several pages to Note 21. A simple click on the browser program's "backtrack" button takes the reader back to the passage above.

Note that the company in question provides a hyperlink from MD&A to the notes, but not in the other direction. Concerns about auditor association doubtless prevent the company from including a reference from material subject to the auditor's opinion (the financial statements and notes) to material not subject to that opinion (everything else). Still, the financial statements are a logical place to use hyperlinks to integrate business-reporting information, even if some links are kept within the statements and notes.

Many of us remember financial statements that referred to relevant footnotes. A caption like "Inventory, Note 3" was once common practice, and it continues in some financial statements today. Over time, accountants came to view those references as superfluous, since the notes are integral to the statements. However, today's notes can total several thousand words, and a topic like inventory may appear in several places. Perhaps the careful use of links can help to overcome concerns about disclosure overload without resorting to disclosure deprivation.

An Example: FauxCom

It's one thing to speculate about what might be; it's another to try and do it. The American Institute of Certified Public Accountants' (AICPA) Special Committee on Financial Reporting faced a similar problem in its report, Improving Business Reporting—A Customer Focus. The Special Committee developed a fictitious computer company, named FauxCom, to illustrate its vision of a business-reporting package. The FASB staff took the Special Committee's vision several steps further and used web technology as an organizing principle to integrate the package's several sections in order to provide users with a way to navigate the information and to make key information portable. The FauxCom demonstration site is available at http://www.fasb.org.

For example, a user interested in FauxCom's inventory can begin at the balance sheet. From there, hyperlinks take the user to separate note disclosures on significant accounting policies, inventories and valuation allowances. A user who is interested in employee stock options can follow links from the balance sheet to the notes and from there to the annual report's discussion of executive compensation. A user who is interested in one of FauxCom's two business segments can move easily from the notes to management's discussion and analysis, forward-looking information, company background information, and segment financial information by clicking hyperlinks.

The FauxCom demonstration web site also provides a wealth of graphic information. Users can retrieve graphs of all information provided in company and segment five-year summaries. All financial information on the FauxCom site can be downloaded as Excel™ spreadsheet files, allowing users to manipulate, combine or summarize the information as they desire. Finally, the FauxCom web site provides a rudimentary search engine that can help users locate topics that are not included in the links.

FauxCom combines the best of current practice in Internet distribution with the comprehensive reporting package envisioned by the AICPA Special Committee. Today, a few companies provide information in portable formats. A few provide limited integration between the parts of an annual report, although we have not seen any that provide the depth of linkages provided in FauxCom. Some provide information and alternative presentations (like Microsoft's presentations using other countries' reporting formats) that were not part of the original FauxCom package. So, in many respects, the demonstration web site simply carries existing capabilities to their full extension.

However, this web site has something that existing presentations do not. FauxCom's auditors issued an opinion on the entire business reporting package. With that opinion, FauxCom can overcome the principal obstacle to a fully integrated presentation. The financial statements are now part of a comprehensive package, rather than an isolated presentation that cannot take advantage of information found elsewhere.

The FauxCom demonstration site appeared on the FASB web site early last year, and responses have been uniformly positive. Indeed, several academics have adopted FauxCom as a teaching tool. We are pleased by the generally favorable response, but we need to learn more. We need to understand the impediments (both regulatory and cultural) to more effective use of the Internet to distribute business reporting information. We also need to understand how the state of the art has changed in the past year.

Looking Ahead

Last year, the FASB decided to undertake a research project to consider the types of information (in addition to financial statements) that companies are providing investors and the means for delivering it. The plans for the project call for an important portion of the work to be done by the FASB's constituents—preparers, users and auditors. The organizational structure of the project consists of a steering committee and several working groups. The steering committee will guide, direct and provide consultative assistance and advice to the working groups, one of which is charged to study present systems for delivery of information electronically and to consider the implications for business reporting.

This working group will begin its work by reviewing a sample of approximately 200 corporate websites. A detailed questionnaire will be used to summarize key details about the sample and provide a basis for follow-up with selected companies. During the follow-up, working group members will ask company representatives about:

• their goals for a financial website;
• how they balanced those goals against costs and regulatory impediments;
• significant problems encountered;
• response from analysts and shareholders; and
• plans for future developments.

The working group's findings on electronic distribution will be combined with findings from other working groups in a report that FASB plans to publish in September 2000.

Concluding Observations

Too often, people versed in technology or any other specialty see all problems in terms of their particular skill. Good consultants know that the best answers fit a solution to a problem, not the other way around. So it is with the use of Internet technology in the delivery of financial information. The power of the WWW lies in its ability to provide a set of organizing principles—not in the particular software solution.

The FauxCom demonstration site is an integrated presentation that provides users with the tools to navigate today's increasingly complex business information. Navigation is the "value-added" component, not the particular techniques used to provide the navigation. That value-added component comes from the accountant's skill in understanding and communicating financial information, not the software or the Internet. Indeed, there are other software solutions that we might have chosen. We used tools that are available at very low cost to any financial statement preparer and that are familiar to any computer-literate user of financial information.

Footnotes

¹ The views expressed in this article are those of Mr. Upton, FASB Senior Project Manager. Official positions of the FASB are developed only after extensive due process and deliberation. Return to article