A New Era in Financial Transparency
By Chris McCall, Cofounder
Detailed financial and accounting data has historically been, for the most part, hidden behind a veil of complexity. Before the explosion of compute power and plummeting data storage costs, corporate accounting generated too many transactions and too much data for management to consider every transaction in real time. Necessity being the mother of invention, accounting and finance experts innovated with tools available to develop these well known processes. Mostly effective, business leaders have accepted the shortcomings and ambiguity akin to a time not too long ago when it was acceptable to print out directions from Mapquest rather than using your mobile device.
With recent advances with inexpensive compute/data storage, new data analytics, machine learning, and artificial intelligence, I pose the following questions for the accounting and finance industry.
Why do we close the books only once per month?: Once a month, accounting records are reconciled with bank account balances. For the other 29-30 days, determining the exact cash position requires a bunch of extra work. For businesses that operate on very low margins, have large monthly debt payments, or are in a distressed situation, monthly reconciliations are not enough. Weekly or even daily monitoring of the cash balance in bank accounts is needed, this is a really hard thing to do with today’s accounting processes and systems.
Why are financial statements audited only once a year?: Once a year, financial statements are audited by outside CPA firms to give investors/board members/stakeholders confidence that they know what’s going on. For the other 364 days financial statements are either unaudited, out of date, or both. Financial statements are also inherently inaccurate. Any audit engagement letter will specify that the statements will contain what’s legally known as “tolerable error” of usually around 5% because auditors rely on sampling techniques. This creates challenges for any sort of investment decisions like mergers and acquisitions or just purchasing stock, as the decisions are almost always made in the 364 days where financial data is known to be inaccurate, not up to date, and not audited.
Why is the Statement of Cash an indirect calculation?: Arguably the most important financial statement of all, the Statement of Cash Flows, is an indirectly calculation based on changes of the line items on the Balance Sheet and Income Statement. It has nothing to do with the actual money that’s flowing in and out of bank accounts. Worse yet, trillions $’s worth of investment decisions are based on complex financial models that rely on complex cash flow calculations because the Statement of Cash Flows is known to be a summary/estimate rather than showing exactly how much money was deposited and withdrawn to/from bank accounts.
If you make the following assumptions:
- Any person with appropriate authority has access to all data, that is, every single financial transaction.
- Intelligent software exists to process all of that data in real time.
I contend that today’s many if not all of today’s accounting and finance processes will be redesigned to consider all data, all the time and eliminate the current shortcomings and ambiguities.
“Today, a big part of accounting is summarizing and estimating. We are moving to a world of full financial transparency where every transaction is considered. Current accounting procedures and tools are being forced to change.” – Angela MacPhee, CEO of RGL Forensics
I’ll leave you with one more question. How come I know what my grandmother is having for lunch each day, even though she lives thousands of miles away but I don’t know what the cash position and current valuation of my largest venture investment is?
The level of financial transparency has historically been suppressed by the sheer amount of data and resulting complexity. Technology exists today to address this. Data and complexity are no longer reasons for lack of transparency.
We are about to enter a new era of financial transparency.