Online financial reports show problems and promise.

Although Web-based financial reports seem to shed immediate light on public companies' activities and performance, investors should make sure they not only know what they're looking at, but also see all they should. At issue, according to a study commissioned by the IASC, is the completeness of such online reports.

As many of those who click on a link labeled "annual report" find, the online version can be less informative than its print counterpart. On the Web, an annual report often consists of an abbreviated income statement and balance sheet, seldom accompanied by a cash flow statement or notes to the financial statements.

Concerned about the lack of relevant standards, the IASC commissioned a group of academics to take a close look at Web-based financial reporting. Paul Pacter, an IASC international accounting fellow, said his organization wanted to better understand how online reporting worked and how it might influence future accounting standards. The IASC published the researchers' findings, Business Reporting on the Internet, in November 1999.

The researchers scrutinized the Web sites of the 30 largest companies in each of 22 nations--660 in all--and found the quality &their online reports varied considerably, sometimes with significant implications. The researchers encountered two key problems: It was difficult to find relevant reports and to confirm their completeness. As one of the researchers, Professor Glen L. Gray of California State University, Northridge, told the Jof A, "With current search engines, when you query for a company's annual report because you don't know its Internet address, you often get thousands of hits."

"Finding anything--even a Web site--is often a task," Gray said. "And when you do locate the report, it's not always clear where it begins and ends. With a paper version of an annual report, you know what you've got. But on a Web site, the report can contain links to marketing material and other unaudited information that look just like the annual report, but aren't part of it."

Gray praised Intel Corp. for the clear warning it gives a user about to leave the financial reporting section of its Web site. Microsoft Corp. and Cisco Systems, Inc., also received high marks for their sites' variety of downloadable formats and languages and presentation of financial statements in various countries' versions of GAAP, as well as for the wealth of online analytical tools they offer.

Gray proposed an improvement any corporation can easily make to help investors get more out of its site. "Using currently available technology, companies should offer users both HTML pages and Adobe Acrobat. HTML is searchable, but, when printing a financial report, you can't always tell whether you've got the whole thing. Acrobat files can't be scanned by search engines, but Acrobat can print an entire document without missing any pages. To be safe, a site should offer users both options."

Gray suggested an additional improvement that would make searching more effective. If corporate Web page designers added content descriptions to an embedded data label, search engines could better identify the pages that closely relate to the searcher's interests. The data label in question, known as a "meta-tag," is part of the HTML page layout language used to format the contents of Web pages.

Despite their concerns about the difficulty of finding information and confirming it,; completeness, the researchers believe online financial reports can deliver a wide range of benefits for global business, as long as regulators and standard setters agree on and apply some much-needed ground rules to the process of creating, distributing and maintaining electronic financial reports.

In order to foster the growth of online financial reporting within a framework of fundamental standards, the researchers have included in their report recommendations for a code of conduct and a global business reporting language.

Under the proposed code of conduct, corporations aren't the only ones with a to-do list. To ensure the accuracy, clarity and completeness of online financial reports, the code of conduct spells out a variety of best practices and assigns overlapping responsibility for them to auditors and even investors, as well as corporations and regulators.

The researchers also urged the IASC to establish a consortium to develop a business reporting language (BRL) for finding, analyzing and reusing financial data. To this end, the study recommended creation of a customized version of XML, a sophisticated language similar to HTML, that can be used to precisely describe each of the various kinds of data found on Web pages.

The AICPA recently developed a prototype of XFRML, its recommended standard for an XML-based representation of accounting data (see "AICPA Establishes a Language for Electronic-Based Financial Reporting," Jof A, Sept.99, page 15). XFRML and the BRL proposed by the IASC's researchers could provide data labels that would make it easier for search engines to retrieve information that strongly matches a search request.

Among the proposed candidates for membership in the BRL consortium are global information distributors, software developers, national standard setters and international accounting firms, each of which could help formulate a sound BRL.

The researchers said their recommendations address the profound transformation financial statements are undergoing on the Web. When paper was the only reporting medium, corporations, auditors and regulators focused on identifying and verifying financial data, paying much less attention to the way in which they were presented.

But now, the "boundaries" of Web-based financial reports have become more dynamic and less distinct, making it necessary, the researchers said, for standard setters to examine the form of an annual report as closely as its contents.

The IASC's Pacter said the researchers' recommendations would enable the organization to follow a "sensible course" in helping to ensure the high quality of online financial information.