The future of financial reporting in Europe: Its role in corporate governance

At a recent congress of the European Accounting Association, the President of the Belgian Institute of Registered Auditors, Paul Behets, delivered a plenary speech with the title: Are Financial Statements an Obsolete Product? Behets' answer was "no," that financial statements are an essential component of the financial reporting system that is necessary for the proper functioning of capital markets. In this article, we reach a similar conclusion, but for somewhat different reasons. A central argument of this article is that an effective system of corporate governance requires an effective financial reporting system, and that an effective financial reporting system requires a well-ordered system of financial accounting. Behets speech provides evidence that financial reporting, and the role of traditional audited financial statements within financial reporting, are undergoing a period of change. The future of financial reporting is difficult to predict with any degree of certainty, but it is likely to be a future marked by change. One possible path for change has been suggested by Elliott (1994), who has indicated that the currently accepted model of financial reporting might be replaced by electronic information systems providing financial and other forms of information about companies, not necessarily in the form of audited financial statements, which would be widely available via the Internet. Under this scenario, decision-makers could decide on the types information that are important, and then arrange the information in the ways they see fit. Financial reports in their present form (i.e. audited financial statements) might become obsolete as users decided individually on the types of information that are important to them. If this scenario were to come into being, the question arises at to whether there would be a continuing need for financial reports as presently constituted. It is the argument of this article that even if it is technologically feasible for financial reports to be changed from their present form, there would still be a need for financial reports as an important component of corporate governance