Regulatory reporting changes on an annual basis as new rules are passed and others are repealed. Learn about the latest statutory reporting requirements and compliance issues impacting CFOs and other financial professionals.
What Is Statutory Reporting?
What is statutory reporting and why is it so important?
Statutory reporting is the act of reporting financial information to a government agency. For example, mandatory financial reporting to the Securities and Exchange Commission (SEC) counts as statutory reporting.
Statutory reporting helps companies track and understand their financial performance. This data helps companies evaluate their performance vis-a-vis peers, track progress toward short-range and long-range goals, and improve corporate governance. Internally, companies can evaluate the profitability of a new product or service, understand their expenses and benchmark performance, whether cost-cutting or scaling.
What Are Statutory Financial Statements?
Every industry has its own standard in terms of required information that counts as statutory financial statements. When it comes to financial statements, the most common documents are:
- Income statement: This statement includes revenue, profit and loss, income tax and business expenses.
- Balance sheet: The balance sheet includes business assets, equity and liability.
- Notes to financial statements: A preamble to the financial statements that explain methods used to calculate figures, assumptions made and relevant financial policies.
- Report of the statutory auditor: This is an audit verification statement signed by a statutory auditor.
These statements may be completed on a quarterly, annual or biannual basis. For example, publicly traded companies must file quarterly statements as well as an annual statement.
Statutory Reporting Requirements
These reporting requirements help companies meet statutory audit report requirements.
- Preparation: The first step is gathering the necessary data sets, validating data and making sure that it is in an accepted format. This step is time-consuming, but there are technology solutions that help.
- Audit: Auditing consists of preparing and reviewing all statutory reports to ensure completeness.
- Filing: Reports must be filed by the appropriate deadline with the SEC. Deadlines vary based on the nature of the report, but tend to fall within a specific time frame, such as within one month of the quarter's close.
Importance of Statutory Reporting
Statutory reporting is required for compliance reasons. This is far from the only reason to care about it, though. Here are a few examples that explain why this type of financial reporting is important beyond the compliance angle.
Correct Mistakes and Avoid Errors of Omission
Technology may be widespread in the financial industry, but teams still rely on manual processes that can insert errors into financial documents. Spreadsheets pass back and forth in an unsecured email channel. There is limited version control and hit-or-miss security, unfortunately. It is all too easy for an incorrect version of a document to replace the so-called official spreadsheet, and errors to become cemented into the financial record.
Then there are the matters of mistakes, whether that is a misapplication of a formula, misinterpretation of a rule or simply a missed deadline. With its audit process, statutory reporting finds and fixes these sorts of errors.
Statutory reporting aims to centralize data reporting and ensure companies operate responsibly and transparently.
Improve Internal Oversight and Operations
CFOs do not have the time to oversee every aspect of the company's operations. They rely on a team. However, if the team has too much agency, there is a risk of operations that go unchecked. If there is questionable data, teams may try to mitigate the risk or hide it from other stakeholders. Unfortunately, this can backfire on the company's operations. Even if the data is not as expected, it is important that all stakeholders are informed, to make the best business decisions given the environment. Statutory reporting can actually help internal oversight by encouraging regular data reporting, transparency and compliance.
Mitigate Risks in an Environment of Increased Public Scrutiny
The flip side of increased transparency is increased scrutiny. With additional data being reported, the public is now aware of more of the internal operations that used to be behind the curtain. This can be good or bad. Consider a company that has one message or brand value it presents to the public, while internal data reveals a conflicting message. Ideally, the company would act in alignment with its stated values, but there are blind spots in every operation. Statutory reporting uncovers the misalignment before it is made public. It therefore gives the company the benefit of time in addressing and mitigating a potential public outcry when the data is reported.
Without the statutory reporting process, the company may be blindsided and unable to prepare a thoughtful response before the outcry begins.
While the importance of statutory reporting cannot be overlooked, there are some important challenges to note: First, the process is very time-consuming. Second, the rules are frequently changing, which makes keeping up with requirements an onerous task. Third, companies tend to silo data across different departments. Finally, deadlines tend to fall off the radar only to be remembered at the last minute.
These factors make it extremely challenging to get all the necessary data together, validate it and complete those required reporting forms by deadline. If forms are not submitted on time, there may be financial penalties.
In a time of increasing reporting requirements, companies deserve financial reporting software that streamlines the process. Explore how DFIN software makes every aspect of the reporting process easier.