More than words: the use of textual analysis in corporate reporting
With the continued growth of corporate reporting disclosures and a diverse range of corporate communications now in use, questions about the consistency and credibility of this information are being raised by investors and other stakeholders. Acknowledging this issue, this year’s PD Leake lecture, organised by ICAEW and funded by ICAEW’s charitable trusts, considered one possible solution – the use of textual analysis. Drawing on his experience at the Securities and Exchange Commission – in his role as Chief Economist – Professor Craig Lewis, Vanderbilt University, explored how textual analysis techniques could potentially provide new sources of information to investors and other stakeholders.
Over the last two decades, there has been a significant increase in the volume of corporate reporting disclosures, most notably in the form of narrative commentary. Pressure on organisations from investors to provide information on how value is generated by the business has contributed to this. Growing societal demands for organisations to explain how their activities impact, for example, on human rights, the environment, society and diversity, have also played a part – as reflected in the requirements of the EU directive on non-financial reporting and in the mission of the Sustainability Accounting Standards Board in the U.S which requires public corporations to integrate social and environmental issues into mandatory filings. The IASB’s Principles of Disclosure project – which aims to improve current disclosure guidance – also appears to validate claims for additional information, recognising the need to improve the quality of these disclosures.
Referring to this ‘rapid expansion’ of data, Professor Lewis highlighted a specific challenge for regulators:
‘As increasing demands on corporate reporting leads to greater diversity in reporting practice, regulators need to design a reporting system that provides sufficient flexibility to enable management to tell their own story while simultaneously ensuring the resulting reports are comparable.’
This tension, he explained, was unlikely to be resolved through regulation alone.
A possible solution
A possible solution to this tension was offered in the form of technological advancement and specifically in the use of textual analysis.
During the lecture Professor Lewis explored a range of text analytics techniques which allow the user to create ‘structured (quantitative) content from unstructured data’. In doing so, he highlighted the potential this offers investors to analyse corporate information in new and innovative ways, giving them the ability to dig beneath the surface of the text to measure the characteristics, quality and tone of the narratives. This in turn, could help investors and other users identify which disclosures are likely to be most informative and therefore useful in decision-making. Conversely, it could also create opportunities to identify inconsistencies and issues which might act as a red flag.
How to find out more
The lecture is based on an academic paper commissioned by ICAEW. The paper, co-authored by Professor Craig Lewis and Professor Steve Young, will be published in 2019 in International Accounting Policy Forum, the annual special issue of Accounting and Business Research.
ICAEW Financial Reporting Technical Manager and Thought Leadership