The financial reporting system - what is it?

This experimental essay constructs a conversation between systems thinking and financial reporting. First, general ideas of system and ecology are introduced and used to inform a review of three overlapping clusters of accounting research. Each of these clusters assumes and emphasises different system characteristics. Second, these characteristics are blended within the model of the financial reporting system as a risk cycle. Third, critical challenges in modelling the financial reporting system are considered, with a focus on the position of a financial reporting regulator. Finally, in a thought experiment, the perspective of a hypothetical non-executive director on the board of a regulator with system-wide responsibilities is adopted. The essay proposes some questions that such a director would expect a model of the financial reporting system would help to answer. In addressing the motivating question, ‘The financial reporting system – what is it?’, the essay focuses on the intellectual and methodological challenges of systems thinking in the financial reporting field. Borrowing from ecology, it is argued that any model of the financial reporting system must: be as simple as possible without being too simple; be dynamic and focused on relationships rather than static entities; and embrace risk and uncertainty to avoid ‘illusions of control’.