Written by Yuki Ozawa     Posted November 28, 2006

Yuki Ozawa, System Engineering Manager at Hitachi America, Ltd., recently attended the annual financial reporting conference of the New York Society of Security Analysts and filed this report:

This NYSSA conference spotlighted a number of financial reporting issues and the critical role XBRL can play. Even when interactive data was not the specific topic of discussion, its potential impact and usefulness were easily seen. Of special note were the following sessions:

Scott Taub, Deputy Chief Accountant of the SEC, briefly updated the audience on the benefits, issues, and current activities concerning XBRL. He highlighted the SEC’s recent allocation of $5.5 million for the development of taxonomies. A roadmap to international convergence was also discussed, and Scott noted SEC activities to support International Financial Reporting Standards (IFRS). Scott introduced the subject of restatements, a key topic that was addressed several times during the conference.

Eric Linder, Principal at SavaNet, looked at XBRL from the vantage point of a financial analyst with a view toward implementation. Eric discussed several recent XBRL developments at the SEC, and he raised issues concerning the Commission’s XBRL reporting program for end-users like investors and analysts. One important focus of his discussion was that, although companies are required to use certain taxonomies under the US-FRTF framework, they have wide-ranging ability to extend those taxonomies and add new items. As a result, the largest problem today is inconsistently structured and non-comparable items.

Given my own experience working with XBRL, I had much sympathy for Eric’s viewpoint. XBRL can bring tremendous benefits as a standard language for financial information; nevertheless, versatility remains an important concern. To reap the greatest benefits from XBRL, there’s a need to refine existing business processes first. Eric also mentioned his recommendations for current SEC approaches, which he titled the SEC Three Step XBRL Program. The steps are (1) create XBRL reporting program implementation rules, which address basic analytical needs; (2) update Regulation S-X for present-day practices of electronic reporting; and (3) be directly and intimately involved in the taxonomy development process.

Kevin J. Cameron, President of Glass, Lewis & Co. gave a talk titled When Will the Restatements Stop? In this session, Kevin reviewed the current circumstances surrounding restatements. He noted that restatements have been increasing and, if current trends are stable, there will be more restatements in 2006 than the 1,200 reported in 2005. Kevin described how restatements can affect a company’s stock price and offered several examples. He provided statistics on the numbers of restatements, broken down by industry, company size, quarter, the reasons for errors, and other measures. Thus, his audience gained an understanding of which companies tended to make restatements and the reasons for them. In my view, in some error categories XBRL can definitely help avoid restatement, but it’s unrealistic to think that many restatements can be eliminated simply by using XBRL. Further investigation and analysis are necessary to detect the causes of restatements, and reporting and validation processes should be improved at the same time.

Near the end of the day, Elmer Huh, Senior Vice President of Lehman Brothers presented Stock Options: Too Much of A Good Thing? Elmer’s discussion focused on the difficultly analysts face in forecasting the impact and assessing the real cost of stock options. It seemed to fit in squarely with one of the overarching themes of the day, namely, the complexity of the many issues raised by attempting to present meaningful, transparent, actionable financial data for highly diverse companies to highly diverse audiences.

NOTE: The complete agenda of the conference is available online.

Written by Bob Schneider   Posted November 8, 2006

In the April 2006 Harvard Business Review, Deloitte executives Stephen Wagner and Lee Dittmar contributed the article The Unexpected Benefits of Sarbanes-Oxley.

An initial, cynical response to that title would be “Yes, SOX has provided an unanticipated boost to local economies from late-night pizza deliveries to accountants’ offices.” Even the less skeptical reader begins the piece thinking: Could the huge investment in SOX compliance been made without some benign side effects showing up somewhere?

But Wagner and Dittmar cite sufficient strong advantages, and back them up with enough examples, to make the case that the gains have been substantial. Wisely, they don’t argue that SOX is really a blessing in disguise. Rather, they demonstrate that, in contrast to the usually negative narrative, the law has had important benefits.

What’s any of this have to do with XBRL? As we read through the successes the authors described, it seemed nearly all of them dovetailed nicely with the increased adoption of XBRL throughout the organization. Here are the benefits the authors cite and how XBRL supports those objectives:

Strengthening the Control Environment Wagner and Dittmar well understand that internal control is less about individual procedures, important as they are, and more about the overall control environment that it is so central to an audit. Experienced CPAs acquire what they call the “auditor’s knack,” a canny sixth sense that tells them a day into an audit whether the client has its act together. If it doesn’t, auditors have to greatly expand the range and number of their tests, because they can’t trust the clients’ numbers. But when the control environment is strong, testing can be reduced, audit costs can be cut, and auditors can focus on improving client procedures and operations.

XBRL can play a vital role in ensuring a strong control environment. It eliminates numerical mistakes. It reduces greatly manual intervention in accounting processes where error, intended or unintended, creeps in. It makes the exchange of data within the company flow more smoothly. Finally, it can be instrumental in creating the audit trails that CPAs depend on.

Exploiting Convergence Opportunities The investment in SOX can often be leveraged for compliance with other standards. The authors describe the experience of RSA Security for meeting ISO 9000 standards. They also discuss how SOX compliance converged with other regulatory regimes in the human resources area, and how “a single set of controls could be used for compliance with the various acts.” Such harmonization can be greatly eased by adopting XBRL-GL, which enables reporting of a diverse variety of corporate information, from employee timesheets to health benefit plans to employee pay.

Standardizing Processes The authors cite the experience of consumer products maker Kimberly-Clark, where hundreds of executives around the world were generating manual journal entries. The process varied widely by division and location, “with some employees creating entries by hand, others keying them into Excel spreadsheets, and still other logging them into the company’s SAP financial software program.” Entering all such entries in XBRL would go a long way toward process standardization. Even where processes remained varied, the fact that all entries were made in the same data standard would enhance consistency and make reconciliation much easier. Another XBRL-related benefit would be that searches on journal entries would be much faster.

Reducing Complexity Wagner and Dittmar cite the case of Iron Mountain, a $1.8 billion records and information management company which over a ten-year period had essentially acquired more than 200 companies. “Some of the companies ran Unix while others ran Linux, Novell NetWare or Windows.” With the easy interchange of data between entities, platform independent XBRL is a boon to M&A.

Strengthening Weak Links The authors write “Another source of complexity arises from outsourcing, partnerships, and shared-services arrangements known as the ‘extended enterprise.’” They cite the difficulty of ensuring internal control when the partner company engages in activities that materially affect the financial statements. XBRL enables much faster reporting, which can be critical when monitoring activities with external entities. Information can also be entered once and delivered in many formats, which can be especially beneficial when dealing with external entities that require certain data formats.

Minimizing Human Error Ask most auditors what they consider the weakest part of internal control, and they’ll tell you “Manual processes.” One of the main benefits of XBRL is the elimination of nodes in supply chain management where human intervention is necessary. Moreover, and of special benefit to auditors, automated controls are highly reliable, so they can be tested less.

In these many areas, the addition of XBRL to the mix enhances the likelihood and the quality of success. In fact, the only two benefits mentioned in the piece where we were a little hesitant to extol XBRL’s virtues were improved documentation (Sarbanes-Oxley required companies to update operations manuals, personnel policies, etc.) and increasing audit committee involvement. And we’re certain less diffident writers with experience in these areas could have expounded on XBRL’s advantages here as well.

Indeed, it may well be that XBRL’s benefits are so pervasive that it is hard to describe a critical area of management operation where its advantages are not manifest.

Note: You can request a copy of the article from Deloitte; the Harvard Business Review is also freely available in electronic form from major libraries.

Written by Bob Schneider    Posted November 2, 2006

On October 20, SEC Chairman Christopher Cox made the keynote address to the 39th Annual Securities Regulation Seminar. During the speech, Mr. Cox demonstrated several XBRL applications (including Hitachi’s Xinba Reader and Analyzer) in a live presentation — a display of courage that will impress anyone who has used any electronic equipment in front of large audiences.

But what we found particularly noteworthy about the speech was that Chairman Cox elected to discuss interactive data at all. In front of such an audience, with its collection of top-notch securities professionals, Mr. Cox could have spoken on any number of subjects much closer to their hearts and minds than a data standard many CFOs still haven’t heard of. Given the October 20th date, he might have even been forgiven for selecting a topic conducive to the partisan interests of a former Republican Congressman. (He did note the low U.S. unemployment rate of 4.6%, but he also made unkind mention of Jack Abramoff.)

And yet Mr. Cox chose to focus on interactive data. Here are a few of the key points he made:

• Both professional security analysts and small investors are frustrated by the enormous amount of financial information dumped on them that is difficult to manipulate and decipher.
• Interactive data provides a solution, because it will allow users of whatever background to request exactly the information they want from any number of company reports
• The SEC has committed over $50 million to give these capabilities to every investor “in the very near future.” (Mr. Cox made clear that meant months, not years.)

Chairman Cox’s commitment to interactive data is truly stunning. His business card could just as well read Chief Interactive Data Evangelist. Here’s a part of his speech that reflects the enthusiasm he brings to the job:

“What we’re envisioning at the SEC is a new way of delivering the numbers in financial statements here in America, and around the world that is so fast and so flexible, it will slash untold hours of waste, cost, and inefficiency from our economy, and make our capital markets vastly more efficient. Just as importantly, it will level the playing field for tens of millions of average investors.”

We encourage you to read the entire speech. All of us in the interactive data community owe Chairman Cox a huge debt for his leadership in promoting XBRL as a universal financial and business data standard.