Written by Bob Schneider Posted on December 15, 2006

In my post of December 12, I described the contents of Global Capital Markets and the Global Economy: A Vision From the CEOs of the International Audit Networks and discussed the comments of some critics. Here are some of my own reactions to the report:

(1) The initial worry among many financial practitioners was that XBRL would be used to implement a single chart of accounts for all companies, or at least those within a specific sector. Now we are hearing an opposite argument, namely, that adoption of XBRL will lead to the release of all kinds of company data that won't be comparable among peers.

In the important issue of standardization in financial and business reporting, XBRL is now being used on both sides of the discussion. I view that as a positive sign for interactive data. It helps it avoid being pigeonholed as simply a Trojan horse for those who want to impose greater standardization on financial reporting. It demonstrates XBRL's versatility and power. And it reinforces the point that XBRL is a data standard, not a financial standard, and it cannot be appropriated solely by one side in the standardization debate.

(2) Calls for radically re-defining the financial model are nothing new, as the CEOs themselves state in a sidebar on page 17 of the report. But those calls may come from a variety of factors, including changes in the business environment. For example, during the 1970s there was a widespread sense that, in such periods of rampant inflation, traditional accounting had lost its usefulness. The suggested solution was "current value accounting" that would adjust statements for price increases.

As price hikes declined in the 1980s and their impact softened, the campaign for statements that were fully adjusted for inflation died down. But the point is that radical change can occur in the business environment over time. The current accounting model has pretty much remained intact for more than 100 years and, all in all, has served capital markets well. If something is to replace it, it must be equally versatile and address the needs of financial information users for the very long haul.

Reading over the essay, I did not get the sense that the authors had tried to look at the possible changes in companies' operating conditions from that very long-term perspective. Perhaps the audit chiefs would reply that the flexibility of XBRL allows constant adaptation of financial reporting to changes in the environment. But I would have appreciated their thoughts on what that environment politically, economically, socially would look like, and what kinds of financial statements were appropriate to it.

(3) I think the CEOs made a mistake in not better defining what the radical reformation of financial statements would actually entail. As I've noted, the essay downplays the importance of periodic statements. But what exactly will the new reporting be like? The principle of periodicity that financial statements should be divided into periods of not longer than one year -- is one of the most basic, bedrock accounting principles, something new accounting students learn on the first day of class. If the CEOs are thinking of changing all that, they should give us a much better idea of what exactly is going to replace it.

(4) Finally, I think the authors made a mistake by coupling in a single report their concerns about the threat of legal liability with their vision of financial reporting. It reminds me of President Bush's Social Security initiative of two years ago. The inclusion of private accounts in the discussion muddied the debate and allowed opponents of reform to gain the upper hand. Private accounts may or (in my view) may not have been an ideological hobby horse of Republicans that would ruin the system. But the accounts could be effectively spun that way. By including discussion of auditors' legal liability, the authors seem to have fallen into the same trap.

Even so, just because an argument is self-serving, it doesn't mean it's wrong. Dismissing what the CEOs have to say about XBRL and the future of financial reporting because it happens to appear alongside a call for change in the auditors' legal position is misguided. If the report jump starts a sustained, serious discussion about the future of financial reporting and the role XBRL has to play, the CEOs will have done the financial community and themselves a great service.

Written by Gianluca Garbellotto Posted on December 8, 2006

Gianluca Garbellotto is a member of the XBRL Standards Board and an active participant in various XBRL Working Groups. He is a frequent and sought-out presenter on XBRL and XBRL GL topics, as well as the XBRL columnist for IMA's Strategic Finance magazine.

XBRL is here. It's not just a matter of growing interest, or more frequent discussions on upcoming implementations. XBRL is required for regulatory reporting in many countries, including the U.S. (in the case of banks), and many others are well on their way to mandating it. Certainly the major investments in this technology recently announced by the SEC cannot be only aimed at adding one more format to the many already available for filings.

Every major company needs a strategy for XBRL. There's no doubt that the major incentive for XBRL adoption comes from regulators that mandate it. This is obviously a great way for a technology to gain momentum; but it's also, in my opinion, the greatest challenge that XBRL faces. There are two ways in which companies (and other entities) can react to a mandated adoption. One is adaptation, the other is evolution.

Adaptation here means doing what is strictly necessary to fulfill the regulatory requirement, either using internal resources or through outsourcing. Most likely, the regulatory filing will be generated in the same format as before, and then it will be converted to XBRL using the original filing as a source. This approach seems appealing because it minimizes short-term implementation costs. However, a closer look may reveal unsuspected indirect costs, especially as XBRL mandatory filings become more numerous over time. To advocates of XBRL like me, adaptation represents a lost opportunity.

Evolution is the more effective approach in a changing environment. In this case, it requires two important actions by corporate management:

1. Understanding XBRL's true value proposition, beyond its more visible and familiar implementations; and
2. Conceiving a strategy that does fulfill the short-term regulatory requirements; but, at the same time, leverages the power of this very targeted and effective standard for business and financial data for purposes much beyond regulatory reporting.

Here is the challenge. The value proposition of XBRL for regulators, analysts, and entities in general that collect, process, and compare data from a large number of sources is evident, and that's why the adoption of XBRL is originating in the regulatory sphere. Individual filers do not currently see benefits for themselves in this process; they tend to think that XBRL is just another format for representing data, no different than a CSV or PDF file, but much more difficult to implement. (Of course, XBRL enthusiasts can relate the potential benefits of more transparent end reporting, as well as the new benefits that XBRL GL, the standardized Global Ledger, can bring, where end reporting can become a simple by-product of internal processes improved by XBRL.) And all this just to make life easier for regulators and analysts! Limiting the analysis to XBRL's most visible application can easily lead to underestimating its real potential.

XBRL for financial and regulatory reporting (XBRL FR) is a powerful and flexible technology to represent summarized information in internal and external end reports. XBRL GL is an agreement on how to use the XBRL technology to represent business and financial data at the detail/document level in a standard, consistent format, no matter in which application or jurisdiction it was generated or resides in. These two different faces of XBRL can be used separately or they can interact with each other. They not only broaden the value proposition of XBRL as a whole much beyond financial, let alone regulatory, reporting. They also offer the opportunity to change the way in which many crucial business processes are dealt with in a corporate environment.

Data archival, data integration, consolidation, auditing and compliance, generation of various internal and external final reports from the same underlying transactions, and automation of the related reconciliations are only some of the processes that XBRL can help make more efficient. It is the ideal payload for SOA (Web Services Oriented Architecture). Being a standard, both a technical format and more importantly in the semantic representation of documents and transactions, it makes seamless exchange of data and information within a business and between information-trading partners (not only regulators, but also auditors, and business partners in general) a reality.

XBRL is the key to a new, standards-based, cost-effective, vendor-independent way to deal with many crucial processes in every corporate environment. A comprehensive XBRL strategy can help your company turn a regulatory burden into a competitive advantage.

Written by Bob Schneider Posted December 2, 2006

Tim Bray is Director of Web Technologies at Sun Microsystems who writes the highly regarded Ongoing weblog. He is a recent convert to the interactive data cause, and it's enormously exciting to have him cheerleading for XBRL.

Tim's posts can present a major problem to his fellow bloggers, however, because in a single sentence he can be so interesting and provocative that it would require ten posts to respond adequately. Take this gem:

"A certain part of the deep complexity and abstraction in accounting theory is in fact there to reflect business reality; but I'm convinced that another part of it is there to serve as a carpet under which to sweep inconvenient truths."

Where to begin? The inability of the 19th century accounting model to deal with 21st century enterprises? The shortcomings of short-term, market-driven quarterly statements? The many constituencies, ranging from small investors to huge government agencies, that financial statements must serve? The difference between the heavy-on-the-rules U.S. accounting and the more holistic approach of the Europeans? There's subject matter here for not just ten posts, but ten books.

Tim's deft one-liner on GAAP comes from Transparent Business, a post he wrote after attending a meeting with Chairman Cox and others on interactive data. In the article he waxes enthusiastic about XBRL and how it will make company data transparent to readers of financial statements. In fact, in my view he is a little too enthusiastic and overstates the case for XBRL.

For example, Tim says that corporate websites currently provide just the "basics" on companies, like "where the offices are, who the CEO is." He strongly implies that little financial information is available online and that interactive data will come along and change all that. But most websites of companies now have respectable investor relations sections that include their annual reports and links to recent SEC filings. And in any case, the filings can all be found and read at the SEC's EDGAR site.

Maybe Tim was just exaggerating to make a point, since the IR section of his own Sun Microsystems is loaded with investor data. But here what's important: I think he's too optimistic about the potential of XBRL for eliminating the creative accounting that some companies employ to mislead. Certainly XBRL has significant potential for making internal controls more rigorous, which should lead to an overall improvement in the quality of financial statements. But remember, XBRL is just a data standard, not a cure-all for accounting's many problems. To burden it with the heavy load of eliminating all financial shenanigans especially when a penny or two difference in per-share profits can wallop a company's stock price -- is unreasonable, even unfair, and can only lead to disappointment among financial statement users.

If a footnote is written with the intent to obfuscate rather than enlighten, it will remain confusing whether it's coded in XBRL or not. If an accounting issue becomes a political football that gets kicked around among Congress, auditors, and CFOs until its stitching unravels, XBRL isn't going to patch things up. A central weakness of GAAP that it combines data like bank balances that are known to the penny and estimates like pension costs that are educated guesses at best will not be resolved by XBRL.

Despite my disagreement with Tim on the extent to which XBRL will make financial data transparent, it's wonderful to have him on the interactive data team. The support of executives like Tim who command widespread respect in all sectors of the business community will ease the path toward XBRL adoption.

UPDATE: After re-reading this post, I realize I should have made important mention of the ability of XBRL to implement real-time reporting of company results, as well as the recent report of the CEOs of the major audit networks, which calls for a new reporting model that takes advantage of interactive data's capabilities. Both developments have the potential to make major changes in the nature of financial reporting.

At the same time, real-time reporting of certain financial and nonfinancial data won't eliminate the need for periodic financial statements, and discussions about overhauling the traditional accounting model have been going on for decades. The overwhelming difficulties of making financial results easily comparable among all companies of all nations will remain. XBRL can help ameliorate those problems, but it shouldn't be expected to extinguish them.