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.
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