Bob Schneider is a Partner in 
Wilson So is the Director of Hitachi America, Ltd. Audit Chiefs Offer Vision on the Future of Financial Reporting and the Role of XBRL — Part II
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.