Bob Schneider is a Partner in 
Wilson So is the Director of Hitachi Consulting Corporation Does XBRL Doom the Half-Yearly Interim?
Written by Bob Schneider Posted July 18, 2007
In a recent post, I recommended a KPMG report that summarized the views of 11 financial leaders analysts, regulators, CFOs, standards-setters on global accounting issues. I promised to respond to their comments on XBRL, about which the leaders were specifically asked and were quoted at some length.
In a field as intellectually fertile as XBRL, it’s not surprising that I didn’t have to read very far to find remarks that demanded extensive reply. The first leader presented is Philip Broadley, Group Finance Director at Prudential; here are his thoughts on interactive data as offered by the reporter:
He is less convinced that technologies like XBRL have yet found a place in the financial reporting world. It is a question of what should the frequency of reporting be? he said. He is a strong supporter of EU internal market commissioner Charlie McCreevy’s oft-repeated view that quarterly reporting will not be introduced in Europe. It would simply increase the possibility of manipulation, said Broadley. Let’s fix half-yearly reporting first. And the concept of XBRL, with its ability to pluck figures from a set of accounts and compare them with those from another company, doesn’t fit with the Broadley approach. Accounts should be for explanation rather than information. You need to report what management thinks, not just the numbers. I’d rather focus on getting the narrative reporting right than follow the XBRL approach. It is down to the culture again. Will XBRL information from a company in Malaysia say the same thing as the information from a company in France?
I’m always wary of criticizing the edited remarks of an interviewee, especially when an hour’s worth of someone’s utterances with their stops and starts, twists and turns are summarized in a single paragraph. Still, none of Broadley’s remarks seem on target. If I can restate his points — I hope not tendentiously — they are:
(1) XBRL will bias users against half-yearly statements and toward the shorter time-span quarterlies;
(2) XBRL will make users focus on the numbers alone, rather than explanation of the numbers;
(3) XBRL will exacerbate reporting differences among various financial jurisdictions by accentuating their different accounting cultures and traditions.
In this post, I’ll deal with item (1) and follow-up shortly with a second post on (2) and (3).
Quarterly financial statements have a long history in US financial reporting. The NYSE has required quarterlies for listed companies for over 60 years. In 1970, the SEC mandated the quarterly 10-Q. Although globalization of world capital markets, the speed of information delivery, and the convergence of accounting standards may put the quarterly versus half-yearly argument in greater focus, it certainly predates XBRL and much of the computer revolution. This year the EU issued new requirements for quarterly reports which, although not as comprehensive as the SEC 10-Q, do seem to indicate a trend toward interims of shorter duration.
If we limit the debate to the impact on investors, the tradeoffs between quarterly and half-yearly statements were summarized nicely in The Capital Market Implications of the Frequency of Interim Financial Reporting: An International Analysis, a study published last year by Rutgers University:
"More frequent interim reports could mean that security prices reflect the latest firm-specific information, leading to more efficient security pricing. [However] to the extent that more frequent interim reports force firms to make estimates in situations where more informed estimates are available only with the passage of time, the more frequent interim reports may be subject to more error (as viewed from the annual report standpoint)." Thus, investor response to the more frequent interim reports may induce greater volatility in security prices."
Thus it’s the competition between timeliness and accuracy that’s key to the debate. But where’s the impact from XBRL? At the margins, interactive data might improve "informed estimates," and that might push users toward interims of shorter periods, i.e., quarterlies. But as the authors note, more informed estimates for allocating operating costs, income taxes, etc. are "available only with the passage of the time." Whatever stunning powers XBRL may have, trying to make the hands of a clock move faster is best left to the likes of Uri Geller and his paranormal cohort.
Indeed, I can think of two ways XBRL may strengthen the case for the half-yearly. First, XBRL speeds the closing process. Thus, if the half-yearly closing can take as few as six days, financial officers who prefer the longer time-span but sense investors think the interval between reports is too long can point to a fast closing in support of the six-month interim.
Second, as John White made clear in his presentation at the SEC Interactive Data Roundtable in March, XBRL will make the analysis and distribution of the information contained in interims much faster. "Not only preparers, but investors, analysts, journalists, etc, will all have instant access to the same documents once filed." Again, users who think the 180-day reporting period is just too long may be assuaged by the fact that, once published, the statements can be quickly analyzed and reviewed.
None of this is to imply that XBRL cannot deliver much more company financial information much more quickly. The term "continuous reporting" is a bit ambiguous; however, it comprehends releases of financial information on a weekly, daily, hourly, or even real-time basis. The concept has been around for a long time. Indeed, a Forbes article dated February 11, 1985, on "continuous computerized reporting" includes a prediction by Sandy Burton, former chief accountant of the SEC, that investors "could be tapping into a steady, computerized stream of information via their personal computers in only 10 or 15 years."
Certainly XBRL brings continuous reporting much closer to reality. In an essay published late last year (and which I commented on in December 12 and December 15 posts), the CEOs of the major audit firms declare that a "brave new world of company reporting is already visible." For the accounting chiefs, the key issue is not the length of time covered by interim statements. In fact, they’re rather dismissive of all periodic reports, which they view as mere historical statements lacking predictive information:
"Financial statements are backward looking documents. They tell how a company has performed in some recent period. Perhaps some of the information contained in the financials is indicative of future performance, but much of it is not.In an environment of user-determined customization, users are likely to care less about the formats that have historically dominated the disclosure of company information balance sheets, income statements and statements of cash flows and far more about new formats that could be developed by our profession, analysts and users themselves."
Their argument, in fact, is that the continuous reporting made possible by XBRL will reverse the short-term outlook of investors:
Finally, and perhaps counter-intuitively, more frequently reported information may reverse some or much of the short-term-ism about which corporate managers and others have long complained. Once investors have almost real-time access to financial and other information about companies, forecasting quarterly profit numbers will no longer be relevant, while forecasts of daily or weekly profits will be pointless.
Whether this "brave new world" is in fact a utopia of transparent financial reporting or an Orwellian nightmare of information overload can and will be fiercely debated. But clearly the battle will be fought on terms much different than whether interims should be 90 or 180 days.