Written by Bob Schneider    Posted on August 31, 2007

SEC Chairman Christopher Cox ranks among the most important and consistent champions of XBRL. Even strong supporters of the standard have been pleasantly surprised by how often the Chairman promotes interactive data (the SEC’s preferred term for XBRL) in public appearances.

To test whether these general impressions were empirically correct, I reviewed Mr. Cox’s speeches from September 2006 through August 2007 to determine the frequency and prominence of interactive data mention. My methodology was hardly scientific: I used the Find command to locate mentions of XBRL or interactive data in Mr. Cox’s speeches published on the SEC website. I likely overlooked a speech or perhaps missed a mention here or there. Nevertheless, I believe my review was sufficiently accurate to establish how often Mr. Cox talks about XBRL, and what that discussion is about.

In all, I noted mentions of interactive data in 16 of his 42 speeches, or 38%. However, I think this ratio understates the extent of Mr. Cox’s evangelizing efforts. First, the numerator includes few inconsequential, “in passing” references — Mr. Cox usually devotes several paragraphs to XBRL issues when he does talk about them. Second, the denominator includes talks on topics like “eliminating the short sale ‘tick test’” that even the most determined advocate of interactive data would have difficulty finding an XBRL angle. In contrast, there was only one venue — the Philadelphia XBRL Conference held in December where Mr. Cox’s reticence on interactive data would have indeed seemed peculiar.

Moreover, the politically savvy Chairman (he was a long-time Congressman) discussed XBRL among audiences such as the National Italian-American Foundation where he might well have chosen more palatable (if pandering) fare, such as the Italian contribution to double-entry bookkeeping. (He did, however, talk about A.P. Giannini, the founder of Bank of America, at length.)

One way or the other, there’s no doubt that Mr. Cox uses his bully pulpit with gusto to get the word out on interactive data.  In his speeches, Mr. Cox makes many of the arguments XBRL supporters traditionally make for the standard: reduced error rates, increased transparency, improved analysis, and so on. But he also discusses benefits that are less well known.

For example, he notes one little-discussed advantage from the introduction of XBRL-enabled call reports for US financial institutions:

And now banks can even provide narrative, because that can be XBRL-tagged as well. As a result of this improvement, today only 5% of original reports need additional work. Before, as much as 34% of bank call reports were returned to banks for additional clarification. The old system lacked the technology to submit notes.

Mr. Cox thus does his best to dispel the persistent myth that XBRL reporting focuses exclusively on the numbers; in fact, he makes it clear that its advantages for reporting text information is manifest.

One other less-traveled area Mr. Cox delves into are XBRL’s benefits for internal control and attracting qualified directors:

Another way that interactive data can help smaller companies is by improving their internal controls, while at the same time reducing their compliance costs. That, in turn, can help attract qualified directors who will be more content with the risk profile of the firm.  It also seems likely that interactive data will permit companies to reduce the amount of manual work involved in maintaining their internal controls over financial reporting, permitting them to simultaneously cut costs while enhancing compliance with Sarbanes-Oxley.

What struck me most about the Chairman’s speeches was how widely he ranges in discussing interactive data uses. In the business press, there is much attention given as there should be — to the question of whether the SEC will make XBRL mandatory for company financial statements. But Mr. Cox, while hardly ignoring the importance of the financials, looks at interactive data through a much broader lens. In addition to the call reports example, he discusses at length the role of interactive data in uncovering the backdating of stock options; its use for disclosing executive compensation data; and the adoption of XBRL for the risk/return summaries of mutual funds. When it comes to interactive data, Chairman Cox truly sees the Big Picture.

There had been some discussion that, in the event of the resignation of Alberto Gonzales, Mr. Cox would be a strong candidate for Attorney General and that his efforts on behalf of interactive data might be coming to an end. It now seems more likely that other names will be put forth. The XBRL community can heave a sigh of relief that its most important advocate will continue his work, and the Chairman’s audiences can look forward to more discussion of XBRL-related issues in his speeches.

Written by Bob Schneider     Posted on August 23, 2007

Last weekend I watched L’Eclisse, a movie by the brilliant and revolutionary (or, if you prefer, pretentious and incoherent) Italian filmmaker Michelangelo Antonioni. The film, which features an intriguing scene of a mini-crash at the Rome stock exchange in the early Sixties, just happened to reach the top of my Netflix queue during a week of similar distress for world bourses. Against the backdrop of current headlines, the film’s depiction of investing Italian-style offers a useful filter for viewing the case for fully transparent XBRL-enabled statements.

The information supply chain of the small investors Antonioni portrays is composed of tips, rumor, buzz, and insider indiscretions. When those fail, they consider throwing salt in a last-ditch attempt to elevate stock prices. In other words, these are not people who would be inclined to use the SEC’s Interactive Financial Reporter Viewer.

For these aspiring members of Italy’s new middle-class, Fiat, Pirelli, and other powerhouses of the Italian economic miracle are merely numbers on a roulette wheel. Revenues and cash flow, much less a new accounting standard for pensions, are not part of the agenda. In fact, the only time “the fundamentals” are (barely) mentioned is when a broker resorts to banalities about the “strength of the industrial system” and “good liquidity” to pacify his newly poor clients.

I know comparing these Sixties-era small-time speculators at one of Italy’s secondary bourses (Milan, of course, was and is the country’s financial center) to individual investors in the US today is wrongheaded. Unlike Italy at that time, the growing interest in economics and investing in the US throughout the Eighties and Nineties, coupled with the availability of extraordinary and inexpensive information resources on the Internet, has today yielded a large and expanding group of US individual investors who are savvy and sophisticated about financial markets.

But what proportion of America’s 90-odd million investors do they represent? Those of us in financial fields who find ourselves discussing investing on an airplane or at a cocktail party will not infrequently discover that our interlocutors have more than a little in common with Antonioni’s characters. Their focus is more on how much money can be made how quickly rather than any of the nasty little details that might help them to do so.

In other words, I’m skeptical about just how many individual investors are eager to do their own investment analysis of companies and want easy access to much greater amounts of financial information. Yet I still come down strongly and unhesitatingly on the side of those who want to make as much financial information as possible publicly available in XBRL, the convenient, drillable, and flexible data format.

The most obvious (if strongest) reason is that it will improve the analysis done by professionals at the financial services firms who manage the funds through which most individuals invest, either individually or through third parties such as their employer.  Moreover, the work done by the pros tends to trickle down to the investing public through both traditional and new media, and XBRL-enabled statements promise to improve the knowledge level of all investor classes.

But I also think it’s important to have interactive data statements available specifically for the direct benefit of small investors, even if only a small percentage actually wind up using them. In the Internet Age, making public companies as transparent as possible (without harming their competitive edge) is what a democratic government in a free society should do. (By the way, that goes for its own activities too, like legislative earmarks.) It’s not a privilege it’s a right we have as citizens.

Many will ignore that right and will continue the traditions of generations of small-time stock players before them. The whispers under the eaves of the stock exchange are merely replaced by anonymous posts in an Internet chat room; the phone call from the stock huckster simply becomes spam from the penny stock con artist.

But small investors will have a much better alternative, should they seek to use it. Some of them will take advantage of that opportunity. Most will continue to leave the analysis to the professionals. And those who do neither will suffer the consequences.

Written by Bob Schneider Posted on August 15, 2007

The CFA Institute (CFAI) Centre for Financial Market Integrity recently completed a survey of its members on XBRL. (You can find an overview, the methodology, the actual survey, and the results online.) As in other interactive data surveys, the lack of XBRL consciousness is striking: When queried about their level of understanding of interactive data, some 59% of respondents answered “I am not aware of XBRL.”

Like many people, I take the results of opinion surveys — even from the most unimpeachable sources — with a grain elevator’s worth of salt. (Case in point: XBRL was the topic of a CFAI “Question of the Month” in May 2006 and the subject of numerous CFAI articles and presentations. Shouldn’t many more respondents by now at least be “aware” of XBRL?)

But when the answers are skewed strongly in one direction and the source is the CFAI, the results are well worth considering. In that light, the responses to two questions jumped off the page at me. First, here’s a question on tagging:

12. The flexibility of XBRL structure allows data tags to be created by companies while preparing their financial reports. What should the protocol be to create XBRL data tags for financial reporting purposes?

Here’s the response from the CFAI participants, a substantial majority of whom are fund managers and buy- or sell-side analysts (I’ve abbreviated the available choices; you can find the original text in the results):

Companies should have limited ability to create new tags in order to reflect unique business activities 66%

Companies should not be able to create new tags 25%

Companies should be able to create new tags without regard to current XBRL taxonomy or list of tags 9%

Given that two-thirds of respondents are willing to give managements limited ability to create new tags, it could be argued that most participants recognize the usefulness of extensibility. Put another way, however, some 91% want companies to have only limited or no ability to create new tags; a full quarter say they don’t want to see any new tags at all.

Thus 25% of respondents, sophisticated analysts who recognize the complexity of financial transactions are willing to sacrifice specificity for easy comparability and the other benefits of standardization. To me, the results also suggest that analysts are somewhat suspicious of how companies will use the extensibility features of XBRL.

This guarded view of analysts toward extensibility presents an interesting dilemma for company managements. If they want their XBRL-enabled statements to fully and accurately reflect the company’s results (or, for more cynical readers, if managers want to put the most positive gloss on corporate performance), they may need to create new tags. On the other hand, the very act of adding tags may serve as a red flag to more than a few analysts that, at a minimum, analyzing the company will require more of their time. Analysts may also view the statements as less comparable to peers’ and hence less useful.

Let’s turn to CFAs thinking on the auditing and review of XBRL statements. Here’s the relevant question on the survey:

14. What level of assurance is necessary to ensure that the proper XBRL tags are assigned to the reported amounts in accordance with GAAP defined tags (For example A company has tagged the cash amount reported on the balance sheet with the XBRL defined tag for cash balance sheet.)

Integrated audit or review by independent auditor/reviewer included in the overall audit 50%

Separate audit or review by the independent auditor 19%

Certification by the company’s managers 16%

Separate non-audit or review by an independent reviewer 11%

No certification by the company’s managers and no audit/review necessary 3%

Thus some 69% of respondents want the company’s independent auditor to assure tag assignment, and 80% want some kind of external audit/review. Simply having top managers sign off on the tagging appears much less attractive.

As I discussed in my post about the SEC’s March 2007 XBRL Roundtable, Chairman Cox was repeatedly asked by Terry Savage of the Chicago Sun-Times whether an audit or review by external auditors would be required for XBRL statements. Each time, the Chairman appeared to say No (you can hear their exchange at 1:17 - 1:20 of the webcast). The collective sigh of relief from the many panelists who are financial managers at early XBRL adopters was apparently audible. (I’m not aware of any further comments from Chairman Cox or the SEC on this issue; if there have been, I’d appreciate it if you would add a Comment below.)

Mr. Cox believes that, whatever the benefits of assurance, they are more than offset by the burdens it would impose. He is concerned that adding an assurance requirement will result in crib death (his phrase) for XBRL-enabled statements. Whether or not he is right, it looks like he will have his hands full convincing analysts of the wisdom of that position.

Written by Bob Schneider     Posted August 7, 2007

In my two last posts, I have argued with the views of Philip Broadley, Group Finance Director at Prudential and one of 11 financial leaders whose thoughts on key accounting issues were discussed in a recent KPMG report. My July 18 post refuted the idea that XBRL will bias users against half-yearly statements and toward the shorter time-span quarterlies. My July 25 article asked whether Broadley’s fear that XBRL will make users focus on the numbers alone rather than an explanation of the numbers is well-founded.

In this final post on his comments, I want to discuss a question that Broadley asks in this excerpt from page 11 of the report:

“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?”

Given Broadley’s sentiments toward XBRL, I think his answer would be “No, it won’t. Interactive data will reinforce national accounting differences, making company data less comparable among firms in different countries.”

I may be unfairly characterizing his position; in fact, it’s unfair of me to wring so much meaning from a single sentence.  I will grant that — whatever Mr. Broadley’s views — his question is an important one. So leaving aside the equally compelling issue of whether some national accounting differences are not only inevitable but necessary, let me address the question: Will XBRL work to perpetuate national differences in financial reporting and make cross-border financial statements less comparable?

A major focus of the KPMG report was to measure the progress in adopting International Financial Reporting Standards (IFRS).  The authors found that “Reporting in each country still bears the hallmarks of its previous national GAAP.” As John Hegarty, Manager, Financial Management, Europe and Central Asia, for the World Bank states:

“German pharmaceutical companies will be more like German car companies than they will be like French pharmaceutical companies. The actual differences remain. We have to be realistic and accept that all of this won’t work perfectly from today. It will take time.”

The Economist had an interesting report on the issue in May:

Whether pure IFRS or not, all countries are prone to interpret the rules in ways that reflect their old national accounting standards, according to KPMG, an accountancy firm Kuwait and other countries in the Middle East, too, are said to be adopting IFRS with certain peculiarities. The worry is that if enough countries seek to tailor standards to their liking, there could be hundreds of different versions of IFRS instead of one set of international rules, which is the whole point, says Sir David Tweedie, the head of the IASB.  We have to nip this in the bud.

Now how does Sir David view the role of XBRL in attaining the IASB’s goal of a single set of international accounting standards? Here are his remarks at the Philadelphia XBRL conference last December:

Where does XBRL fit into the IASB’s efforts on the standard-setting front? As I mentioned earlier, the IASB is committed to developing standards that meet the needs of users of financial accounts, in particular the investor community, to enable them to make rational economic decisions. We at the IASB and the IASC Foundation (our oversight organisation) view XBRL as an important tool that will enable these users to take full advantage of the increased comparability and transparency offered by IFRSs.

For Sir David, clearly XBRL is part of the solution, not part of the problem.

Let me turn to the views of Charles Hoffman, who is widely considered the George Washington of XBRL. In his book Financial Reporting Using XBRL (UBMatrix, 2006, p. 159), here’s what Hoffman says about interactive data and comparability:

XBRL is comparable to the extent that users of XBRL in a certain situation desire to have comparability. Comparability is not an XBRL issue; it is a domain issue; how much comparability does a specific domain, or use, of XBRL desire. Comparability is a very emotional issue that people turn into a technical XBRL issue. It is a domain issue which will be determined by the domain.

I’m taking some liberties here in using this quote to support my argument. Certainly Hoffman isn’t specifically addressing XBRL vis–vis IFRS standards, and clearly “domain” has wide applicability beyond financial reporting. Nevertheless, could there be a more straight-forward declaration of his feelings on the matter than “comparability is not an XBRL issue.”?

Now you would think at this point that — delighted to find seemingly strong support for my position that interactive data will not hinder cross-border comparability from both the world’s leading accounting standards-setter and the Father of XBRL — I would have the good sense to claim victory and sign off.

Well, I may not be dumb, but I am stupid. Because I can’t help mentioning that I do see a way that the structure of XBRL could impede cross-border comparability of financial reports.

Describing the role of jurisdictions, XBRL says “Jurisdictions promote XBRL and organise or sponsor the creation of taxonomies, notably for the main accounting standards for business reporting in their area.”There are 20 jurisdictions Japan, Canada, Poland, etc. — including one for the IASB. Many if not all of the jurisdictions have created national taxonomies to reflect the accounting specific to their area.

As I reviewed the websites of the various jurisdictions, I came across this statement from XBRL New Zealand:

A draft taxonomy has been prepared in accordance with “old” New Zealand Generally Accepted Accounting Practice (NZ GAAP).  This taxonomy will not be developed further because after 1 January 2007 all financial reporting entities in New Zealand will need to prepare financial statements under New Zealand equivalent of International Financial Reporting Standards (NZ IFRS)…XBRL-NZ intends to replace this taxonomy with an extension taxonomy to the approved IFRS taxonomy developed by the IASCF to recognise unique terms in the financial statements of New Zealand reporting entities.

For me, this raises the question: Will all jurisdictions follow New Zealand’s example? Will all national GAAP taxonomies be allowed to gracefully decay as IFRS is adopted? Or do these GAAP taxonomies, in at least some jurisdictions, have constituencies that would like to see national taxonomies continue to reflect country-specific accounting practices, thus perpetuating the cross-border differences in XBRL-enabled statements that Sir David seeks to eliminate?

Comments from XBRL jurisdiction members, demonstrating that I’m both stupid and dumb, are most welcome.