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.

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