Written by Bob Schneider      Posted on December 19, 2007

Back in the Early Paleozoic era of interactive data (i.e., autumn 2006), my Google Alerts on keyword XBRL would arrive only fitfully. Even when an alert did show up in my mailbox, it would have only an entry or two.

That prehistoric epoch is clearly past. This month, I’ve been getting alerts almost every day, sometimes with ten links or more. Some of the frenetic activity is due to the Vancouver conference, and some to the recent release of GAAP taxonomies. But overall, the explosion (well, uptick) in media coverage and blogosphere musings reflects the growing recognition that XBRL adoption is rapidly coming into view for US companies. Here is a roundup of some of the more interesting stuff that’s recently appeared on the Web.

(1) As usual, Peter Wallison of the AEI had important things to say about XBRL in his address in Vancouver. He placed interactive data in the context of other watershed events in US financial history, such as the introduction of GAAP in the 1930s and the end of fixed commissions on the NYSE. Wallison offers interesting predictions of XBRL’s impact, most of which I think are on target, such as CFOs will be put under greater pressure to explain the underpinnings of the financial statements they release.

One forecast I question, however, is his belief that the concomitant drop in research costs means that …an industry of freelance analysts is likely to develop offering advice to ordinary investors for a modest fee.  Let’s assume more ordinary investors are indeed willing to lay out hard dollars for investment research, which is hardly a given. I think large, established financial players will still be much better positioned, since they can reduce their cost structures to offer an economical product that, importantly, has brand-name recognition. But overall, Wallison’s predictions appear spot on.

(2) Don Tabscott, a leading business strategist, gave a speech titled Wikinomics: Mass Collaboration, Transparency and XBRL. I don’t see it online as yet, but a post on his blog gives good insight into the content. The speech was sufficiently inspirational to motivate Charlie Hoffman to start his own blog on XBRL for financial reporting. In an announcement on the XBRL-Public group, he states the objectives of the blog and makes a persuasive case of why business users need to get involved and take XBRL “the last mile” to broad use.

A major focus of Charlie’s blog (which already seems to be going great guns) will be the public review of the US GAAP taxonomy released on December 5 by the SEC. (The Commission’s press release refers to its contents as computer labels, which seems unfortunate to me.) XBRL US has a step-by-step tool; the comment period ends April 4, 2008.

(3) Was Chairman Cox’s recent discussion of XBRL on CNBC the first known mention of interactive data on everyday TV Perhaps, but after a few comments on XBRL by the Chairman, CNBC’s reporters segued immediately into other, apparently weightier topics. (However, CNBC is still a step ahead of the New York Times: a search of their archives still doesn’t reveal a single hit for XBRL.)

(4) Dominic Jones at IR Web Report has an amusing post on the efforts of Microsoft and EDGAR Online to claim bragging rights for being first to file its 8-K using the new XBRL tags. Although Microsoft apparently won the race, as the Comments reveal, EDGAR Online can claim victory too.

In general, the press coverage XBRL has received has been mostly positive; examples are found at the Financial Times, Reuters, and itbusiness.ca. One dissenter in a letter to the FT did see XBRL primarily as a ploy by consultants to increase their fees. But in a rejoinder Robert Kugel of Ventana Research, who recently did a great article for us on accounting standards and XBRL, makes quick work of dispatching his arguments.

Finally, Financial Week has an interesting piece on the speech John White, the SEC division of corporation finance director, recently gave to the AICPA. Mr. White said the SEC has lots of different choices of how XBRL might be phased in, including:

Mandating XBRL adoption based on a company’s size;
Allowing companies to file XBRL statements 30 days after filing their paper 10-K; and
Having companies issue reports using XBRL that are more informal than filings.

Notably, he added I would not see us mandating anything in this area until we see that the actual taxonomy can be successfully, efficiently, effectively used.

Written by John Turner Posted on December 12, 2007

John Turner serves as the Chairman of the XBRL International Standards Board and is a member of the XBRL consortium’s executive committee. He is the Chief Executive of CoreFiling, one of the leading XBRL vendors. In this post he addresses a missing piece of the interactive data puzzle: assurance. You can read more about this topic in a white paper he wrote titled Assurance Considerations for Interactive Data.

Fresh back from the latest international XBRL conference in Vancouver, I think the writing is on the wall. The SEC’s Voluntary Filing Program (VFP) — the sandbox that lets registrants furnish their quarterly and annual financial statements in XBRL format in a low risk, low pressure environment to the EDGAR system — is going to close down. Why Because it is going to be replaced — with mandatory XBRL filings for large corporations toward the end of 2008 or early 2009. All other registrants will follow before long. The immediate message that all SEC registrants should take away is that now is the right time to participate in the VFP: while it’s still available, still low risk, still low pressure.

Mandatory XBRL filings will undoubtedly involve (no doubt with a short transition) explicit or implied assertions about the accuracy and utility of the financial information contained in them.

That’s why it is important that financial executives, regulators, and auditors alike work together to determine how XBRL documents can be independently reviewed.

The SEC’s efforts are creating a domino effect, with securities regulators around the world either monitoring what is happening or implementing their own programs. Increasingly, policymakers are seeing this development as a question of national competitiveness. For an admirable analysis of this phenomenon, read the keynote speech made to the conference by Peter Wallison, who serves on the Pozen Committee of the SEC.

Japan’s Financial Services Agency is moving to mandatory XBRL-based disclosures, including the equivalent of earnings releases (made through the Tokyo Stock Exchange) for all listed companies as early as April 2008. One-quarter of Japanese companies are participating in a pilot program that’s fully 1,000 listed companies.

Contrast this with the few dozen companies, or less than 1% of EDGAR filers, that have participated in the SEC’s VFP program so far. Perhaps the VFP will become substantially more popular at the point that it is crystal clear mandatory filing is on the way, but at present it looks as though the US market is letting slip a great opportunity to get comfortable with this technology. Let me repeat: It’s not too late! Sign up now.

It won’t be very long before it is those documents the bar-coded financial disclosures that will be the primary materials consumed by financial market systems to help analysts and investors make decisions about the best way to invest. This is vastly more sophisticated than today’s processes that rely on slow and inaccurate re-keying of a subset of the financial information published by companies.

Is the American market ready? Well, the framework is not far away. Thanks to a Herculean effort by XBRL-US, the new US GAAP taxonomies have just been completed in draft. Public review of these taxonomies is well under way. The software situation is beginning to shake out. The education process for CFOs and IROs has a long way to go, but it is accelerating quickly.

However, there is one area that still really seems to need a kick along: audit and assurance.

While there are a number of committees working on this issue within the audit profession, and the regulators are examining the issues actively, this is an area that needs rapid attention from preparers as well as the broader audit profession. Not just in the US (in fact, all the action is currently stateside) but internationally as well.

First, there needs to be acceptance of something fundamental: XBRL disclosure will require (a small amount of) additional review, above and beyond today’s audit. Suggesting that this step is unnecessary would be a serious disservice to the investing public as well as the professional financial markets. Publishing information in XBRL is more complicated than transforming an existing report into PDF or HTML. It isn’t like today’s “EDGARising” of existing reports into a specific layout. It involves management making decisions about which “tags” they need to use for which concepts. It is like having a supermarket of goods without bar codes that need to be labeled correctly.

You need to put the bar code for Heinz tomato soup on the Heinz tomato soup can, not the (similar-looking) Heinz potato soup can. Just as in the grocery store, once you’ve selected your bar codes the first time around, the process becomes much easier next time. And, as you’ve guessed, if you can get the manufacturer (in this case, the consolidation or ERP system) to put the bar codes on at source, everything becomes easier again. Whichever way the bar codes are applied, the information that has been marked up this way gains hugely important utility and gives rise to a wide range of efficiencies. Investors are going to rely on these tagging decisions, so they need to be reviewed by someone independent.

To be clear, this isn’t a huge area. There have been a few suggestions from frankly rather badly informed pundits that XBRL assurance will amount to another Sarbanes-Oxley. That is probably a bit mischievous.

What’s really involved? Auditors (and investors) are concerned with identifying areas of risk that might introduce material misstatements into financial statements as a whole. XBRL introduces a small number of new types of risk. First, there is a pretty wide range of basically technical issues that need to be tested. Examples include determining whether the correct date and the correct currency have been associated with concepts being disclosed. Most of these tests can be automated, in part or in full.

While management no doubt can run through these kinds of tests, it would be best if an independent expert also conducted these reviews.

More substantively, there are a number of areas that require professional judgment from an independent expert. These relate to decisions about the manner in which financial statements are marked up, or tagged. Since XBRL encourages companies to create extension taxonomies (i.e., customized definitions about financial concepts being disclosed by particular companies), this is not quite the same as choosing between bar codes of tomato and potato soup. But the analogy is not a bad one. Specific areas that require professional judgment include:

–Determining whether a company has chosen the correct tag to mark up a specific disclosure.

–Determining whether a company has correctly decided to extend a taxonomy with a custom definition.

–Deciding whether a company has associated the right values with its chosen tags.

(As mentioned in the introduction, a lot more detail, some examples, and some tentative recommendations can be found in the white paper I’ve prepared on this topic.)

So what needs to be done? The business community needs to accept that a small incremental piece of audit work is part of interactive data. It is likely to involve some small additional costs at the outset which should be more than offset by a range of savings in the short term.

The “assurance supply chain” community (i.e., the audit profession, its regulators, and its clients) need to identify the tests that should be applied to draft XBRL versions of financial statements. Work needs to be done with securities regulators as well as software vendors to make sure that anything that can be fully automated is automated. And the audit profession and its regulators need to agree on an audit or assurance standard that will govern this kind of work. Most important, auditors then need to be educated in the new procedures. If this education process is not in full swing by the summer of 2008, the “assurance supply chain” might have failed the investors and analysts that it serves.

Written by Bob Schneider Posted December 6, 2007

When the accounting research team at Bear Stearns talks, financial professionals listen. And with good reason: the group has been number one in its category on Institutional Investor’s All-America Research Team for 17 straight years.

The group’s recent report XBRL: The Investor’s Path to Better, Faster, & Cheaper Financial Information should go a long way toward convincing securities analysts that XBRL should be adopted for financial reporting. In assessing the value of interactive data for analysts, lead author Dane Mott makes a powerful and compelling statement:

We believe that the inevitable mass implementation of this technology by public companies will lead to one of the largest increases in analyst productivity since the introduction of electronic distribution of financial filings over e-mail and the Internet. When fully implemented, XBRL has the capability to simultaneously increase the integrity of the data collection process, reduce data-accumulation costs for investors, and decrease the time that it takes for analysts to load financial information into their models.

Most of the report is in the form of a FAQ. For me, the most interesting question is: What are the primary benefits of XBRL to investors? If I am an analyst already subscribing to databases that allow me to download financial information, why is the introduction of XBRL a meaningful event for me?

Mott’s smart answer is to draw on real-world experience, using his own group’s activities as an example of the improvements interactive data offers:

Often times we conduct very large studies on accounting issues impacting companies in indices such as the S&P 500 and Russell 3000. Due to the significant volume of data we need to analyze in these studies, we either must spend weeks or months manually collecting the data or download the data from the databases available to us. If we collect the data ourselves, we often must make the decision to not collect some relevant data to our analysis simply because every additional data item we decide to collect can lead to days or weeks of additional data-collection time. Further, we have found that when we make the decision to collect information from databases, we often must spend days or weeks “cleaning” the data due to errors made by the data collectors. When we compare our manually-collected information to database information, we typically find an unacceptable level of data entry errors in databases. While cross-checking our data adds to the reliability of the information we publish in reports, it is a costly and time consuming process that could be completely eliminated with the mass-use of XBRL technology.

Mott suggests interactive data will be particularly welcomed by quantitative analysts, who similarly work with enormous amounts of data. Their computer programs often focus on data outliers (i.e., values far off from most others in a data set), which are frequently the result of input errors and other inaccuracies. XBRL statements promise to eliminate many of these false signals.

Here are some other key points Mott makes:

(1) XBRL is a “rather inexpensive” technology for companies to adopt. He cites the experience of United Technologies, whose total investment for implementing XBRL in the reporting process was just $40,000.
(2) Fee-based databases of company financial information will still be valuable to investors. XBRL will improve the cost structure at data aggregators and allow them to reduce their prices.
(3) Analysts have been indifferent toward XBRL not because there’s little need for the technology, but because they don’t know much about it. With only 61 US companies implementing XBRL, there isn’t much incentive for analysts to learn more.
(4) Mass adoption of interactive data will only come if the SEC or stock exchanges mandate it. This echoes Mike Skutinsky’s view of the necessity of a “top-down” approach for implementation.

As with any report with so much substance, the reader may have one or two quibbles. Mott says the US in many ways is behind other nations in XBRL adoption, and cites an example of 800 companies that used XBRL in their half-year reports to the Shanghai Stock Exchange. Given the more advanced regulatory and legal environment in the United States, however, I’m not sure this is a fair comparison. I also wish that some mention had been made of XBRL GL and the potential of interactive data outside the realm of financial reporting.

Overall, however, this is an outstanding piece of work. The imprimatur of the Bear Stearns accounting group is an important milestone for interactive data and is sure to be widely applauded by the financial community as a key reference point in the deployment of XBRL in the US.