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.
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