Written by Matt Kelly     Posted on May 28, 2008

Matt Kelly is editor-in-chief of Compliance Week, a magazine and online newsletter on corporate governance, risk, and compliance. Prior to his role at Compliance Week, Kelly was a reporter and contributor on corporate compliance and technology issues for magazines such as Time, Boston Business Journal, eWeek, and numerous other publications.

Well, the captain of the football team has finally announced that he will be attending the big XBRL homecoming party. Now everyone is just waiting to see what he’s going to bring when he shows up.

Of course I’m talking about the Securities and Exchange Commission. Two weeks ago, it confirmed what everyone already knew: that it is going to push through some sort of rule mandating XBRL for financial reports starting as early as next spring. As usually happens in the bureaucratic world of U.S. securities regulation, the SEC voted on its proposal before the language of any proposal was available. Official word from the Commission is that the language of the proposing release will be published “soon.” In the common tongue, that translates into “once the SEC staff gives up trying to answer the really tricky questions.”

So here we wait. And that gives us an excellent opportunity to try answering those really tricky questions ourselves.

Auditor Attestation   One of the great fears Corporate America has for XBRL is that auditing firms will horn in on the action. If auditors start inspecting the accuracy of XBRL tagging efforts (and increase their billable hours accordingly), CFOs and their financial department minions will go into orbit. That is precisely what happened when the Sarbanes-Oxley Act came along in 2002. To this day, corporations grumble that auditors force excessive testing (read: costs) upon them under threat of a bad auditor’s opinion.

At the SEC meeting on May 14, when the commissioners approved the XBRL proposal, everyone was notably silent on the question of auditor attestation. The SEC certainly knows this is a big deal and auditors themselves go to great lengths to say they do not want to start testing XBRL-tagged statements. (Whether you believe them or not is a different matter.) So plenty of SEC watchers believe the proposing release won’t include auditor attestation either.  

Legal Liability   So let’s assume auditors aren’t going to start testing the accuracy of XBRL tags. What happens when some company, inevitably, files a financial statement with data tagged incorrectly?  At the moment, the SEC says it will extend the same liability protections as companies in its pilot XBRL program received; XBRL statements will be “furnished” rather than “filed,” thus liability under federal securities law will be limited.

That may be a wise introductory step. But in the long term, if the SEC really wants investors to use and rely on XBRL, it can expect investors to want to sue somebody when an XBRL-tagged statement proves unreliable, or for someone to be held accountable if a company tries to use XBRL fraudulently. I don’t even know how XBRL could be used fraudulently right now; however, as enthusiasts keep saying it will usher in a new wave of innovation in financial technology, we can expect that new forms of fraud or sheer ineptitude will be part of that… and we’ll need some way to bring the law to bear on the offenders.

Tagging Standards   Yes, the new XBRL taxonomy of U.S. Generally Accepted Accounting Principles is a comprehensive dictionary of terms to describe financial data. Companies still need to agree on when to use those terms. The better analogy here is to think of the taxonomy as a thesaurus, providing many different words as substitutes for some other word. In the world of XBRL-tagged financial statements, that is going to mean disputes over exactly what qualifies as, say, a “distressed asset,” or an “allowance for doubtful accounts.”

Several XBRL enthusiasts have told me the solution is for industries to get together and form a consensus on what tags to use under what circumstances. But the word “consensus” derives from the ancient Greek “something industries can rarely do.” Will the SEC’s proposing release address this? Probably not, and that’s probably wise. But that doesn’t make the question go away.

Written by Bob Schneider     Posted on May 27, 2008    

As Gary Purnhagen reported in his recent post, the SEC voted 3-0 on May 14 to propose a rule that would mandate XBRL for financial reporting. Here is a round-up of some of the interesting commentary and links on the proposal:

Rob Blake live-blogged the announcement for the new (and very promising) Bowne for XBRL blog.  I agree with his assessment that the SEC “…closely followed the recommendation of CIFiR” and was a little less aggressive than some observers had predicted. In the view of Rob and others, a particularly noteworthy item was the SEC’s recommendation on notes:

For year one of a registrant’s XBRL filings, the SEC will require the statements to be tagged in detail but the notes/footnotes in “block” or summary tagging only.  No surprise here…trying to “ease” companies into the tagging of the narrative information.  But year two…wow…they are heating things up a bit.  A registrant’s second year (and assumed beyond) XBRL filings will have the notes/footnotes provided in detail tagging, just like the financials.  That’s a substantial workload increase for year two of XBRL creation over year one.  Technically a company could begin the detailed tagging process during year one and simply choose to only submit the summary tagging for the notes/footnotes to the SEC but still…watch out for year two!!!

Dominic Jones at the IR Web Report generally agrees with this appraisal and attempts to quantify the cost:

The cost and burden of preparing deep-tagged footnotes and schedules in the second year appears to be unknown. I think it could easily be double or triple that of tagging the face of financial statements.

John Turner on his Insight blog also found this part of the announcement interesting and surprising, but he demurs on how onerous it will be:

Some commentators have suggested that [deep-tagged footnotes] will be very burdensome. I happen to think that the next generation of tagging tools, which I expect to be available before too long, will take most of the pain out of the process. I think that the SEC is trying to ensure that XBRL can eventually replace traditional filings, and, in any event, by ensuring that notes are tagged in detail, they are guaranteeing that the markets will get their hands on the structured data that they really want.

Broc Romanek at the TheCorporateCounsel.net, however, is generally skeptical on costs: “Put me down as leery of the SEC’s estimate that the average price for an XBRL conversion will be under $30,000 and require less than 40 hours of work.” He also weighs in on the “furnished” versus “filed” debate:

During the meeting, the SEC was coy about what the proposed liability scheme will be (and who might be on the hook for the tagging). It was mentioned that there would be “limited” liability, but no one mentioned if XBRL data would be considered “furnished” rather than “filed,” as is currently the case under the SEC’s pilot program. This is an issue that likely will be intensely debated during the comment period, regardless of what the SEC actually proposes (and in my opinion, limited liability for the accuracy of the financials is a huge mistake — if investors can’t rely on the numbers tagged in XBRL, what’s the real value of them?).

As for the longer term impact on an XBRL mandate on equity research, this is the take of Integrity Research Associates:

Research processes will also change dramatically.  The sell side outsources much of its junior analytic work to teams in India.  These requirements will be dramatically reduced once financial data is tagged and easily (and quickly) incorporated in financial models.  There are similar implications for information companies such as Bloomberg, Thomson Reuters, Factset, etc, some of which were slow to embrace the changes, but now paying close attention to both the XBRL and RIXML initiatives.

Here are some other useful commentary and primary source links:
• The Motley Fool, one of the leading sites for individual investors, is very enthusiastic.
• Another optimistic appraisal at istockanalyst
• Good summaries of the details are provided at the FEI blog, Financial Week, and AccountingWEB.co.uk
• SEC press release on proposed rule
• Statement of James Lopez, SEC staff member, on specifics of the rule
• The webcast of the meeting (scroll down to the May 14 files)
• XBRL US white paper on the proposed rule
• Pozen Committee Interim Progress Report

As TheCorporateCounsel.net noted, there’s confusion right now about what exactly the SEC is proposing on furnished versus filed statements and the role of assurance. The proposed rule should be published soon; let’s hope it gives us specific answers on what the SEC intends on these key issues.
 

Written by Nigel Matthews      Posted on May 19, 2008

Nigel Matthews is Senior Product Manager at ACL Services Ltd..  He is a member of the Canadian Institute of Chartered Accountants and has over 15 years experience implementing audit analytics in North America, Europe, and Asia.

Mike Willis of PricewaterhouseCoopers wrote in last October’s issue of Internal Auditor that “There are many pervasive [information] supply chain problems that exist today due to the lack of an open information standard and proprietary formats…XBRL enhances the work of internal auditors by addressing these information problems and enabling them to do more at a lower cost.”

Much of the recent discussion on XBRL has focused on the technology’s application to solving interactive financial reporting problems, most notably the SEC’s initiative to XBRL-enable EDGAR filings. But there’s a lot more to the XBRL concept than EDGAR. Mike’s comment highlights the tremendous potential of XBRL-GL to address one of the fundamental challenges facing auditors today: How can the average non-specialist auditor find and make sense of complex, often poorly documented, but nonetheless vital enterprise data — without getting deep into the weeds of IT technology?  
 
So why is continuous auditing important, and how can it work together with XBRL to provide improved business value? Continuous auditing gives auditors the ability to notify the organization, on a timely and ongoing basis, about errors and other situations that affect financial performance. Properly implemented, continuous audit and monitoring strategies can go a long way toward ensuring day-to-day adherence to internal business policies and external regulatory requirements — for example, correct handling of VAT on goods purchased and sold. (Note that the terms continuous auditing and continuous monitoring can be used somewhat interchangeably. Depending on who in the audit profession you talk to, continuous monitoring implies a responsibility for self- monitoring on the part of business stakeholders, as opposed to a purely audit-driven function.)

Continuous audit is becoming an important tool to enable enterprises to respond to and manage specific enterprise risks. In practice, continuous audit strategies are typically used on a daily basis to determine the validity, accuracy, and the appropriateness of transaction-by-transaction business records relative to business policies and control objectives. For example, one can use continuous auditing to examine and test every one of the millions of transactions that pass though the enterprise’s core computerized accounting records and ultimately contribute to the enterprise’s reported financial position — a task that would be impossible in all but the smallest organizations without the use of computerized tools.

Before continuous auditing came along, the “traditional” approach to audit, developed over the last forty years (after business computing caught on in the late 1960s), involved either of two methods. If the auditors chose to audit “through” the computer, they obtained periodic bulk downloads of historical data and fed this into their analysis tools, often through a long process of trial and error data discovery involving IT specialists and system administrators. In this case, the data was frequently weeks or months out of date before the audit began.

Many auditors chose not to even try this, instead opting for the second method, i.e.,  auditing “around” the computer. This approach entailed  placing their trust in the correct configuration and operation of the computer systems and business controls, sometimes backed up by various judgmental or statistically based strategies for achieving audit “coverage” via transaction sampling methods.

The concept of continuous auditing is not new. In recent years, however, it has become increasingly obvious that continuous audit is now not only technically viable, but is the auditor’s preferred response to the challenges posed by continuously changing  business conditions, massive data volumes, and the demands to audit better, smarter, and faster.

That said, continuous audit requires the auditor — and the computerized tools they are using — to have ongoing and ready access to enterprise data.  This is where XBRL-GL enters the picture. XBRL-GL enables auditors to pull information from disparate systems and map this information to standardized, tagged format, both in terms of the data content, and most important, placing and maintaining the data in the correct business context throughout the audit and reporting process. It answers the questions: What is the time period covered by the data?  What currency is that transaction in?  When was the transaction last updated? Where did this data come from? Has the data under audit been traced and reconciled back to source?

In the continuous auditing implementation projects which I have been involved in, answering these types of questions often takes up much of the available project time – in some cases up to half the total project.  XBRL opens up the possibility for auditors to achieve near-real-time data access and immediate, relevant, audited business information. It’s a simplified audit process that equips auditors to review more data in detail more frequently, thereby allowing them to spend time evaluating data, not working through information supply chain problems.

So where does making life better for auditors fit into the overall picture of XBRL-enabled financial reporting? In today’s organizations, continuous auditing and monitoring has become a reality, but there are still challenges in the financial reporting supply chain. These challenges require extensive manual audit and reconciliation procedures before and during (and hopefully not after) the audit process. XBRL-GL can bridge that gap and make the roll-up of continuously audited data into XBRL-enabled financial statements a faster, more effective process. The result is less opportunity for errors, less re-work, and improved efficiency for all stakeholders in the financial reporting process.

We’ve already seen the benefits that continuous auditing has brought to many companies around the globe, despite the challenges these firms (and their auditors) have been forced to face and overcome to access enterprise data. Beyond achieving the primary goal of delivering more timely, higher-quality output from the audit function, continuous auditing strategies frequently generate immediate, significant contributions to enterprise financial results through early identification of errors and fraud, and allow companies to move quickly to respond to control weaknesses and gaps. Once implemented, continuous audit strategies often exhibit ROI within days and weeks.

If a standard XBRL-GL schema is adopted and implemented widely by both technology providers and organizations submitting financial reports, one could reasonably expect the efficiency and cost savings of continuous audit to be achievable for more companies. At the very least, it would allow more organizations to benefit from continuously reviewing key financial controls and help overcome the data access challenges that often prevent companies from even trying.

Written by Gary Purnhagen      Posted on May 15, 2008

Gary Purnhagen has more than 20 years experience in helping firms in diverse industries meet document processing challenges, including SEC disclosure. His engagements have included responding to the SEC’s EDGAR program, use of the Internet and other digital media for information dissemination, and most recently XBRL. Over the past three years he has given dozens of executive briefings on XBRL and spoken about the standard at a number of professional seminars.

The SEC has adopted a rule proposal that, over a three-year phase-in period, would mandate companies submit their financial reports in XBRL format. As I wrote in my recent post, “If the SEC’s Voluntary Filing Program (VFP) and all the speeches Chairman Cox has given have not convinced the public that the SEC is serious about making XBRL a reality, these proposed rules should.”

Here are salient details of the proposal:
 
The phase-in begins with companies with a worldwide public float of over $5 billion (about 500 firms) for fiscal periods ending on or after Dec. 15, 2008. These companies will be required to “furnish” exhibits with their annual and quarterly reports containing their financial statements tagged and their footnotes tagged on a block level for the first year. The second year after a company is phased-in it will be required to tag footnotes in a detailed manner. The approximately 500 companies will be both domestic and foreign firms that prepare their financials using US GAAP.  They will also be required to post these exhibits on their web site if they have one.
 
In the second year of the phase-in, all other large accelerated filers will be mandated to submit XBRL exhibits.
 
In the third year, all remaining companies, including small and foreign firms preparing their financials using IFRS, will be phased-in.

For the first year after being phased-in, a company will have a 30-day grace period in which to submit these exhibits (I assume under the cover of Form 8-K).
 
The rules should be published within two weeks and there will be a sixty-day comment period.
 
Chairman Christopher Cox presided over the open meeting attended by the two standing commissioners. All three voted to propose the rules. In his introductory comments, Cox spoke of the implementation timeline of the SEC’s EDGAR taking ten years. He called that as being a languid sleepwalk. In today’s environment with information overload and a competitive global capital market, moving quickly to adopt this technology is a necessity.
 
John White, head of the Division of Corporate Finance, who coordinated the proposed rules and has been a vocal proponent of XBRL for the past two years, noted that these rules were a reflection of Chairman Cox’s vision and dedication to interactive data. In his introductory comments, White cited the milestones leading to this proposal:
 
2004 – The SEC begins to study the feasibility of XBRL.
2005 – The SEC launches the Voluntary Filing Program.
2006/2007 – Numerous roundtables on interactive data are held.
2007/ 2008 – The SEC creates and posts XBRL viewers.
2007 – The Office of Interactive Data is created.
April 2008 – XBRL US delivers the new US GAAP taxonomy
 
Observing these milestones, you did not need to be a fortuneteller to know what was going to happen at this meeting.
 
The SEC also announced a meeting for next week to consider whether to propose amendments to provide for mutual fund risk/return summary information to be filed with the Commission in interactive data format. To date, funds have been lagging corporations in participating in the SEC’s Voluntary Filing Program. This meeting on the heels of yesterday’s event will help to close the gap. After all, Mr. Cox realizes that the biggest impact that XBRL tagging will have with the vast majority of American investors is how it improves how fund information is distributed and analyzed.

Meanwhile, software vendors, financial printers, and other service providers are all rushing to these 500 companies looking to capitalize on the published mandate. Companies will face a basic question of whether to obtain the software tools and learn how to do it themselves or outsource the initial time-consuming preparation work. Companies that offer services all have a different approach to tackling this work, and I’m sorry to say with various degrees of quality. So buyer beware, the solution that a service provider offers you may not be the best one for you.
 

Written by Daniel Roberts     Posted on May 12, 2008

Daniel Roberts is the former Chairman, XBRL-US Steering Committee; he can be reached by email. 

Normally regulators, including the SEC, find it difficult to claim cutting-edge status as technological innovators. However, the current Chairman, Christopher Cox, clearly showed his intentions as far back as November 2005, when he publicly stated his objective to bring financial reporting into the 21st century. As past chairman of the XBRL-US Steering Committee, I had the pleasure of watching the Chairman’s commitment to that goal take shape and become the now widely expected mandate for the adoption of XBRL for regulatory reporting to the SEC.

Recently a subcommittee of the Pozen Committee, a task force established by the SEC to address the issue of complexity in financial reporting, recommended that the Commission mandate the use of XBRL for reporting financial information. The new language is designed to make financial reporting clearer, more consistent for comparing “apples to apples and oranges to oranges,” and faster for the consumption of the information that today’s investors and regulators need in order to perform rapid and detailed analysis of public companies. In mandating the use of XBRL, the SEC follows other capital market and banking regulators, including those in China, Singapore, the Netherlands, and Spain, not to mention the United States. Other regulators are expected to follow, extending the spread and scope of information-centric reporting.

The widely anticipated (and previously postponed) release of a proposed Rule by the SEC on May 14 will show just how aggressive, or otherwise, the Commission will be in its initial requirements.

Historically, financial statements and associated reports have been “document-centric,” whether physically or electronically printed. Now, business leaders have a narrow window of opportunity to prepare themselves and their financial reporting infrastructure for the imminent conversion to an “information-centric” marketplace.

XBRL or interactive data is an international standard for “tagging” individual pieces of information within a full report, thus making it possible for a consumer of that information to select and import automatically only the information required by the user. Regulators will not be the only, or even the primary, benefactors of the change to information-centric reporting. Analysts, investors, lenders, managers and competitors will all benefit from the ability to select and import information the moment that information is released by a company. Gone will be the days of manual re-keying or inference-based data import engines. Also gone will be potential errors resulting from that process, as well as the need for significant information technology infrastructure to parse and process the information.

Following the recommendation of the Pozen Committee (and in particular Peter Wallison’s additional comments provided to the Committee), and based on progress to date, there is a widely held expectation that the Commission will require companies to provide 2008 year-end results as XBRL-tagged reports. How many companies and to what level of “tagging” will remain uncertain until we see the proposed Rule. But consensus seems to be that we should expect the “largest 1000” companies to be providing XBRL versions of their financial statements to the SEC in 2009.

The SEC has spent the past four years experimenting with XBRL through its Voluntary Filing Program and the Test Program, and through its support for the development of a comprehensive US GAAP taxonomy (i.e., the “dictionary” of business terms that can be used to “tag” financial reports as XBRL documents). In addition, the SEC’s reporting system is undergoing a complete rewrite.  The SEC is also investing $49 million in a rewrite of the EDGAR system with acceptance of XBRL as one of the key elements.

What can the thousands of SEC reporting businesses do today to prepare themselves? There are four steps that a business can take today to ensure that the transition to XBRL is smooth and to position their business for taking advantage of this change:

1. Identify a project team to learn more about interactive data and experiment with the creation of XBRL versions of current reports.
2. Ask the primary business reporting software provider to brief appropriate personnel on how they will assist in making a smooth transition.
3. Ask the company’s auditor to brief appropriate personnel on how they will be incorporating the provision of assurance over XBRL reports into the audit process.
4. Brief company executives and Board of Directors on the impact, benefits, and timelines for the introduction of XBRL into business reporting processes.

When ultimately mandated by the SEC, the transition from document-centric to information-centric business reporting need not be resource-intensive, and it should not become another “SOX” event. All the evidence from participants in the voluntary and test programs to date seem to indicate that the costs are significantly lower than many fear. The steps above will ensure that the transition goes as smoothly as possible. Otherwise, as with any fundamental change, failure to plan and prepare will result in increased costs — both internal and external.
 

By Mike Willis and Michael Smith     Posted on May 9, 2008

Mike Willis was Founding Chairman of XBRL International and is a partner with PricewaterhouseCoopers. Michael W. Smith is a vice president in Gartner Research. In the first installment of this two-part article, they described how baseball’s front office is using an objective-evidence approach (known as “sabermetrics”) to win more ballgames – a method that business managers would do well to emulate in their own operations. In Part Two below, they look at how Enhanced Business Reporting (EBR) coupled with XBRL-GL can help realize for businesses what sabermetrics has achieved for baseball.

Does a pitcher’s ERA or a player’s batting average actually align with the desired outcome, i.e., winning?  Not according to the professional opinion of Bill James, a former night watchman for the Stokely Van Camp Pork and Beans plant in Lawrence, Kansas.  In Part I of this two-part series, we discussed how James changed the way baseball managers view critical performance measurements. The point is that “what you measure impacts performance,”  so why do many financial executives continue to assemble metrics that don’t actually align with corporate performance?

At the source of existing measurements for both baseball and corporate performance is a common thread:  tradition.  James has been instrumental in scientifically debunking many of baseball’s traditional measures and establishing those more directly aligned with the desired performance outcomes. But he has an advantage that many financial executives don’t:  relatively cost-effective access to the underlying transaction-level data from which he can perform his scientific analysis.  Typically, financial executives cannot cost-effectively access transaction-level data from within their own organizations.

The limited access to transaction-level data by financial executives results from another tradition, the double-entry accounting system established in 1494 by a Franciscan monk, Luca Pacioli.  The traditional use of double-entry accounting methods within reporting systems, based upon the manual summary methods of the 15th century, are focused on organizing and summarizing accounting information. 

This double-entry compliance approach to information is based on information summaries (revenues, costs, assets, liabilities) that typically do not facilitate the aggregation of transaction-based unit data that may be more useful for performance measurement purposes.  As many financial executives are painfully aware, this limitation of existing double-entry summary-based accounting systems is at the core of their business intelligence and/or corporate performance transformational project efforts. 

Let’s look at a simple example.  Traditional internal systems can help corporate management with a wide range of compliance-oriented requirements and related questions such as What were sales last period?  and What are our inventory levels?.  However, these same systems cannot answer more basic and important performance-related questions, such as: How many ‘widgets’ did we sell?, What was the product mix of our sales or orders for the same period?, and What did we sell to XYZ customer last period?  At the core of this information problem is the double-entry accounting orientation wherein transaction level details are discarded as the information is summarized and moved upstream from one software system to another.  

In order for corporate managers to make the same type of scientific analysis and leverage the outcomes-based measurement approach that James brought to baseball, transparent cost-effective access to underlying transaction level data is needed.  However, data warehouses and reporting tools are commonly optimized for accounting-based compliance-oriented reporting (e.g. financial statements), and changing the proprietary design or architecture of the data warehouse to expose this data is simply not a cost-effective solution. 

Standardized transaction ledger level taxonomies can expose this transaction unit level data without changing the existing design or proprietary schema of the underlying databases.   How to achieve this in a cost-effective manner is where the XBRL Global Ledger (XBRL-GL) comes in.  The XBRL-GL taxonomy is a standardized way to describe any ledger-level concept: general ledgers, payable ledgers, receivable ledgers, inventory ledgers, any type of ledger. 

The XBRL Global Ledger is NOT a standard description of a “general ledger” containing the 55 million possible ledger account descriptions; rather, it IS a standardized way to describe ledger level information, the database fields common to business operational and accounting systems.  As such, the XBRL Global Ledger can be used to both (1) standardize the relevant transaction level details currently included within relevant ledgers, and (2) expose this transaction level data for analysis and inclusion in performance measurement processes. 

The application of the XBRL Global Ledger does NOT require the underlying ledger systems to be XBRL compliant.  A company’s XBRL Global Ledger standardized description of a ledger can be mapped to virtually any ledger system — from those that are already “XML compliant,” to those accessible via ODBC or SQL, to those that can export a simple text export file — using a simple XML mapping tool that costs less than $500 (here’s an example of how this works). 

The heavy lifting here is neither with the technology nor the XBRL Global Ledger; rather, it is in the design of a company-level standardized description of the relevant ledgers.  This is an architectural effort that can start simply, but for the greatest benefit requires a fairly deep understanding of the company information processes and requirements, including those that relate to predictive performance metrics.

The double-entry limitations imposed by existing internal compliance processes adversely impacts the metrics used for performance management. Retail sales per square foot (RS/SF) is an example of this limitation in a commonly used key performance indicator (KPI) for the retail consumer products segment.  It provides some insights on performance, but is based upon summary level information rather than the more detailed information available at the transaction level.  This commonly used KPI does not help management understand the product mix, product through-put, product margins, or rental costs associated with the profitability of the store, business unit, and/or company. 

The RS/SF metric is based upon historical data and does little to assist management with predicting future demand for specific products and therefore future net cash flows.  The RS/SF KPI is the corporate equivalent of a baseball’s ERA or batting percentage.  It is a traditional measure, but its relationship to profitable performance and future net cash flows may be somewhat dubious at best.

Enabling management to cost-effectively obtain and analyze the unit level transaction data from their existing proprietary data warehouses is critical to making the assessments necessary in creating relevant outcome-oriented performance metrics.  Ensuring management has the necessary information to timely and cost effectively monitor and manage the increasing complexity of business operations is critical to long-term sustainable performance.

Assessment and analysis of the underlying data leads to development of more relevant and outcome-oriented performance indicators.  The XBRL-GL can expose the underlying ledger level transaction data, and XBRL taxonomies can articulate relevant KPIs.  Mapping from the underlying data to the KPI reporting summaries used by management is a native “feature” of XBRL.

A corporate equivalent of James’s scientific approach to predictive baseball metrics is needed.  The Enhanced Business Reporting Consortium (EBRC), as Robert Eccles has discussed on this blog, provides a collaborative environment for development of an information framework and specific standardized key performance indicators relevant to specific industry sectors.  As such, it enables management to cost effectively address the traditional transaction level information access points above. 

EBRC is an open collaboration of market participants working to improve the quality, integrity, and transparency of non-financial information.  Members of the EBRC are developing a voluntary, global information framework for nonfinancial components including predictive key performance indicators. 

The EBRC structured information framework and standardized KPI concepts, articulated via XBRL taxonomies, provide an explicit machine-readable artifact that can be mapped to the wide range of disparate internal data stores, thereby enabling increased transparency of information relevant to KPIs predictive of future net cash flows.  The EBRC framework industry sector KPI information can be obtained from the relevant internal data stores in a cost-effective manner, regardless of how the double-entry accounting information is aggregated.

The XBRL and EBRC standards and market-based development processes are now a reality.  Company and investor collaboration in the development of predictive standardized KPI concepts is underway.  Join this effort to move your performance metrics out of the 15th and into the 21st Century.   To learn more about the EBRC KPI collaboration project efforts, please visit  http://www.ebr360.org/.  To learn more about the application of XBRL to your internal performance processes visit http://www.xbrl.org/.

Written by Toshinori Kobayashi     Posted on May 5, 2008

Toshinori Kobayashi is director for enforcement of corporate disclosure at JFSA (the Financial Services Agency of Japan). He was responsible for the XBRL renovation project of EDINET, the JFSA’s electronic disclosure system.

On March 17, the world’s largest XBRL-enabled public system made its debut: Japan’s Financial Services Agency (JFSA) launched its renovated EDINET system for the electronic disclosure of financial information of listed companies and other business entities.

Based on the results of the Government’s internal review, the renovation project began in August 2006 with the development of the system and taxonomy. As it proceeded, various stakeholders – businesses, investors, analysts, CPAs, and others — weighed in with their input on the deployment. In January/February 2007 and July/August 2007, two test pilot programs took place. There was a high level of interest by Japanese businesses in this project: some 1,200 companies voluntarily participated in the second pilot program.

Development proceeded relatively well; however, as is usual in big projects of this kind, the workload was largest right before launch. Just before the new system went into operation, the project’s engineering staff endured a string of all-nighters. The engineers’ fatigue turned to exhaustion when, on the day of launch, heavy access at start-up and minor programming errors brought the new system down for several hours. However, in the end, mass chaos did not ensue, and the new EDINET system successfully came on-stream.  (Please note the new EDINET taxonomy can be obtained online.)

The business entities that, according to Japanese law, must prepare and disclose electronically their annual reports, quarterly reports, security registration statements, and other financial filings total about 5,000 listed companies and 3,000 funds. What’s important about the current project is that, for those entities required to file, the XBRL format is no longer voluntary but mandatory. 

NOTE: Currently companies that prepare their statements in US-GAAP or IFRS are not required to file using the XBRL format.  Because the systemization of taxonomies for US-GAAP and IFRS in their home countries and areas has not yet been completed, such a requirement would be too much of a burden for the affected companies. When the taxonomies for US-GAAP and IFRS are completed, mandatory filing will be reviewed for the affected companies.

Companies that are filing on EDINET will be required to issue XBRL-enabled financial reports and statements starting in fiscal 2008. Since most firms in Japan have March fiscal year-ends, the large majority of companies will issue their first XBRL reports for the first fiscal quarter ending June 2008. The reports for that period will be submitted in July to August.
 
As I mentioned at the outset, the new EDINET system will be the world’s largest XBRL-enabled public system; it (1) covers about 8,000 companies (funds included), which is an exceptionally large number; (2) mandates XBRL, and (3) makes XBRL-enabled data public for the use of investors and others. 

Although various countries have put into place XBRL systems, I don’t believe there are any that have all three characteristics.  Prior to my current post, I had responsibility for software policy inside the Japanese government. I can say that, outside of information appliances, there are not many areas where Japan is a world leader in IT systems. Therefore, this new, leadership position of Japan in the XBRL field is very exciting, and I believe Japan should make efforts to continue that excitement in developing XBRL.
　
Nevertheless, certain issues do face the new EDINET system:

(1)  XBRL adoption is only being effected for the financial statements. The announced US GAAP and IFRS taxonomy drafts cover footnotes, which the EDINET taxonomy currently excludes.  A definitive schedule for introducing notes hasn’t been established; at the very least, footnotes should be considered for inclusion soon.

(2)  The technologies for versioning, rendering, and formulas are not in place. As work goes forward to decide the specifications for these technologies, a pathway toward implementation must be evaluated.

(3) There is a need to secure US-GAAP and IFRS interoperability. Right now XBRL is being introduced in Japan and the other major securities markets. However, if the technological consistency of the various taxonomies, the method of introduction and application of those taxonomies, rules for instance document generation, expression methods, and so on all differ among Japan, US-GAAP, and IFRS, financial information will be neither interoperable nor compatible.

From the beginning of the project, I have been very concerned about item (3) above. In January 2007, we raised this issue in our discussions with the SEC, and — after several meetings — the IASCF joined in October 2007. Thus, there is a system now in place for the SEC, IASCF, and JFSA to work together on this matter. In December 2007, at the international XBRL conference in Vancouver, the three parties announced their cooperation on this issue (please refer to our conference presentation). Afterwards the cooperation of the EC was secured as well. As a result, there is a system in place for four of the major regulating entities to work together on these issues.

I believe XBRL must become a part of the global infrastructure for securities markets. The impact of XBRL will be enormous not only for investors and analysts, but for the reporting companies as well. From this vantage point, I think securing multinational interoperability is extremely important. I hope to touch on these points in more detail in future posts. My hope is that an understanding of the Japanese experience with EDINET can contribute to the cooperative work of the major regulating entities, and that we tackle this arduous task of promoting interoperability. We are busy working together with the SEC, IASCF, and the EC in preparing to introduce a part of our cooperative work at May’s XBRL international meeting at Eindhoven. 
 

Charlie Hoffman, who is widely regarded as the originator of XBRL and has one of the most distinguished resumes in the field, kindly agreed to do an extensive interview with us. The third and final installment, beginning with question (8), appears below; part one was published on April 23 and part two on April 28.  

(8) You recently started your own XBRL website and blog that has become required reading for the XBRL community. What encouraged you to start a blog at this point? What objectives do you hope it will achieve?

I wanted to experiment with blogging. I have quite a bit of knowledge and information which I have accumulated over the past 10 or so years, and I am the type of person who prefers to share information.  Besides, I find that pulling information together in order to do a good job presenting the information helps you learn.

I can’t really say that I have any objectives to achieve.  I do like having a forum to express my views and to organize things and distribute them where I don’t have to answer to XBRL International or UBmatrix.  I can pretty much do what I want – there’s no “party line” to follow.

(9) Your Financial Reporting Using XBRL, published in 2006, is one of the very few books that discusses the technical aspects of interactive data in any detail. Do you have any plans for a new edition?

I am working on a new edition which updates the old version for things which I have learned and developments in XBRL over the past two years.  I hope to have the completed version available by the end of the year or so.

(10) As XBRL moves forward, so does the trend toward convergence of international accounting standards. Do you see the two movements as part of the same trend toward global standardization of financial reporting? In what ways do they support and reinforce one another? Or, alternatively, do you see them as being on separate tracks?  

The trend toward convergence to one set of accounting standards has existed long before XBRL existed.  It seems only reasonable that, if we have one set of global financial reporting and accounting standards, that we would want one electronic format to express that information, rather than every country (or whoever) creating their own electronic format.  I don’t know if IFRS and XBRL are on the same track, but each does seem to benefit the other.

Of course, this assumes that you believe that paper is a dead reporting format for financial reporting.

What is interesting about this is to see if the world has the resolve to actually make one set of accounting standards and one electronic means to exchange that information a reality.  I mean, look at how great the simple standard USB (Universal Serial Bus) is.  What a fantastic thing.  Plug and play, it actually works great.  It would be fantastic if those who are in charge of such things could pull off creating one set of accounting standards, one electronic format.  Wouldn’t that be fantastic!

Undoubtedly IFRS and XBRL are opportunities to improve financial reporting globally.  It will be very interesting to see how all this turns out.

(11)  Is there anything you can think of that has not been commonly communicated relating to the value of XBRL that should be?

In my view, it has not been commonly communicated what XBRL really is.  People generally are told that XBRL is a means to exchange information.  But that is not really what XBRL is; rather, that is one of the things that XBRL enables.  It enables way, way more things than exchanging information. The best definition of XBRL I have seen is on Wikipedia:. 

XBRL (Extensible Business Reporting Language) is an open standard which supports information modeling and the expression of semantic meaning commonly required in business reporting.

In my view, XBRL is a way of expressing semantic meaning and one of the things you can do because of that is exchange information.  In my view, exchanging information is a by-product of XBRL. What is interesting to me are all the things you can do with that semantic meaning inside taxonomies and financial reports.

An example of this benefit is a disclosure checklist which is commonly used in creating a financial statement.  Imagine an application which could, for example, tell you that you forgot to disclose a property, plant, and equipment policy.  It is trivial to write an application which says basically, “If you have a line item on your financial statement called ‘Property, Plant and Equipment,’ then you need to have X,Y, and Z policies and disclosures.”  The FDIC uses this type of business rule extensively within their systems; they call them reportability rules.  I think they have two thousand such rules.

Because financial statements where XBRL is used are structured data (rather than unstructured data), a computer application can take advantage of this and automate things like a disclosure checklist.  VERY, VERY, VERY few people every mention this, but in my view (as a CPA and a financial statement preparer), this is the highest value of XBRL.  This attribute will both improve the quality of financial reports of all sorts and reduce the cost of preparing these reports, as many of these things checked manually can be automated if XBRL, or any structured format really, is used.

And this notion of an electronic automated disclosure checklist (and I do realize that not everything in a disclosure checklist can be automated) is only ONE example of how XBRL can be used.  There are many, many others.

By Mike Willis and Michael Smith     Posted on May 2, 2008

Mike Willis was Founding Chairman of XBRL International and is a partner with PricewaterhouseCoopers. Michael W. Smith is a vice president at Gartner Research. In this first of a two-part post, they describe how baseball’s front office is using an objective-evidence approach (known as “sabermetrics”) to win more ballgames – an approach they believe business managers would do well to emulate in their own operations. In part two, they will look at how Enhanced Business Reporting (EBR) coupled with XBRL-GL can help realize for businesses what sabermetrics has achieved for baseball.

Springtime, hot dogs, and those famous words “play ball” are hallmarks of America’s favorite pastime: baseball.  ERA, pitcher’s wining percentage, batting average, RBIs are traditional baseball metrics… but do they actually measure the performance outcomes that matter?  Bill James, a former night watchman at the Stokely Van Camp Pork and Beans plant in Lawrence, Kansas, believes that many of these statistical measures are simply nonsense.  But who is Bill James?  And for that matter, who cares what he thinks? And what does any of this have to do with your company’s performance?
 
Let’s first look at some of baseball’s traditional metrics and how James sees them.  (See also this 60 Minutes article and 60 Minutes video for additional information.)

A pitcher’s won-loss record does not tell how good or how bad a pitcher is. “The most accurate thing is to focus on the strikeouts, the walks, the home runs allowed. And to evaluate the pitcher on that level,” James explains.

Batting averages are considered THE way to measure a hitter’s effectiveness; however, James believes that players who get a lot of walks and wear down pitchers are overlooked. So he created a new more telling statistic, the “on-base percentage.”

James also disputes the notion that pitchers prevent stolen bases.  He proposes that it is really the catcher.

But his opinions are not just about players. His analysis of Boston’s Fenway Park (with its famed left-field wall, the Green Monster) shows that it favors left-handed hitters rather than right-handed hitters as commonly assumed. 

Many baseball fans have never heard of Bill James, even though his objective-evidence-based statistics have literally changed the way that the game is played.  James was hired by the lowly Oakland A’s in 1997.  Subsequently his insights led to a lineup of young, underrated players that put the A’s in second and first place in the American League West in 1999 and 2000, respectively. 

In 2004, another long-time hapless team, the cursed Boston Red Sox, hired James away from Oakland.  James’s objective-evidence approach to baseball statistics, commonly referred to as “sabermetrics,” tipped the scales on the curse and led in part to the Red Sox World Series championships in two of the past four years after the historic 86-year drought.    

So, who is Bill James?  He is Senior Advisor for Baseball Operations for the Boston Red Sox.  Many in baseball say that he has moved the management style of a lot of General Managers from one of gut instinct to a more systematic approach based on hard evidence; in so doing, he fundamentally changed the way the game is played.

At the core of James’s approach is a deep analysis of how baseball games are won and what factors most influence this outcome (i.e., cause and effect relationships).  This has led to a more detailed analysis of game results and the identification of new performance metrics that are predictive of these results.  This approach is very similar to the objectives of corporate performance management, and CFOs should take notice.

James truly understands the end-state objective and how the parts contribute to that objective. In baseball, the objective is winning games and the parts are the players/coaches, ballparks, and equipment. In business, the objective is to maximize the net present value of all future cash flows (not just for the next 30 days, 90 days, or twelve months, but for the entire life of the firm); the parts are resources and related business processes, people, and technology used to generate cash flow.

James has always seen baseball from this simple perspective — winning and how the parts contribute to winning. He is not distracted by individual accomplishments and truly sees the whole as being much greater than the sum of the parts.

Business executives, retail investors, and regulators can learn a lot from James. It starts by having a clear understanding of the end state value objective — maximizing the net present value of all future cash flows. Next, it’s understanding what affects the ability of the company to generate future cash flows, namely the parts (i.e. internal people, processes, and technology). To measure the effectiveness of the parts, management must have timely and cost effective-information on:  

• operating margin and unit information on specific products and services;
• relationships between specific employees, process enhancements, technical capabilities, and skills;
• insights on process status measurements;
• supplier and customer delivery expectations.

Understanding and measuring the cause and effect of how these parts contribute to the whole is sabermetrics for business, and it is long overdue — unless of course, you prefer the 86 year curse.

Traditional corporate performance metrics include EPS, gross revenue increases, current ratio and others, but these are lagging indicators of performance.  Company managers are becoming increasingly aware of the need for predictive measures of business performance, and they are seeking to learn more about these measures to assist in their operational decision-making.  Many financial managers can quickly identify growth via revenue increases; however, the sources of this growth go undetected.  For example, increases in product units, product mix, and related specific product margins are often more difficult if not impossible to obtain in a timely or cost-effective manner, leaving managers flying blind for days, weeks, and often months. Its “batting with a blindfold,” to use a baseball analogy.

There are two standardization efforts that are useful to management in implementing more effective information processes for decision making.  One is the extensible business reporting language (XBRL), which is an international information standardization language that can be used to articulate, access, manage, and analyze the granular levels of information and data necessary for more effective objective and evidenced-based decision making.  The second is the Enhanced Business Reporting Consortium (EBRC); as discussed in a post on this blog by Robert Eccles, it is a market-based collaborative standardization effort that has developed an information framework for a broad range of value-oriented concepts and predictive performance indicators.  

EBRC is collaborating with other similar market oriented efforts in the US, the EU, Japan, and Australia to create a robust reusable international standardized framework and related predictive performance indicators for consideration, expansion, and adoption by company management.  

There’s an old business school idea called managing by objective.  EBRC makes this idea work by clarifying the relationship between the actions that a manager might take and the objective that the manager wants to achieve.  In other words, EBRC helps the manager concentrate his efforts to achieve their priority objectives; after all, what you measure does impact performance.  This is true for baseball and for corporate performance.   The question is:  Are you measuring the right things to achieve your desired performance objectives?

Both XBRL and EBRC are market collaborative consortia, open to all supply chain participants, and specifically designed to address the problems of information access and evidenced-based predictive measurements.  Management should consider engaging in these efforts to ensure that they are leveraging the most advanced delivery methods and performance measurement criteria, rather than relying on outdated delivery and performance decision process enablers.   

While the great American pastime is baseball, the most popular American pastime is making money.  Understanding the cause and effect of business performance measurements is critical to sustainable corporate economic growth, and value creation is a critical skill for any all-star manager worthy of Hall of Fame consideration. 

And for all you Yankees fans, we understand that they have developed their own approach to sabermetrics!