As many readers know, Walter Hamscher is an XBRL pioneer and one of the smartest people in the field. He recently gave us a wide-ranging interview in which he discussed a host of XBRL topics, including the SEC’s proposed mandate, the pace of XBRL adoption in the US and abroad, assurance issues, and Inline XBRL. The second part of the interview, which begins with question (4), appears below. The first part was posted last week; we’ll publish three more installments over the next three weeks.

(4) Arnold Hanish, Chairman of the FEI’s Committee on Corporate Reporting, recently said that he expects most companies will stick with the bolt-on (as opposed to integrated) method of furnishing XBRL exhibits, thus “yielding no benefits to preparers.” Do you agree with that assessment? Do you think that companies’ use of XBRL will naturally evolve from bolt-on to an integrated approach where they can realize the full benefits of XBRL adoption — or are you concerned that many firms will seek merely to comply with the SEC mandate and continue with the bolt-on approach?

There is a whole spectrum of interpretation as to what that statement means. At one very simple level, he is saying: nothing ventured, nothing gained. He also in some sense is jumping past the software to the XBRL, recognizing that in the short-term right now, corporate software tends not to have XBRL fully integrated into it — and it’s not even particularly easy to locate the plug-in module for whatever enterprise software or reporting product you happen to have at the moment.
 
But there are indeed separate products, products that are really XBRL native; but these other products are not necessarily aimed at Fortune 500 sized companies, and they don’t have nearly the mindshare that some other products that we’re familiar with. It’s also a difference of perspective. For Fortune 500 companies, it is so easy to do the bolt-on approach, in the same way that it’s easy for them to hold an office Christmas party. It is just an expense, and they put down their money and they move on; it doesn’t really impact their operations.

On the other hand, if you look at an Eli Lilly [NOTE: Arnold Hamish is Lilly’s Chief Accounting Officer], you notice that in the past couple of months, they actually are going through a rather large internal transformation centering around streamlining and making more efficient what they regard to be the core of their business, which of course is patient care and patient health. Naturally that is where Eli Lilly is focused as a consequence of its size. Access to capital markets is not an issue for them.

But now stop and think about smaller companies. It may be that in big companies, the preparers feel very much divorced from the fate of the company itself; the smaller the company, the more it is obvious that the preparer benefits from financial transparency — for the simple reason that financial transparency is what lowers their cost of capital. Eli Lilly’s cost of capital is probably not nearly what it is for a smaller company.

So the consequence of that is, of course, the larger the company, the more they regard the process as “this is just a burden, we already have all the access to capital markets that we need.” The smaller the company, the more XBRL is going to look like a bargain as the software comes online to actually make this work.

Consequently, the way I look at Arnold’s statement is that it’s true for large companies at this particular point in time. But I also think it’s focusing on the high end of the spectrum where I agree that a big company could get a short term benefit from XBRL, whereas as a midsize or a smaller enterprise is probably in a much better position to do that.

(5) Well, to make sure I am understanding you correctly, are you are saying that a smaller company would be more likely to move more quickly to an integrated approach for XBRL as opposed to the bolt-on approach?

I believe that if they were looking at it just from a cost of ownership and business value of the implementation that’s true. Of course, small companies have lots of other things on their mind. But if you start with the premise that for smaller companies access to capital markets and transparency have greater marginal value to them than it does to large well-known companies, apart from that you say, “we want to get these XBRL reports out, we want to get them out efficiently… but the bolt-on approach doesn’t look very efficient, does it?” No, and it’s not.

Let me just expand on this a little further. I know this mid-size company in Connecticut which has about 40 subsidiaries.  For a small- to mid-sized company, that data integration problem is fairly significant and it’s a cost to them; yet they are small, and so access to capital is always a problem. So for them, it seems to me that the trade-off to using XBRL to get control of their internal data is a much better value proposition, given that it also enables as a side-effect they are reporting in XBRL to the capital market. (By the way, Ralf Frank from the German Society of Investment Professionals had a very good presentation at the recent international conference at Eindhoven that spoke to these issues.)

I think that, once again, if you look culturally in the US, people are focusing on, “The damn government is forcing us to do this thing we don’t want to do.” Instead of saying, “well, if you move beyond the regulatory mandates there is actually a streamlining opportunity here.”

Now, the fear factor is exactly what I said before, which is if you don’t have a working application sitting there in front of you that you can understand in 15 seconds or 15 minutes, it is going to be a stretch for somebody to see benefits. But I think that once again some of the companies that are in this market do understand what that opportunity is. I think that once XBRL becomes an accepted part of the landscape — rather than a new regulatory mandate — it will be a lot more obvious and a lot easier to sell.

My point here is I think that when people look at the big Fortune 500 companies and say well, if they don’t benefit from a bolt-on, yeah that’s right, nothing ventured, nothing gained. Now, what about the other 9,500 US listed companies, how about them?

 

Add to Del.icio.us | Digg this

This entry was posted on Friday, June 20th, 2008 at 7:29 pm and is filed under General, . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.