Jack Ciesielski kindly granted us an interview which appears below. Through his ownership of R.G. Associates, Jack publishes The Analyst’s Accounting Observer, a research service focused on accounting issues and trends as they affect financial reporting and investment analysis. His public AAO Weblog is one of the best accounting blogs on the Web. He has been a member of the Financial Accounting Standards Advisory Council and FASB’s Emerging Issues Task Force; he currently belongs to FASB’s Investors Technical Advisory Committee. Jack was formerly an analyst for the Legg Mason Value Trust and spent his early career in public accounting.

(1) It’s generally agreed that the analyst community has not been vociferous in demanding XBRL. Some observers attribute that to a lack of knowledge about the benefits XBRL can deliver. Do you believe that’s the case? Or do you think there are other, more substantive reasons why analysts haven’t shown greater interest in XBRL? 

I think the investor interest is latent; it is something that will appeal to them, but right now, there isn’t much to grab one’s attention. You can’t start doing the kind of analyses – cross-industry, cross-company – you’d like to be doing five years from now once this is off the ground, simply because the technology isn’t there yet. Neither is the breadth of companies adopting XBRL.

Don’t take the silence as disinterest. Analysts do their work in the here and now. When there’s a wide variety of interfaces and entire industries of firms that have adopted, they’ll show more interest. I don’t think it will be hard to convince them, if you can show them that it might enhance their abilities to make comparisons.

(2) How important do you believe assurance is for getting analysts to use XBRL data? Do you think they will be convinced by arguments that interactive data has essentially already been audited and that XBRL merely presents audited data in a much more flexible format?

The data may already be audited. Its integrity needs to stay sound in the format in which investors use it. I think that the “assurance tag” won’t be a priority – at first. Once there’s an intentional snafu (a bias or outright lie) in some firm’s data that has been tagged – something that I don’t look forward to, but there’s bound to be someone who will cross the line of propriety – I think users will start to be wary and it could actually hurt the image of XBRL data.

You know the old saying “garbage in, garbage out”? You could hear that a lot among users if there’s an accounting blowup linked to XBRL.

(3) Under the SEC’s proposed XBRL rule, approximately 500 of the largest companies will be the first to submit XBRL exhibits. But some say it’s smaller firms seeking to lower their cost of capital who would benefit most from an interactive data mandate, and thus they should be involved earlier. In this aspect of the phase-in of an XBRL requirement, do you think the SEC took the right approach?

I think most investors would prefer to see all-at-once adoption. Think about the promise of XBRL: it’s supposed to enable comparisons of all companies against each other, not just one big company against another. While the staggered adoption approach makes sense, I think investors would be badly served and would become unsettled if the staggered approach starts staggering – with repeated deferrals for small firms. We saw this with Section 404 – the deadlines for small firms were repeatedly extended. It was shameful.

As for lowering the small firm’s cost of capital, I hesitate to generalize. It’s too easy to see expanded facility for analyzing also having the opposite effect.

(4) Do you see some segments of the financial community benefiting more from XBRL statements than others? Among (a) portfolio managers, (b) quantitative analysts, (c) buy-side analysts at a major fund, (d) sell-side analysts at a major broker, and (e) knowledgeable retail investors, which should benefit most, and which will benefit least?

It’s all a guess at this point, but it seems most likely that the quantitative analysts would gain the most, since their work is generally the most data-intensive and this should make data more fluid. After that, I’d say buy-side analysts at major funds would benefit the most: they generally have the most companies to follow, and the data-flexibility in XBRL would help them work smarter with less effort. The same holds true for perhaps knowledgeable retail investors. As for the sell-side analysts — they usually have a smaller universe. And I don’t think the portfolio managers would benefit much: they usually don’t do a lot of detail work. They’re relying on the analysts for that. I wouldn’t rule out the possibility that XBRL could tempt portfolio managers to wade into data, however, and change the way they do their jobs.

(5) How do you see the future of XBRL? Do you think most companies will adopt it only to the extent that the SEC requires them to do so? Or do you think many companies will move to adopt XBRL throughout their information supply chains to realize the greatest possible benefits?

I tend to believe that firms don’t willingly adopt new standards unless there’s something in it for them – even  if there’s something in it for their investors. SOX 404 was a good example: good for the shareholders, but viewed only as a compliance cost that didn’t help the company’s managers. That’s not an easy mindset to change, and I think that’s an obstacle for XBRL adoption. Until tangible results show up – lowered IT costs, lowered cost of capital, or both – I think it would be tough to get adopters without an SEC mandate.
 

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