Written by Daniel Roberts     Posted on September 24, 2008

Daniel Roberts is the former Chairman, XBRL-US Steering Committee, and member of the AICPA and XBRL International working groups on assurance over XBRL. He is the former National Director of Assurance Innovation for a Global Six accounting firm. Mr. Roberts can be reached by email.

This is the first installment of his two-part article on XBRL and the assurance function; the second half will be published next week.

Background

About two years ago, the CFO of a large firm told me that his company would not participate in the SEC’s XBRL Voluntary Filing Program (VFP) until he had assurance regarding the XBRL that his firm would provide to the SEC.  He knew that the SEC did not require assurance, and that the XBRL would be “furnished not filed.” Nonetheless, he would not publicly participate until he knew that his financial reports in XBRL would not contain any errors.

He did this by having his staff perform their own assurance engagement based on the guidance provided by the PCAOB in 2005. When I asked him why, he said “It’s not the SEC that requires the assurance; I require the assurance”.

Earlier this year, the SEC released a Proposed Rule recommending a timetable for the adoption of XBRL for reporting by SEC registrants.  Notably missing from the recommendations is the requirement for reports provided in this new format to be audited or reviewed as is required for current SEC filings.

Participants in the SEC's existing VFP are not required to have any assurance provided over their VFP filings. At the Interactive Data Roundtable on March 19, 2007, Chairman Cox said that to require assurance over these filings would be "crib death" for the voluntary program, and potentially for the XBRL initiative (see page 59 of the transcript).

Still smarting from their terrible underestimate of the costs that Sarbanes-Oxley (SOX) would impose on businesses, the SEC has taken every opportunity to emphasize the low cost of XBRL implementation.  The shock of SOX assurance costs, and the fact that such costs for XBRL are such an unknown, have probably been the major reasons for the SEC to avoid the subject of assurance over XBRL.

At the same time, primarily from a lack of a deep understanding of XBRL by their professional standards groups and what I’ll call “standards overload,” the accounting industry also has not developed guidance on how to provide assurance over XBRL.

This lack of clarity has resulted in a lack of guidance for industry as a whole, and it is leading some people to state that assurance over XBRL filings will not be required, that auditing firms will not want to provide that assurance, or that filing companies will be unwilling to request or pay for such assurance.

For regulators and investors, the XBRL "version" of the financial statements will most likely become the primary version, or at least the version that investors will rely on.  As a result, a failure to provide an audit opinion on the version of the financial statements that are used as primary statements by the investor community would certainly undermine the very assumption that there is a need for an audit in the first place.

Auditor Conservatism

Auditors by nature are a conservative, cautious bunch.  Not only are they trained to be, but their standards specifically state that they are required to be. When companies fail, shareholders, clients, and creditors frequently go looking for the deepest pockets…and that includes the auditors. All firms carry significant reserves for potential legal costs, knowing that any claim, even if not supported by a court, can still result in millions of dollars in costs to the firm.

And -- of course -- there is the still-fresh memory of the collapse of Andersen, one of their peers.  All the major firms are now homes to large numbers of former Andersen partners and staff; to these individuals, caution and risk are both real, and have had a painful impact on them.

The best way to minimize the risk of a lawsuit is to ensure that the auditor has traced all financial statement figures all the way back to source transactions.  Needless to say this is not possible, and therefore the concept of "materiality" comes into play.  All "material" financial statement figures will be confirmed to a level of granularity where the auditor can have some confidence that the figures are accurate.

When considering the work to be performed by the auditor, there is a natural desire, from the perspective of minimizing their risk, to expand the scope of audit work to cover as much potential risk as possible.

XBRL as a New Risk

New technology brings new risks. If there is anything that is certain, it is that the introduction of XBRL, a new reporting technology that today is rather poorly understood by either the auditor or the filer, will be viewed as an area of significant potential additional risk. Auditing standards professionals in the accounting and auditing firms will understand the risk (or at least understand the uncertainty associated with new technologies applied to financial reporting.)

When XBRL becomes mandatory, the auditor that says "Okay, we'll only audit the HTML version of the financial statements" will be taking on a huge level of risk.  As a result, we should expect the professional standards and risk management functions within the auditing firms will insist on auditing the XBRL as well, or they will refuse to provide an opinion on the rest of the financial statements in any other format.

It’s a smarter position.  Picture a future courtroom.  On the stand is the audit partner who signed off on the opinion.  "Can you please tell the court why you chose not to audit the information that your own literature has been saying for years will be the information that will actually be used by the investor to make investment decisions?"  I doubt that is a question that any audit partner will want to have to answer.

It stands to reason we should expect auditors will take the most cautious approach when presented with the question of whether to audit the XBRL or not to audit the XBRL.

Written by Gary Purnhagen     Posted on September 12, 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. He is an independent consultant assisting firms in embracing innovation and responding to the SEC's pending mandate of XBRL.

I’ve been reading with interest the various takes on the SEC’s press conference introducing IDEA last month. They generally range from “ho-hum” to “there isn’t much substance,” and that EDGAR will be around for some time. EDGAR will be around for a while, just like travel agents are still around. I don’t use them anymore, but I’m sure others do. I like the value and convenience of Travelocity or Orbitz. They provide me with a better model than visiting or calling a travel agent. And I suspect that IDEA will in fact be a far better model than EDGAR is for most consumers of disclosure information.

I cannot deny that the timing of the press conference coincided with the end of the formal comment period for the SEC proposed rule for mandating XBRL. And this announcement certainly had a PR component. Nevertheless, my take is that the SEC is assuming that disclosure information will be tagged with XBRL and is planning on taking advantage of how this enabling technology can change the model of disclosure.

Up until the unveiling of IDEA, I viewed XBRL as the full realization of EDGAR. With EDGAR we had the Electronic Data Gathering and Retrieval but no Analysis. XBRL alone will give us the ability to automate analysis but EDGAR is based within the context of disclosure via documents; access to the information would still have been awkward. To the SEC’s credit, they are moving far beyond the old model to a platform that will allow new ways of interacting with the information as we wish and have yet to envision. IDEA puts XBRL into a larger context and the committee that Professor William Lutz is heading up, 21st Century Disclosure Initiative, will give us the direction for IDEA.

Dr. Lutz has stated that his group is starting with a blank page and asking the questions of what information do we want, how do we want it, and how should the SEC provide it. This is innovation at its finest. It is taking advantage of new technology to not just mimic the old way of doing things with some improvements, but rather realizing the full power of XBRL as an enabling technology and imagining how it can improve how we work with this information. All of this helps to further the argument for the rulemaking for XBRL.

IDEA also makes economic sense. The SEC is spending $48 million on the current EDGAR system contract. Much of the data that is gathered, stored, and retrieved is useless information. IDEA will streamline the data mining that takes place and the applications that will be created will have easier interfaces for small investors.

I began this article by mentioning most writers were skeptical of the whole IDEA concept. One observer who I think not only got it right but has been providing us with glimpses on where IDEA and XBRL will take us is John Turner of CoreFiling. You can read his articles on the topic at his Insight blog.

Saeed Roohani is Professor of Accounting at Bryant University and one of the leading authorities on XBRL education. He is Program Chair of both the 9th Global XBRL Academic Competition and the 8th Bryant XBRL Conference to be held on October 13. The first part of our two-part interview with Professor Roohani appears below; Part II contains questions eight through twelve.

(1) Along with Eric Cohen, you have been the driving force behind the Global XBRL Academic Competition since its inception eight years ago. What have been the significant trends in XBRL research over the past eight years? Or, put another way, what changes have you seen in the direction of XBRL research?

The major changes have been in the quality of research and the sophistication of research questions.  Earlier, most people were mostly addressing whether the financial community is “aware” of opportunities offered by XBRL – basically, a descriptive approach.  Now we see XBRL research that addresses implementation, value proposition issues, and internationalization.  The XBRL research articles are now more than descriptive, and include case studies and empirical studies.  We also see some articles exploring opportunities for XBRL GL.

(2) Which of the Competition’s projects do you think have contributed most to the development of XBRL?

It is hard to say any single one contributed more than any other.  It seems that every year the projects submitted by students follow different challenges and opportunities for XBRL; the projects generally vary with new XBRL applications and implementations around the world.  Overall, projects exhibiting new and promising applications of XBRL (e.g., continuous auditing) and the development of taxonomies for certain jurisdictions or countries have been rated highly by judges.

(3) Which subject areas do you believe are most fertile for future XBRL research?

I would answer this question by referring to the advantages that we in the XBRL community have stated over the years, namely, that XBRL makes business reporting faster, cheaper, and better.  We now have access to XBRL data reported by firms, so it’s time to get academics involved in the emprirical testing of various propositions about XBRL.  Will XBRL help continuous (more frequent) reporting where information becomes immediately available to the market upon release? Is there evidence that all parties in the supply-chain will benefit from standardized business reporting? These are the kinds of questions that should be explored.

(4) What is the state of XBRL education at the college level right now? Are separate courses in XBRL offered in few, many, or most college accounting programs? Or is XBRL incorporated as part of the curriculum within existing accounting courses?

I know most accounting textbooks mention XBRL and describe its goals. However, I’m not sure whether the coverage is enough to generate discussion about the usefulness of XBRL and its applications.  Two of my colleagues have been offering day-long XBRL workshops at the annual American Accounting Association for the past four or five years. At my school, Bryant University, we have an annual XBRL conference that encourages participation of academics, as well as the Global XBRL Academic Competition.

So there have been a lot of opportunities for academics to get involved in research and education.  However, many faculty and students automatically assume XBRL is a “technology thing,” not an accounting, reporting, or auditing subject.  The fact is that XBRL is more about financial accounting and auditing than technology itself!

With worldwide adoption of XBRL now demanded by many regulators, I have noticed much more interest in XBRL research and education.  Among the courses I teach at Bryant are XBRL reporting and its application, and I know a dozen more accounting faculty at other universities worldwide who cover XBRL and XBRL GL in a meaningful way in their courses. I am not aware of a course totally dedicated to XBRL, and I don’t expect it either.  I anticipate XBRL to be an active component of upper level accounting courses

(5) Let’s say a sophomore walks into your office who is committed to an accounting career and asks you what he or she should know about XBRL. How would you respond? Would you advise him or her that a general familiarity with the language is sufficient for prospective accountants? Or do you think being able to understand XBRL code – or actually write it – will give new accountants a huge advantage over their peers?

Actually, I’ve already been asked those kinds of questions.  One of my summer interns told me his boss asked him to investigate what XBRL is and find out how much he (i.e., his boss) should know about XBRL.  I recommended some of the introductory materials available on the web, including the various resources mentioned at XBRLeducation.com.

I think most accounting students won’t get involved in the mechanics of XBRL tagging, as software tools will do this. However, verifying the appropriateness of the tags, the use of proper taxonomy, authentication of XBRL documents, and knowledge of the XBRL filings required for regulators -- all of these will be important to all accounting students.  My understanding is that XBRL is now part of the CPA exam, so students should at least be familiar with it.

(6) For financial professionals in the field, what advice would you give them regarding learning XBRL? How much XBRL knowledge do you believe they will need to do their jobs successfully and build their careers?

I would give the same advice to financial professionals.  In addition, financial professionals, such as analysts who develop financial models for clients, now have to be more knowledgeable about XBRL if they wish to absorb new and timely information generated by XBRL and available online.  XBRL allows a continuous flow of financial information on the web; this demands new and hybrid financial models to help their clients.

Depending on their specialty, financial professionals should be familiar with the applicable XBRL taxonomy for the entity, how to create an instance document with XBRL tools, and XBRL regulatory reporting requirements.

At this time, XBRL is basically focused on external reporting and so not much on management accounting.  However, XBRL GL is the XBRL link to internal reporting and auditing.  The prize winning student project of the Global XBRL Academic Competition in 2005/06 was about XBRL GL and continuous/internal auditing.

(7) What is the status of XBRL education in the US compared with that in other countries? Do you think the US is a leader or a laggard in XBRL education?

This question is difficult to answer.  Initially, it seems there was more XBRL awareness in U.S. educational outlets such as the American Accounting Association. Also, the adoption of XBRL by the FDIC generated some interest among U.S. academics. Then XBRL adoption took off a bit faster in other countries, such as Japan and Australia.

Interestingly enough, many emerging economies -- somewhat motivated by the recognition opportunities accompanying XBRL -- were eager to create XBRL-interest groups or adopt XBRL for external reporting. In most of these countries, college professors in accounting or finance have direct or indirect influence on accounting and financial reporting innovations and regulation.  In the past three months I have received several proposals from junior faculty or PhD students who reside in countries like China, Turkey, and Egypt and who have full scholarships to come to Bryant University for the purpose of XBRL education and research.