Christian Dreyer, CFA, kindly agreed to the following interview. Chris is a past president of the Swiss CFA Society, a 1,700-member-strong association of finance professionals in Switzerland. He is Managing Partner of Tertium datur AG, an advisor specializing in pan-European pension funds. Previously he was CFO of an IT outsourcing firm and head of investment research at a Swiss state bank. He is also on the IASB’s Strategic Advisory Council for XBRL and publishes the European Pensions//iorp.eu blog.
1. In your article Cheaper, Smarter, Faster: Benefits to Analysts from XBRL, published in September 2006, you noted that analysts were still largely unaware of XBRL. Do you think the level of recognition is now much higher? Do you think the level of awareness differs between US and European analysts?
In essence, that assessment is still true. The CFA Institute conducted an extensive member survey about XBRL in summer 2007. The change in awareness among its membership is insignificant. Some 59% of over 850 respondents consider themselves unaware of XBRL. The lack of awareness is highest in Latin America at 71%, and lowest (but still too high) in the USA with 53%; Europe, Middle East, and Africa (EMEA) was at 66%. I am reasonably confident that awareness will pick up quickly when XBRL disclosure becomes mandatory and, at the very latest, when up-to-date fundamental information of a comprehensive investment universe become available. Before that, there is hardly enough return on invested time for an investment professional, especially in these times of financial crisis.
UPDATE from Chris on 11/22/08: The CFA Institute has just published the results of its latest Monthly Question survey for October. These results indicate that, if anything, awareness has become worse, with 75% of 1346 respondents saying that they were not familiar with XBRL. Note that in this survey, the CFA Institute asked about familiarity rather than awareness, which may be more easily denied, but I doubt that this explains fully the decrease in awareness of no less than 16 percentage points.
2. In expressing their skepticism of XBRL for financial reporting, some CFOs have said “The analysts aren’t asking us for this.” Assuming that statement is true, why aren’t more analysts asking for XBRL statements? Do you think it’s a good argument against XBRL mandates?
It's a classic chicken-and-egg problem: analysts are not aware of XBRL, therefore they do not ask for it. They will not pay much attention to it as long as there is no clear perspective about an impending, large-scale availability of XBRL formatted information. XBRL has to become part of the infrastructure of financial markets, just like the payment system. This requires coordinated, if not mandated, action with a lot of sustained, visible momentum. Analysts will not design and maintain a parallel research process for a subset of XBRL formatted information. It's all or nothing, really. That's why scope and momentum behind the movement to XBRL are critical.
3. Some XBRL supporters have said that having XBRL statements would have helped prevent the current financial crisis. Others note that call reports of US banks have been in XBRL format for a few years now, without any apparent benefits for discerning weaknesses of the financial system. Do you believe that publishing XBRL statements for all financial institutions might have helped avert the current financial crisis? Or do the skeptics, in pointing to the availability of XBRL call reports, have a powerful argument?
IMHO, the answers are No and No. The credit crisis has causes that are outside of the domain of financial reporting and reported numbers as per today's reporting standards. XBRL is "just" an efficient vector for such data. I'd be very reluctant to use the crisis as an argument to promote XBRL, because the linkage is marginal at best. We'll hopefully see improved reporting standards with more transparency, less Held-To-Maturity trickery, and a lot more fair value as a consequence of the crisis. At that point, we'll see all that information using XBRL.
4. Which investment professionals – quantitative analysts, buy side analysts, sell side analysts, or portfolio managers -- do you think will benefit most from the introduction of XBRL statements? Which will benefit least?
Tough call. I’d have a go at Homi Byramji's excellent presentation at the recent London conference (the slides are now available, and we hope to have a podcast as well). At this point, finance professionals are reasonably satisfied with the information and tools they can buy from suppliers like Thomson Reuters and others, despite of all the known shortcomings (i.e., delay, errors, normalization).
That said, there are some intriguing results from the CFA Institute survey I mentioned before: across all respondents (including portfolio managers, investment advisors, academics), the split between "most to all" manual extraction of information from company sources as opposed to purchases from third-party suppliers is almost even at 52:48. Looking at more specialized investment analysts, however, there is a remarkable shift towards manual extraction. It seems paradoxical, but automation is lowest for those respondents who perform analysis on a regular and recurring basis. The only reason I can think of for that is that the data supplied by third parties is insufficient for the information requirements of those specialists. They will probably be better served by XBRL information "as reported,” assuming that disclosure neutrality holds.
But then, third-party suppliers will not sleep. They'll improve their offering by building XBRL data into the plumbing of their systems. Through this, finance professionals will get access to XBRL-grade information through the known and tested user interface of the suppliers' toolboxes without having to bother about XBRL -- for a price. Those incumbents will be quite formidable and deep-pocketed competitors for newcomers to beat.
But that's not the end of story. The really interesting, potentially disruptive innovation (for investment research) might happen when a large universe of XBRL instances resides in the cloud and is accessible to semantic Web services, driven by the cognitive surplus of "amateur" investors outside of traditional finance firms. But before that can happen, a number of challenges need to be overcome. I'm watching closely.
5. There’s been much discussion about how XBRL will change the nature of financial reporting by facilitating EBR, real-time delivery of KPIs, and enhanced narrative reporting. How do you see the impact of XBRL on innovative methods in financial reporting?
It's a prerequisite. Financial reporting today is too much about presentation, too little about substance. That can only change when presentation becomes virtually irrelevant in XBRL instances. There is a risk, however, that XBRL introduces additional complexity into the reporting process that is not warranted by supply chain needs. One case in point is the use of extensions, which needs to be severely curtailed in order to retain comparability. Also, innovation has about as bad a name in finance today as creative accounting had in post-Enron days -- our heartfelt thanks go to the crisis, again. But once the crisis has blown over, we can get back to the business of innovating its reporting, as described in the CFA Institute's Comprehensive Business Reporting Model, for instance.
6. Can you perceive any differences between Europe and the US in the speed and nature of XBRL implementation that arise from different business cultures and different attitudes toward government?
Generally, business cultures and attitude towards government vary widely between countries in Europe, so it's virtually impossible to identify a single European culture or attitude that could be contrasted with its US counterpart. But those influences will be at work in individual countries, of course.
7. You have been a keen observer of XBRL and the financial community for many years. Have there been any surprises for you in the speed and nature of XBRL implementation, or has it proceeded about as you had expected?
Does it sound conceited if I say “no surprises?” My first exposure to XBRL was about six years ago. At that point, XBRL was just another wannabe standard arising from the technology domain. There was little reason to believe it might grow to the role it has today, because it was a technical specification that was not complemented by a commensurate business standard. All that changed when the IASB adopted XBRL as its reporting medium of choice to stop killing trees. That's when I changed my mind. It has been exciting to watch the momentum of XBRL grow since then, and I'm looking forward to its fruition.