Neal Hannon, who writes regularly for Data Interactive, is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Active in the XBRL community since 2000, he served on the first XBRL US steering committee and has written over 60 articles on XBRL. You can contact him by email.
This first installment of a three-part interview contains questions one through four. Part 2 has questions four through eight; Part 3 has questions nine through twelve.
(1) The SEC has yet to publish its final rule for interactive data. But just on the basis of the December 17 meeting, did any of the announced revisions to the proposed rule surprise you? Are there any revisions you’d like to comment on?
First, I was not surprised by the six-month delay in the implementation of the rule. The June 15, 2009, start will give both filers and XBRL software companies time to understand the details of the rule and have a smooth implementation. Second, I was surprised that the SEC chose to delay liability on XBRL filings for two years after a company’s first filing. Correct XBRL filing is not that challenging. Most companies will get the tagging right the very first time. As always, additional surprises wait in the final rule. I will be particularly interested in what the final rule has to say about company-unique element extensions.
(2) On the liability issue, CFO.com reported that “Commissioner Luis Aguilar, a Democrat who joined the SEC earlier this year, criticized the XBRL proposal for sheltering companies when they first begin using the technology from some liability. He called the safeguards "unacceptable."” Do you think Commissioner Aguilar’s fears are legitimate?
The roadmap to full XBRL acceptance into the IDEA system is clear. In two years or slightly more, an XBRL filing directly into IDEA will be the most used method to file with the SEC. Companies will quickly adjust to putting every effort, including an audit review, into accurate and timely XBRL filings. The limited liability afforded by the rule will not significantly alter the safeguards surrounding SEC filings, mainly because the present system of EDGAR filings remains, for now, firmly in place. The same can be said for financial information displayed on Yahoo Finance or MSN Money. Although the data aggregation decisions leading to condensed financial statements can be somewhat suspect, investors have mostly benefited from access to this information. XBRL filings will be able to expose much more to the investors and should lead to interesting questions concerning the underlying accounting. This is a trade-off I’m willing to live with while we await “prime-time” as filed XBRL.
(3) Besides the SEC’s XBRL rule, what other developments in 2008 in the XBRL field do you believe were particularly noteworthy? Was there anything important you believe was not reported or underreported?
The biggest underreported story about XBRL in the US is the FDIC. During the recent financial crisis, the almost two years’ worth of quarterly data collected in the XBRL format has given the Treasury Department valuable insight into which financial institutions have suspect holdings. Secretary Paulson is in a much stronger position to make correct bailout allocation decisions because of the landmark work accomplished at the FDIC. I understand that since the crisis began, the FDIC has expanded the number of questions asked of over 10,000 U.S. banks each quarter. Kudos to the FDIC!
Additionally, the worldwide growth of XBRL has been remarkable. The example the Netherlands is setting for the world is not only historic but visionary. Governments all over the world will soon be following their lead by asking how they too can reduce the regulatory burden on corporations by consolidating their requests for data to one coordinated request based in XBRL. The Australian government is attempting the same type of program right now. Anyone serious about reducing the size of our US government should take a hard look at these outstanding examples of win-win.
(4) In your presentations, you continually emphasize that, while XBRL can be very technical, it’s really all about the accounting. Could you explain what you mean by that?
Back in late 2001, just after the Enron scandal, I was giving a lecture at the Northern Colorado University about adding XBRL to accounting courses. Mid-lecture, Lynn Turner, former SEC chief accountant under Chairman Arthur Levitt, stopped me cold. He said that he was a big supporter of XBRL, but I had to promise him one thing. He asked me to never let the technology get ahead of the accounting. In other words, the accounting must be correct or the tagging is worthless. That theme has stuck with me.
The underlying accounting in XBRL consists of the standard label, the accounting definition in the label linkbase, and the authoritative literature in the reference linkbase. I call these items the XBRL accounting triad. This is why the initial mapping from a company’s financial statements to the correct XBRL element is so crucial to getting the accounting right. If a label is chosen to represent management’s accounting intent, but the metadata associated with the element gives investors and the SEC a different signal, the accounting is not correct. In other words, a company can introduce an accounting error into their filings by making a bad choice of XBRL elements.
Software programs today will check for compliance to rules such as XML syntax, XBRL structure rules, and the like, but management is responsible for the accounting that goes into the tagging of their financial statements. With limited liability protection in place for two years after the first XBRL filing, this matter will not be super-critical. However, if the accounting in the XBRL filing is not right, it could be misleading. As much as the new XBRL US GAAP 2009 taxonomy has been checked, accounting problems will surface once 500 filers queue up to the EDGAR filing of interactive data. XBRL US will need to stay on its toes and correct errors on a timely basis.