Written by Michael Alles Posted on August 25, 2009
Dr. Michael Alles is associate professor at the Department of Accounting, Business Ethics & Information Systems at Rutgers Business School and editor of the International Journal of Disclosure and Governance, whose August 2009 issue is entirely devoted to XBRL. His specialties are continuous auditing, XBRL, and governance.
For a technology that is designed to increase the transparency of information, there is much that is still opaque about XBRL itself. Even as the firms that make up the overwhelming majority of market capitalization in the US begin reporting to the SEC using XBRL for the first time, fundamental questions remain about the demand for interactive data and how investors and others will make use of it.
Just a few weeks ago at an XBRL panel at the American Accounting Association annual meeting in New York, Bob Laux of Microsoft, which in early 2002 became the first technology company to report their financials in XBRL, said “I would love to know why it was that so few firms joined the voluntary filing program (VFP)." As Glen Gray noted in his talk XBRL: Solving Real World Problems:
Despite the potential benefits of XBRL only 137 companies (out of over 10,000 filers) participated in the SEC’s voluntary filing program (VFP). Less than 1% of the banks required to use XBRL for quarterly call reports to the FFIEC are also participating in the SEC’s VFP. XBRL adoption appears to be sitting on the edge of the chasm between the early adopters, who are tolerant of the issues associated with new technology and are less concerned about near-term ROI, and the majority of the potential market, who are more sensitive to costs, ROI, and ease of use.
Contemplating the low levels of participation in the VFP, Bob asked plaintively "What does that say about XBRL?"
One is tempted to dismiss such questions about the VFP as obsolete now that XBRL is mandated, but that may be too facile. The fact of the matter is that XBRL is marketed as so self-evidently beneficial at so trivial a cost (“chickenfeed” is how Bob described the cost of the approximately 24 person-hours that he said it took Microsoft to tag its latest reports, down from 180 hours in the first year), so widespread in the efficiencies it would generate throughout the information value chain, and so clearly going to reduce the cost of capital for reporting firms, that people should have lined up around the block demanding XBRL. In fact, some of the original pioneers of XBRL, such as Eric Cohen, have mixed feelings about the government mandate for tagging, since they had always envisaged XBRL adoption as arising naturally as a market-driven phenomenon.
However, as Professor Gray points out, even as US banks have built up a deep familiarity with XBRL -- given the early decision by the FDIC to require tagging of call reports -- the bottom line is that almost no banks took the (what presumably would have been for them a trivial) extra step to also tag their financials. There is clearly something going on here — fear of litigation, lack of knowledge, lack of interest — that was not envisaged.
And demand is not the only unanswered question about XBRL. Take assurance: the SEC does not require it (as yet), but it does not discourage auditors from looking at tagged documents. On the other hand, for reasons best known to itself, the SEC does not allow the audit opinion itself to be tagged!
Of course, one can make the market efficiency argument for not mandating that mandated XBRL statements have a (mandated) audit opinion and, instead, letting the market decide the value of such statements, with firms providing voluntary assurance if they judge it warranted. But the contradiction between having to mandate XBRL statements because the market isn’t demanding them and then leaving assurance to market forces is fairly obvious.
While the position of firms on assuring XBRL reports may change as their two-year safe harbor provision expires, even if assurance proves desirable, the question remains about how that assurance will be provided. Ironically, here the apparently low cost of preparing XBRL statements works against their assurance. If it takes Microsoft only 24 person-hours to tag their reports, realistically how many audit hours will they be willing to pay to provide assurance for them? And even 24 hours may be an outlier, with Phil Moyers of Edgar Online claiming that, with his automated tagging approach, a typical firm’s statements can be processed in no more than 8 to 10 hours.
Contrast that with the elaborate framework Professors Alex Kogan and Raj Srivastava have come up with for aligning XBRL assurance with standard audit practice and their argument that no current proposal for auditing XBRL instance documents is consistent with auditing standards. Will audit firms be able to come up with an expedited low cost audit procedure for XBRL documents (i.e., low enough relative to the expected cost of repeated XBRL tagging that may be no more than a few tens of thousands within a few more years)?
It’s possible, but let’s not forget that Congress expected that it would take a typical firm no more than 90 minutes to comply with Section 404 of the Sarbanes Oxley Act, as opposed to the billions of additional revenue that it generated for the audit firms. The fact is that in the litigious environment of the US, no auditor will sign off on an entirely new statement with only the brief examination that low cost allows, while it is equally unrealistic for firms to pay more to assure a document than they pay to prepare it.
What these examples indicate is not that there is a fundamental problem with XBRL as a technology, but that it is now much more than a technology. It is becoming part of the fabric of US business life and hence subject to all the forces and pressures that occurs in business, from resistance to change to fear of litigation.
The latter may be the biggest hurdle that XBRL will likely have to overcome if it is to fulfill its promise, as evidenced by the tale of the extension tags. As far as the VFP is concerned, a very large proportion of tags were extensions. The story is apparently that lawyers recommended to filers that existing terminology from the firm’s financial statements be retained as an extension rather than allow even small changes in order to use an official taxonomy item. And there is much more use of extensions today than one might expect given that the current taxonomy has over 14,000 tags.
What is interesting is that this “better safe than sorry” argument was never apparently countered by the case that better tagging would facilitate better comparisons with peer firms and a more favorable reaction in the capital markets. Perhaps the latter argument will come to the fore as more firms file in XBRL, and the SEC is clearly pushing firms harder to stick to the standard taxonomy. But this example clearly demonstrates that predictions about how tagging will work in practice cannot be made on a purely technical basis alone, and hence, many more unexpected outcomes are to be expected as the mandatory program kicks in.
Perhaps the reality is that managers simply do not perceive tagging in the way that the IT specialists who have made it a reality do. One more story: academics have repeatedly pointed out that many of the VFP filings did not even do something as basic as validate, and often contained many other easily detectable technical errors. Hopefully, these problems will decrease with more experience and the SEC previewer feature will greatly help filers submit only valid instance documents (though the fact that the SEC felt obligated to offer a previewer in the first place is quite telling). But the question is why filers made such elementary errors in the first place, when voluntary filers most of all are surely driven by expectation about the net benefits of XBRL. Perhaps “good enough” is about as far as managers are willing to go with tagging and see no reason to give it a higher priority. That would disappoint many of the advocates of XBRL, but it is perhaps a realistic assessment of where tagging fits into the already overfull agenda of today’s CFOs.
With the SEC mandate for XBRL coinciding with the tenth anniversary of the birth of the standard, it is worth asking where tagging will be going over the next decade. Will it become the new language of business, as the AICPA put it in a recent publication, or will XBRL be ubiquitous in the way PDF is today: part of the plumbing of business infrastructure, essential certainly, but also unremarkable. Success may actually mean that it is both, but we should have no illusions that the road from here to there will be smooth just because we have a taxonomy that is 2.1 instead of 1.0. It is time that XBRL be seen by users, regulators, academics and preparers as a business practice, with all the complications and unknowables that this implies, and finally put aside the illusion of the technician, i.e., that if you build it they will come.