Bob Schneider is a Partner in 
Wilson So is the Director of Hitachi Consulting Corporation XBRL: An Interview with Paul Wilkinson (Part 3)
Paul Wilkinson is Chief Strategy Officer of CLOUD, Inc., the Consortium for Local Ownership and Use of Data. He was Senior Adviser to SEC Chairman Christopher Cox from 2005 until 2009, where he oversaw XBRL adoption. From 2001 to 2005 he was Executive Director of the U.S. House of Representatives Majority Policy Committee, handling international and economic policy. He can be reached by email.
This is the third installment of a three-part interview. Part 1 contained questions 1 through 5, and Part 2 has questions 6 through 10.
11. How has the financial crisis of the past two years or so changed the playing field for XBRL implementations? With the immediate sense of financial meltdown now passed, has the urgency to adopt XBRL in such areas as TARP funding and stimulus spending diminished?
The crisis has made the case for transparency stronger than ever, for industry and government alike. In industry, better data is obviously critical to detect risk sooner and pierce bubbles earlier. In government, there’s an interesting right-left coalition for transparency and open government. About the time Web 2.0 came around, I began contemplating the chances technology might support a genuine political realignment. I don’t think there’s any doubt that a generation raised using standard communication platforms like Facebook will want to revolutionize the snail-mail era corporate proxy rules, not to mention have better oversight and control over how their tax dollars are being used by their government.
With U.S. fiscal and monetary health in such a precarious position, I think it’s becoming more urgent every day to find ways to use technology to empower government to do more with less. Congress and political appointees tend to assume cost savings necessary to fund political priorities will materialize out of thin air, while career civil servants are left to clean up the messes after each new wave of spending. I hope the people who have dedicated their lives to federal service, rather than politics, will recognize the need for better data systems to improve efficiency and consider how XBRL has proven itself as a flexible financial standard that could be applied as easily to government finances as it was to corporate finances.
12. In a Comment on a Seeking Alpha article on FAS 157, you wrote that “What the [SEC] staff means by ‘the complete integration of interactive data as a tool to bridge the gap between historical cost measures and fair value’ is using XBRL to give investors choice in how to evaluate asset value.” Could you explain how XBRL enables investors to do that?
Data tagging makes it easier for issuers and financial statement users alike to calculate, disclose, and compare various facts that comprise “valuation.” Some believe anything but historical cost or real market prices are subject to manipulation. Others believe models are the only way to calculate useful valuations in the absence of a market transaction. Disagreements like those are what make markets. And the more information market participants have, the less likely they are to walk away from a transaction on the grounds of uncertainty about risk.
I’ve never understood why ABS couldn’t simply be priced based on anticipated net present values of future cash flows under various scenarios minus risk premiums. Markets value more complex instruments, from currencies to options to public company securities, 24/7/365. During the crisis, the problem seemed to be that ABS holders thought risk premiums were too high and that accepting them would threaten their solvency. Bankruptcy judges work out problems like that all the time, but because ABS and their derivatives were deemed too complex, bankruptcy judges were deemed incapable of handling problems like Bear Stearns. Preparing ABS and derivatives using an industry standard computer language like XBRL could make such securities less complex, meaning bankruptcy judges could go back to doing their jobs. They, like investors, would have more information upon which to base important decisions.
Computers can handle more XBRL data more quickly and less expensively because with XBRL, computers have more data and require less human intervention. The typical fear, uncertainty, and doubt concern the expense of creating systems to produce and analyze XBRL data. But in the long run, the context XBRL data carries, and the software that creates, validates, and analyzes XBRL data more efficiently than data in other forms, saves untold hours of human labor that are typically required to process data in less structured forms.
Computers don’t care if they’re dealing with ASCII text that carries HTML tags or ASCII text that carries XBRL tags. Users, however, when they see the value added by XBRL tags, do care. And users don’t even need to know what XBRL is to see that value. XBRL is the global standard for financial data in the private and public sectors for the simple reason that it’s more efficient than other standards.
13. In a Comment to a post on this blog, you wrote “A focus on human auditing of XBRL DOCUMENTS could, indeed, be expensive. That’s why machine auditing of XBRL DATA is important.” Could you explain what you mean by that? What is the difference between auditing documents and auditing the data in them?
Presenting XBRL statements doesn’t change most of the audit process. The main new requirement is that the numbers and captions on the old paper financials match the numbers and captions in the new data financials. I try not to use the term “XBRL documents,” since it’s almost an oxymoron. Sure, you can print out the raw ASCII with all the brackets (which would result in really big audit costs since those “documents” are so tough to read), or you can print out numbers from any number of viewers on your PC. But XBRL isn’t intended to be used on its own to create documents. It is intended to let data users and computer programs know what the data means so they can do things with the data that users consider valuable. The point of my comment was to note that besides supporting the rendering of financial statements, XBRL can be used in internal systems, along with other software, to prevent manipulation or unauthorized access. From trusted time stamping to reliable audit trails to cross checking among various systems, handling financial information in data format instead of document format or spreadsheet format promises better audit efficiency and therefore more reliability.
14. XBRL adoption for financial reporting has been touted as a way to decrease the cost of capital for small- and mid-size companies. Do you think that is likely to happen? If so, why haven’t smaller companies been more vocal in demanding implementation?
Smaller companies are necessarily more concerned about dealing with the world as it is and usually don’t have time to explain to policy makers how the world should be. Future business strategy and innovation are often more important to investors in smaller companies than past financial performance. To the extent XBRL permits funders to get more comfortable with more data sooner, it will reduce capital costs. And to the extent XBRL can be expanded to cover reporting about strategy and innovation, it will also mean more and better competition for capital among smaller firms.
One benefit of the XBRL phase-in will be that big firms will pay the bulk of the costs for the development of software that smaller firms will then be able to use to improve their own financial reporting. Just as HTML and XML standards have empowered smaller start-ups ranging from Google to Expedia to Pandora to take on large old-economy market leaders, XBRL should give smaller companies fairer access to more capital sources. Better information means markets are better able to allocate capital toward better uses – and if small companies can find better uses for capital, they can use XBRL as a tool to help them compete with more established companies. Small companies might overcome large company reputational advantages by using actual authenticated information to compensate for their own less robust reputations.
15. There’s been much discussion of using XBRL for Enhanced Business Reporting (EBR), Key Performance Indicators (KPIs), and more extensive narrative reporting. How do you view the potential for XBRL in these areas? How important do you think these implementations are compared with those for current financial reporting requirements?
With more market participants having more and better access to financial information, that means there will be less opportunity to differentiate your analysis of a particular company on the basis of the financial statements. The market will price in financial information sooner and more accurately than ever. Therefore, non-financial metrics will be more important than ever.
XBRL’s potential in these areas is vast. Whether and when it will be realized is another question of leadership. We have the world’s most powerful capital markets because we have the world’s most powerful information infrastructure, but there are no guarantees for perpetuity. The more we can do to improve the information infrastructure, the better. I’m sure that market leadership to improve the entire commercial and personal information infrastructure will emerge. The sooner it does, the better off we’ll all find ourselves.