Written by Michael Alles Posted on August 26, 2010
Dr. Michael Alles is associate professor at the Department of Accounting and Information Systems at Rutgers Business School and editor of the International Journal of Disclosure and Governance. His specialties are continuous auditing, XBRL, and governance.
You get what you pay for, goes the old saying, which came to mind when I recently attended the 2010 annual meeting of the American Accounting Association in San Francisco and listened to a large number of paper presentations and panel discussions on XBRL.
What in particular prompted my thoughts was the revelation that Microsoft’s latest XBRL filing to the SEC cost $100,000. Even for only the second-largest (!) technology company, this strikes me as a trivial amount.
Certainly a business innovation that is too expensive poses problems and controversy — consider the supposed $30 billion cost of implementing Section 404 of the Sarbanes-Oxley Act — but I think we have yet to fully understand what it means for something to be too cheap for its own good.
To return to an old question, consider auditing the now-mandated XBRL statements.
Stephanie Farewell from the University of Arkansas at Little Rock along with Roger Debreceny from the University of Hawaii at Manoa presented a fascinating teaching case on attesting to the XBRL filings of a (fictional) airline with SOP 09-1 Performing Agreed-Upon Procedures Engagements that Address the Completeness, Accuracy or Consistency of XBRL Tagged Data released by the Auditing Standards Board in 2009 (ASB 2009).
This is a wonderful accomplishment by the authors, providing students with “engagement file cover sheet, signed engagement letter with attachments, client representation letter with attachments, client interview, third-party communications, rendered XBRL files, mapping and extension reports and validation reports” — in other words, all the complicated information necessary to even begin an assessment of an XBRL filing, and this only for an agreed-upon procedure, not a full-blown XBRL audit, whatever that might look like.
At the conclusion of her presentation, I asked Stephanie, “So, would you agree to do an audit of Microsoft’s XBRL filing for $25,000?” She bravely said “yes,” but she is not a partner at a Big 4 firm facing the ever-present risk of litigation and the constant pressure to get the next large revenue engagement. I seriously doubt that any Big 4 auditor would be willing to assume the risk of auditing an XBRL filing from any Fortune 500 company for so piddling a sum as $25,000, even assuming that this sum covered its outlay costs.
Then again, why would a client pay even as much as 25% of the cost of an original filing to audit it? To be blunt, doing so is an entirely non-value-adding activity to the filer.
The other major implication of XBRL’s being so cheap to implement is that few market opportunities exist for developers of XBRL software. In particular, software only designed to prepare SEC-mandated XBRL filings has a market of a few thousand accelerated filers at most. Furthermore, in practice the number of potential customers for this software is smaller still, perhaps eventually being restricted to the handful of commercial printers who appear to be doing most of XBRL filings’ preparation. Given this small size, it is very difficult to imagine major software firms finding this market large enough to be worth entering. Notably, Microsoft has not released an XBRL product despite being one of XBRL’s earliest and most significant corporate proponents.
My main concern in this regard concerns academic research into XBRL.
At the AAA meeting, there was a great deal of it presented, and much of it was highly innovative and insightful. Diane Janvrin from Iowa State University and Won No from Iowa State University, for example, presented an interesting field study in which they detailed the steps that several first-time XBRL filers undertook in preparing their filings. As a result of this investigation they posed a long series of research questions about the XBRL process which they felt deserved further study.
I entirely agreed with Janvrin and No that their questions were interesting and perhaps even important. Nonetheless, would devoting academic effort to investigating them really be worthwhile when the entire process costs no more than a few tens of thousands of dollars? At some point, doesn’t research into the minutiae of a process with trivial cost become an exercise in academic navel gazing?
Among Janvrin and No’s more surprising findings was that in many instances the entire focus of senior management was in making sure that renderings of XBRL instance documents exactly matched paper annual reports. As long as they matched in that way, managers did not really care what underlying tags looked like. This obviously demonstrates a total lack of understanding about the purpose and benefits of XBRL — namely, to liberate financial data from its paper-based format. At the same time, however, it’s difficult to blame these managers when the SEC also places so much emphasis on matching XBRL renditions with paper-based filings.
Incredibly, Janvrin and No also found in several cases that the commercial publishers on which their sample firms relied to make the actual submission to the SEC promptly re-entered company data using their own filing software, totally ignoring the company’s laboriously-prepared instance documents. Apparently no one from the company complained about the procedure, perhaps because they didn’t realize what was happening, but also, I suspect, because they didn’t want to increase the cost of the operation by making a fuss. (Once again, remember that you get what you pay for.)
As one looks forward to fully-tagged footnotes in the next filing year, it may well be the case that management will pay more attention to the tagging process. Then again, perhaps not: if expenditure decisions are delegated once they fall below a certain (very large) threshold, is seems unlikely that a CFO will personally supervise tagging in its second or third year, when the costs have fallen even further from what they are today.
The logical outcome of this process is that XBRL will come to be considered part of the infrastructure of a company, something that can be outsourced as secondary to its core competency. If that sounds fanciful, consider that this is precisely why companies hire commercial publishers to undertake their SEC filings. XBRL is simply an optional service today for these publishers — a service that will become part of the standard package in the future.
Before asking whether XBRL can avoid this fate, consider whether that would be such a bad outcome. PDF remains a highly valuable tool for document publishing even if no one outside Adobe knows or cares how the conversion process is undertaken. Perhaps those who have been so intimately involved with creating XBRL have a distorted view of the importance of the means of tagging rather than simply focusing on its outcome.
That is not to say that XBRL cannot enhance its value added. At the AAA many interesting examples of the use of XBRL in non-financial applications were presented, from bill collection by the state of Nevada to Standard Business Reporting in Europe and Australia, while Glen Gray from Cal State Northridge and Rick Hayes of Cal State L.A. discussed the synergies between XBRL and continuous assurance. In a similar vein, Marlon Attiken and Santosh Nair from IBM Global Business Services have advocated the use of XBRL to accomplish nothing less than saving the US financial system!
These examples of innovative uses of XBRL are interesting, and many are, in fact, already in operation. This demonstrates the versatility of XBRL as a tagging tool that helps aggregate disparate data systems. That is the point: these applications use XBRL generically as an already-developed and readily-available tagging mechanism. If XBRL did not exist, they would use some other taxonomy for that purpose rather than inventing XBRL in particular. While the utility of XBRL in these examples should not be minimized, it also has to be acknowledged that XBRL was not designed with these purposes in mind, which surely has to imply that in at least some circumstances XBRL is not as well-suited as a custom designed taxonomy would be. After all, XBRL is meant for tagging income statements, not tax forms or accounts payable.
There is, of course, one variant of XBRL that is precisely meant for a much wider application than financial reporting, and that is XBRL-GL. At least at the AAA, however, not many examples of the use of XBRL-GL were presented. Perhaps that will change as the value of XBRL outside financial reporting becomes apparent.
In fact, I think this is the only way that XBRL can avoid the trap of being too cheap for its own good: become a multi-purpose tool despite having been conceived and designed with one very specific task in mind. Just as one could not have imagined every application for the telephone or the computer until they were invented, perhaps XBRL’s unintentional versatility as a cost-effective tool to bring together legacy data systems will prove to the real source of its value.
This subject deserves further exploration some other time. Let me just close with another old chestnut of a saying, that something that remains a bargain is no bargain. XBRL has turned out to be a lot cheaper than anyone ever imagined only a few years ago, but for its own good, it has to be worth more than it costs.