You espouse the use of XBRL for auditing. What are its advantages?
The key advantage is having the full SEC public company data set at your disposal to evaluate exactly where your clients stand in terms of risk, performance, and so on. Before conducting an audit we need a plan laying out the ways we are going to assess risks. The auditor needs to perform analytical procedures to find areas that require more attention or warrant investigation. We need to check for areas of the financial report that don’t appear to be normal, areas that might represent specific risks, including the existence of unusual transactions and events, and amounts, ratios, and trends that warrant investigation.
These analytic procedures obviously require data. The typical way this analysis is done is by comparing current period’s figures to prior period’s figures. An opportunity exists for a potential improvement and enhancement of the analytical procedures by using peer data. XBRL data is standardized, structured, and potentially linked. It provides easier, more open access to peers’ financial data.
Furthermore, XBRL allows the auditor to use both internal and external data. If the company being audited is using XBRL GL (General Ledger), the auditor can drill down to the transaction level and see what seems to be off.
XBRL came to prominence as an open-source application for making filings with the SEC and other regulatory agencies, and the structured data has been useful to investors, as well as companies looking to investigate acquisition targets, vendors, and clients. How do auditors use XBRL data from outside the company being audited?
External data is the big thing about XBRL that makes an auditor’s life easier. It allows a broader use of financial reporting and peer data for benchmarking purposes to assess whether a company’s data looks OK or not. Different vendors are currently offering tools for easy access to XBRL-based peer data.
For example: Is the company’s reported inventory a cause for concern?
There are several things we could examine: How does the inventory value compare to prior years’ values? How do the client’s peers report inventory? Is the value of our client’s inventory extreme?
Say, the client’s annual information for 2011 to 2012 shows inventory increased 50 percent in ’11 with significantly smaller increases for the other years. We can also look at inventory as percentage of total asset value. It could be interesting to look at the client’s peers and see what happened to their inventory to help establish if the company’s valuation is extreme and also to look for industry trend information.
An increase in the percentage of the client’s assets in inventory might be of no concern if we compare it to peers and see increases in their inventory as well.
We can also look at footnote information for our client, Caterpillar, and a peer, John Deere. According to the footnotes, both companies are using FIFO accounting procedures, and neither seems very different. .
With XBRL, we can go a step further and compare Caterpillar’s data to a peer group based on industry or an index, something that would have been very time consuming before with the need to prepare and standardize data. Using an analytical tool, a chart can be produced showing mean and median values of the peer group’s inventories. If Caterpillar is in the 66th percentile of inventory valuation as percentage of total asset, some auditors may decide that position requires further examination. Others might not decide further investigation is warranted if the company ranks at the 80th percentile or maybe even the 90th percentile. The same applies at the other end of the spectrum.
The idea is that by having access to structured data facilitated by tagging we can access and compare large quantities of data much more easily than before. In addition, the structured format, allows for easy access to footnote data and linkages between amounts on the financial statements and the footnotes associated with those amounts.