Hitachi XBRL » Financial Reporting

XBRL Benefits Emerging as More Companies Report

Barron King — Thu, 10 Mar 2011 18:42:12 +0000

Even before all public companies are required to report in XBRL and well before investors have begun making meaningful use of it, the critical benefits of adopting XBRL and putting it to work in analyzing corporate data are coming to light.

Although only about 1,500 companies have reported their financial results in XBRL so far, Michelle Savage, vice president at XBRL US, demonstrates how it might have provided useful insight into systemic risk before the economic crisis. She provides some great examples of how XBRL might have been handy in heading off the credit crisis before it became a global economic tailspin.

Strolling through 2010 third-quarter data, for example, Savage discovered that the financial sector, which includes insurance and real estate, holds 65 percent of total assets but only 14 percent of revenues among companies reporting in XBRL. Fannie Mae alone held 9.5 percent of total assets.

Here’s more: In the retail sector, WalMart’s revenue represents 29 percent of the total retail trade reported revenue of $1.4 trillion. Companies in the petroleum refining sector make up less than 1 percent of the companies that have reported through XBRL to date, but their revenue in the third quarter of 2010 was almost 10 percent of total revenue reported.

That’s the kind of information that could be invaluable to investors as they learn to use XBRL to gather and sort information. But even further, that has big implications for regulators looking for stress fractures in the economic system. “With this kind of information available on a real-time basis, identifying investment opportunities and flagging problem companies can be as simple as a few keystrokes,” Savage says. We can expect the new regulatory initiatives taking shape as a result of the Dodd-Frank Act to make significant use of XBRL to look for signs of trouble.

The data will get deeper and more meaningful when thousands more companies begin reporting in XBRL in 2011 as required by the Securities and Exchange Commission. There still are plenty of questions in the marketplace about whether XBRL is really worth the time and expense, but XBRL really is the modern variation of EDGAR. When EDGAR emerged in the late 1980s, folks then had a hard time imagining how the electronic submission and storage of financial data would change the way the market accesses information. “Today, however, could any of the investors, analysts, librarians, academics or reporters who actively use it imagine a world without EDGAR?” Savage wonders.

XBRL US has created a simple application to demonstrate the power of XBRL, allowing users to extract revenue and asset information for all companies currently filing in XBRL. The application demonstrates how XBRL makes information and analysis so fast and accessible. Savage says it not only opens up a wealth of information, but it promises to level the playing field between large and small companies when all companies are reporting under XBRL.

XBRL: Is It Too Cheap?

Bob Schneider — Thu, 26 Aug 2010 16:12:47 +0000

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.

XBRL Adoption in the US: A Model of American Democracy at Work

Bob Schneider — Thu, 15 Apr 2010 19:08:39 +0000

Written by Bob Schneider Posted on April 15, 2010

The website of the Office of Interactive Disclosure – the SEC’s XBRL unit -- is an essential XBRL resource, with avenues to filings, news, taxonomies, tools, and so forth. Among its many parts, a particularly revealing page is the SEC Speeches and Public Statements Related to XBRL and Interactive Data. It has links to such discourses for the years 2005, 2006, 2007, 2008...and suddenly stops there.

Given the bureaucratic venue, this premature termination reminded me of a decades-old cartoon from a MAD Magazine series called “road signs we’d really like to see” that took a slap at the ways of government. A gleaming new highway abruptly ends in a swamp with frolicking brontosauruses; the sign at highway’s end reads “Road Stops Here (because so did Federal funding).”

That punch line, however, is not appropriate here: construction of the SEC’s XBRL infrastructure is on schedule and proceeds apace. Given that steady progress, I found it curious that no one at the SEC had bothered to mention interactive data in any public pronouncement for more than a year. Another, perhaps more likely reason for the 2008 terminus could simply be that, as often happens on the Web, nobody had bothered to update the page recently.

I did a search on both XBRL and interactive data for all News and Public Statements from January 1, 2009, to date to see if that was the case. Compared with preceding years, there were indeed few hits, and, at the Commissioner and Chair levels, only three records. Kathleen Casey mentioned XBRL in a November speech; Troy Paredes raised the subject in May and October orations. Notably, Ms. Casey gave the keynote address at the 15th XII Conference and Mr. Paredes has written for this blog; both Commissioners have long been enthusiastic interactive data supporters.

In terms of both quantity and executive level, the recent history is a far cry from the heady days a few years ago when, in one 12-month stretch between September 2006 and August 2007, Chairman Cox discussed interactive data in 16 of his 42 speeches. He even extolled the virtues of XBRL to audiences like the National Italian-American Foundation, where he might have been expected to devote his time instead to, say, Frater Luca Bartolomes Pacioli, whose Summa de Arithmetica... was the first to chronicle the Venetians’ pioneering system of double-entry bookkeeping.

Needless to say, Mr. Cox’s hard work was greatly appreciated by the XBRL community. It can be debated whether XBRL would eventually have been made mandatory for financial reporting in the US without his support. But it’s difficult to deny that his efforts accelerated implementation. Some XBRL supporters may be disappointed that, as exemplified by its silence on the standard, the SEC’s current leadership has not had the same focus (even allowing for the necessary shift in priorities because of the financial meltdown).

A few weeks ago, columnist Charles Krauthammer made an interesting point about American democracy that I find applicable to the current environment for interactive data at the Federal level. Krauthammer is, of course, a man of the right, but I think it is fair to say his argument here is non-ideological. He writes:

The rotation of power is the finest political instrument ever invented for the consolidation of what were once radical and deeply divisive policies. The classic example is the New Deal. Republicans railed against it for 20 years. Then Dwight Eisenhower came to power, wisely left it intact, and no serious leader since has called for its repeal…True, the rotation of power inevitably results in stops and starts and policy zigzags. Yet for all its inefficiency, it in the end creates a near miraculous social stability by setting down layers of legitimacy every time the opposition adopts some of its predecessor's reforms -- while at the same time allowing challenges to fundamental assumptions before they become fossilized.

I’m naturally hesitant to include interactive data among the landmark government policies that command Krauthammer’s attention. Nevertheless, I do find his words applicable to XBRL adoption in the US.

Skeptics of the SEC’s continued commitment to interactive data can point to the newly proposed rule on asset-backed securities and note that the Commission is recommending an XML, not an XBRL, solution. But consider the discussion the SEC offers on its preference for XML, in which XBRL figures prominently. Post Cox and the SEC’s adoption of XBRL for financial reporting, the terms of the conversation have changed. It’s no longer “Why XBRL?” but “Why not XBRL?” In Krauthammer’s terms, the current Administration has adopted its predecessor’s reforms, while challenging the fundamental assumption that XBRL is always the solution of choice.

The SEC has elected XBRL not only for company final reporting, but mutual funds as well. XBRL is being promoted for use in federal financial management: the Comptroller of the OMB has said, according to Federal News Radio, that making the data generated by agency financial offices compatible with XBRL coding is a big priority. NextGov reports that efforts are underway for using XBRL to make it easier for the public to review federal spending and how government uses funds. Interactive data is under discussion for delivering the ratings history from nationally recognized statistical rating organizations. At least at this point, the path toward continued, wider adoption of XBRL in the US seems reasonably clear.

XBRL provides a better, faster, more efficient solution for exchanging business information. Who knew it would provide an excellent civics lesson as well?

UPDATE 4/20/10: Overall, the best gateway page for XBRL activities at the SEC is not the OID site but rather xbrl.sec.gov. The link-laden homepage makes it easy to find and open XBRL resources.

Are Accountants the Wallflowers at the XBRL Prom?

Bob Schneider — Fri, 02 Apr 2010 18:09:12 +0000

Written by Bob Schneider Posted on April 2, 2010

The stereotype of the timid accountant was established long before Hollywood started taking its shots. Leo Tolstoy captured this apparently timeless stereotype exquisitely in his epic War and Peace. As Napoleon’s soldiers battle with Russian forces, the accountant provides the comic relief:

Behind Prince Bagration rode an officer of the suite, the prince's personal adjutant, and…an accountant who had asked permission to be present at the battle out of curiosity. The accountant, a stout, full-faced man, looked around him with a naive smile of satisfaction and presented a strange appearance among the hussars, Cossacks, and adjutants, in his camlet coat, as he jolted on his horse with a convoy officer's saddle.

"He wants to see a battle," said Zherkov to Bolkonski, pointing to the accountant, "but he feels a pain in the pit of his stomach already."

His reputation for timidity notwithstanding, today's accountant may well be forgiven for feeling a pang of torment when he first encounters XBRL. Taking a look at the XBRL section of the EDGAR Filer Manual, he finds most of it sounds like this:

The URI content of the xlink:href attribute, the xsi:schemaLocation attribute and the schemaLocation attribute, after XML Base resolution, must be relative and contain no forward slashes…

Told to get a feel of what an instance document looks like, he likely finds even the simplest of examples forbidding:

5347000

OK, the accountant rationalizes, XBRL is a markup language, so of course it’s going to have many more <’s and >’s than dr’s and cr’s. As he navigates the new financial reporting superhighway, the accountant comforts himself that he can remain in the financial reporting driver’s seat, while the XBRL technician slaves under the hood.

At least that has been the assumption. As John Turner recently said in an interview with this blog:

Since the early days of XBRL, there has been a mantra within the Consortium that XBRL models existing reporting processes, it doesn’t change them. XBRL doesn’t alter GAAP, or impose a standard chart of accounts on companies.

But despite the best efforts and intentions of XBRL’s leaders, I wonder if this powerful technology, like so many others, changes the game simply by being there.

When accountants first learned about XBRL several years ago, they were indeed concerned that it would entail a standard chart of accounts. They were reassured that it did not. Extensiblity is part and parcel of XBRL – it’s even part of the name itself.

But isn’t something like a standard chart of accounts where we’re headed? At the July 2009 XBRL Technology Workshop, Campbell Pryde of XBRL US said that extensions that appear often in instances will be added to the US-GAAP taxonomy – which, if I heard correctly, was reiterated by SEC staff at the SEC’s March 23 XBRL Public Education Seminar.

Fast forward five or eight years. At that point, won’t any extension be viewed with a whiff of suspicion by analysts and investors? A company must be doing something unusual if the line item it needs to describe has not yet been incorporated in the US GAAP chart of…er, taxonomy.

Financial analysts are already circumspect about extensions (see page 9 of the most recent CFAI XBRL survey). Perhaps they’ll become less so, but it seems more likely that, as taxonomies are refined, they’ll become more wary. When considering a new item for financial statements, won’t accountants look first to taxonomies for an existing element and try hard – very hard -- to find one?

What about XBRL’s impact on accounting processes? In the recent SEC XBRL Seminar, Tony Mealey, Senior Accountant at the Office of Interactive Data, said (beginning at 54:12):

“The third rule, to use the standard element with the narrowest definition, can be illustrated by the following example.

“In the statement of cash flows, the filer reports the payment for common stock repurchases. Instead of selecting the standard element “payment for the repurchase of equity,” the filer should select the element “payment for repurchase of common stock,” because it has a narrower definition.

“I might also point out that, even if the line item label in the traditional format financial statements reads “payment for the repurchase of equity,” if the transaction represents only the payment for repurchasing common stock, that is the concept that needs to match the element selected.”

This surprised me. I would have thought the SEC’s instruction here would be “pick the element that most closely matches the line item on the traditional format financial statements.” The financial statements are the product of the hard work, debate, and compromise among management, company accountants, and the auditors. In this case, that process yielded “equity,” not “common stock.”

Well, six of one, half-dozen of the other, right? But the impact may be more significant. In her post on this blog last November, Chie Mitsui said:

When selecting sales from Japanese financial statements, users just choose the element “NetSales” from the “IncomeStatement” and the “Current year” period context. All Japanese companies’ taxonomies have the same name for this element, hence users can easily select it.…[But] naming for US XBRL financial statements varies. Each company decides its own names for elements, presentation links, and contexts. For users unfamiliar with US company financials, such inconsistent naming causes confusion during the selection of elements for comparison.

This too surprised me. The item to be mapped and tagged is the top-line, i.e., net sales or total revenue. On traditional financials, the terminology chosen by companies varies little. How many different elements could there be for the top line?

The 3Q 2009 report of Progress Energy, a utility holding company, provides an example of what Chie was talking about. In the instance, the element selected for the top line was UtilityRevenue. The standard label for UtilityRevenue is “Electric and Gas Revenue.” The company extended the taxonomy to overwrite the label with “Operating Revenues,” which matches the top line in the traditional income statement.

I don’t know if UtilityRevenue was chosen because it was the narrowest definition. I don’t know whether -- given the many objectives that financial reporting might have, from international comparability of financial statements to improved company analysis by SEC staff -- UtilityRevenue is the best choice or not.

What I do know is that “utility revenue” does not appear anywhere in the company’s 3Q financials (which were reviewed by the company’s auditors). Like “equity” versus “common stock,” perhaps the choice of UtilityRevenue for the top line of a utility company seems like a quibble – in fact, most definitely an improvement.

But suppose it was a forest products company whose business is 92% wood and 8% paper. The traditional P&L has “Net Sales”; the US-GAAP taxonomy offers both TimberRevenue and SalesRevenueNet elements. Which is better? At the least, such choices and the decision-making it requires seem like a non-trivial change in traditional accounting processes (not to mention what additional auditing procedures it may entail).

Perhaps that’s inevitable; perhaps that’s all to the good. But like so many other industries where new technology is introduced, it is reasonable to ask what the impact on accounting will be, and whether XBRL will merely express accounting output, or change it in important ways.

XBRL: Comparing Japanese and U.S. Financial Statements

Bob Schneider — Sun, 22 Nov 2009 22:50:33 +0000

Written by Chie Mitsui Posted on November 22, 2009

Chie Mitsui is a Data Analyst at Nomura Research Institute, where she is helping design NRI’s new XBRL-enhanced services. She previously worked as system designer for information service products at Jiji Press, a Japanese financial news and data distribution company. Ms. Mitsui holds a masters in physics from the Tokyo University of Science and is pursuing her MBA.

XBRL Japan held a workshop in February on "How to Use XBRL for Analysis," which I discussed in an interview with this blog. The attendees -- analysts, data intermediaries, and representatives of securities firms -- focused on how users can analyze statements using the XBRLized earnings digests that the Tokyo Stock Exchange has been providing on the Web since last year.

Besides showing the audience on how to use XBRL for analysis, the seminar also served to extend the dialogue regarding continuous improvement of the data standard. In order to serve users better, I believe we need (a) more testing from users' perspectives, and (b) greater opportunity for them to express their views.

Toward that end, we hosted a second seminar with the same theme in September. This time we treated US and Japanese XBRL data together for comparing companies’ performance across the two jurisdictions. Enabling fast, inexpensive, and user-friendly comparisons of this kind should be one of the main objectives of XBRL.

The important lesson we learned from this exercise is that there are considerable challenges to selecting meaningful sets of elements from among XBRL data. When we asked users to choose several elements (accounts receivable, revenue, etc.) to compare the financial performance of Japanese and US companies, they found the exercise difficult and confusing.

There were two main problems:

Differences in the style of element names Elements are developed under different business cultures and accounting traditions in different countries, leading to difficulties in identifying elements that can be meaningfully compared.

Differences in the structure of taxonomy Even if the element names are different, if the structure of the taxonomy is similar, then selecting the correct element wouldn't be much of a problem. But the different approaches to naming elements, the similarities among them, and their vast number – US GAAP taxonomies have more than 15,000 elements -- created confusion for participants. In the end, the XBRL tools we employed couldn’t enable the user to select the correct set of elements and contexts.

We used computation of the receivables turnover ratio (sales/account receivable) as an example. When selecting sales from Japanese financial statements, users just choose the element “NetSales” from the “IncomeStatement” and the “Current year” period context. All Japanese companies’ taxonomies have the same name for this element, hence users can easily select it.

However, naming for US XBRL financial statements varies. Each company decides its own names for elements, presentation links, and contexts. For users unfamiliar with US company financials, such inconsistent naming causes confusion during the selection of elements for comparison. Because Japanese users are used to a consistent naming style, they have considerable difficulty in selecting elements from US taxonomies. (Japanese taxonomies also have their problems, as I described in the interview.)

At the workshop, we discussed how feedback from users opinions could successfully be channeled to taxonomy makers. In my view, XBRL Japan should lead this effort. The XBRL groups in Japan and the US, as well as the IASB and other teams around the world, should work together to formulate international standards and rules for taxonomy design.

We hope to continue the dialogue on how XBRL taxonomies should be created from the perspectives of international users. Our next seminar will focus on comparisons between IFRS and Japanese XBRL, and I look forward to discussing the results of the meeting.

The Regulatory Rationale of XBRL

Bob Schneider — Wed, 26 Sep 2007 23:54:16 +0000

Written by Troy Paredes Posted on September 26, 2007

Troy Paredes is a professor at Washington University School of Law, where he teaches corporations, securities regulation, and corporate finance. Mr. Paredes has written on a wide range of topics, including securities regulation, executive compensation, and hedge funds. Before joining Washington University's faculty, Mr. Paredes was a corporate and regulatory lawyer. He is a graduate of Yale Law School.

The federal securities laws are all about disclosure. Mandatory disclosure is intended to give investors the information they need that is, to make markets more transparent so that investors can assess for themselves how best to allocate their capital. By arming the market with information, mandatory disclosure is designed to promote informed investor decision making and, relatedly, boost investor confidence and result in more efficient securities markets. Further, once mandatory disclosure empowers investors with information, there is no need for the government to engage in more substantive securities regulation that might find the government passing on the merits of a particular issuer and its securities. This full-disclosure philosophy has animated the Securities Act of 1933 and the Securities Exchange Act of 1934 since they were first adopted over 70 years ago.

The practical challenge has been in turning the philosophy of mandatory disclosure into an actual regulatory regime that works. Two things are needed for a disclosure-based regime like the federal securities laws to promote transparency. First, information has to be disclosed. That is relatively straightforward in concept, although deciding what exactly should be disclosed isn't always so easy. Second, and too often overlooked, is that the users of information must be able to use mandated disclosures effectively. In other words, investors, analysts, and others must not only have access to information, but must be able to search, process, and interpret what is disclosed relatively easily and at low cost. Disclosures that aren't understandable don't do much good. A recent report by Robert Pozen, who is heading the SEC Advisory Committee on Improvements to Financial Reporting, has embellished on this point. He explained in a recent Discussion Paper for the Advisory Committee ("Discussion Paper") that users of financial information want:

--To understand the financial reports, at the level of detail that is desired by each type of user;
--To be able to rely on the integrity of the financial reports (and not be told later they were incomplete, misleading, or actually wrong);
--The financial reports to reflect the economic substance of the business, regardless of technical rules;
--Financial reports to reflect, to the extent feasible, actual changes in market values from period to period; and
--The reports to be delivered in a format that makes it easy to compare one company to another.

Likewise, in the mid-1990s, the SEC's Task Force on Disclosure Simplification remarked in its report that disclosures must be understandable, complete and timely. It is hard to disagree with this assessment.

The enduring question is how best to achieve more understandable, complete, and timely disclosures. Asked differently, under what circumstances does disclosure actually advance transparency?

When more transparency is called for, the typical regulatory response is to require more disclosure. Indeed, the federal securities laws mandate that companies disclose oodles of information. For example, companies must make extensive disclosures in their registration statements, annual reports, quarterly reports, and proxies, the principal filings a public company must make with the SEC. More information must be disclosed now than ever. Additionally, many companies voluntarily disclose even more information than the law requires.

However, it is not enough simply to call for more disclosure. (In fact, as a result of so-called information overload, it is possible that users of information may make worse decisions when faced with more and more information, in which event more disclosure may actually lead to less transparency.) To promote transparency, it is also important to focus on the presentation and formatting of what is disclosed.

There are numerous ways to reformat disclosures so they are more understandable and thus more useful. One simple technique, which the SEC has increasingly used, is to require disclosure through graphs, charts, and tables. The SEC's executive compensation disclosure requirements illustrate the possibilities. Another example is plain English, which requires that certain disclosures be made in "plain English" (as opposed to legalese).

The leading initiative that SEC Chairman Cox has been pushing to promote transparency since he got to the SEC is XBRL. Chairman Cox, correctly in my view, sees XBRL as holding out promise for meaningfully revamping how disclosures are formatted and presented and thus for increasing the value of what is disclosed. Without question, the technicalities of XBRL are challenging. Not least of all, an agreed-to set of tags must be crafted. Further, any time there is a change in disclosure, some legal uncertainty is introduced. And with legal uncertainty comes concern about legal liability.

The potential benefits of XBRL, however, are considerable. XBRL makes it cheaper and easier for investors and other users of information to access information. It's just not the ability to access information that matters. Anybody can relatively easily access an issuer's disclosures by looking at the issuer's most recent quarterly or annual report on line. The next step is the ability to manipulate the information that is available. XBRL will effectively allow a user to package the information that is disclosed as the user sees fit given its interests and objectives. Again, as Pozen recently put it in his Discussion Paper:

The SEC is engaged in a major project to introduce interactive data tagging technology for the informational content of financial reports, such as through the use of XBRL, so that users have the ability to quickly and easily focus on the important information they desire in these reports. Moreover, tagging of information may allow investors to customize their needs based on their desired level of detail. The tagging of information can be focused on performance metrics for carrying out the strategy of a specific company and could be designed along the lines of a balanced scorecard. The tagging of information can be organized into a variety of standard formats for key performance indicators (KPIs) organized by industry. . . .

If XBRL is successfully extended from tagging financial information to tagging narrative disclosures, its benefits are even greater. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is a particularly key set of disclosures that a company makes in its SEC filings. However, the MD&A is narrative and, given that the MD&A can run several pages, it can be difficult to wade through and digest in a timely manner. Alan Beller, when he was Director of the SEC's Division of Corporation Finance, suggested that companies give a summary of the full-blown MD&A. As Beller reportedly put it, Current MD&A goes on endlessly about stuff that investors can find on the balance sheet. They don't need 10 pages of elevator music. Unfortunately, elevator music is often what investors and analysts get. Not only do the users not need this noise, but the elevator music can obscure the important information that investors and other users do want. The ability to tag MD&A disclosures could render this information much more valuable to investors, analysts, and others.

The bottom line is that XBRL makes the same body of information much more searchable and understandable. Consequently, XBRL should lead to more transparency and thus better decision-making by users.

This Thing of Ours Called XBRL

Bob Schneider — Thu, 20 Sep 2007 01:34:49 +0000

Written by Michael Ohata Posted on September 19, 2007

Michael Ohata is Chair of the International Steering Committee of XBRL International and Senior Director of Reporting Standards for Microsoft Finance.

In the U.S., it sure feels like the tipping point of widespread XBRL filing with the Securities and Exchange Commission hovers just around a corner or two or three. SEC Chairman Christopher Cox recently announced mutual funds joining the Voluntary Filing Program -- Allegiant Advantage Fund, American Funds Europacific Growth Fund, Muhlenkamp Fund, and Vanguard 500 Index Fund. And the NYSE Euronext piles on as the first stock exchange to furnish its 10-Q.

Also really interesting is the SEC Advisory Committee on Improvements to Financial Reporting chaired by Robert Pozen. It includes a subcommittee on delivering financial information that will focus on tagging information. Folks in XBRL International, the organization that has developed the standard, seem to hold communal breath: we want that approved format, we want some mandate. Projects around the world wait for the watershed event.

It all seems so easy to push for the ruling. Meanwhile, Financial Executives International, specifically its Committee on Finance and Information Technology, shared a discussion with the SEC and XBRL US, Inc., even as they sweat over the XBRL US GAAP taxonomy (many thanks and recognition for all the organizations behind this effort). The dialogue raises a broad question: How do we thoughtfully and effectively manage the requirement for XBRL filing in the US over time?

This thing of ours XBRL has moved beyond hype and evangelism it has got to. The market collaboration and dialogue that includes the SEC reflects the growing focus on how this thing of ours gets implemented. XBRL adoption goes beyond XBRL International's efforts it is for us to collectively collaborate and solve.

Financial Reporting Reform and XBRL (Part 2)

Bob Schneider — Wed, 12 Sep 2007 22:43:50 +0000

Written by Kurt Ramin Posted on September 12, 2007

Kurt Ramin is Chairman (Emeritus) XBRL International and a consultant to the International Accounting Standards Committee Foundation (IASCF).

In my post last week, I applauded the SEC for establishing its Advisory Committee on Improvements to Financial Reporting, which seeks to reduce unnecessary complexity in financial statements and make information more useful and understandable for investors. In this post I will describe an approach to financial reporting that I believe will help accomplish both these objectives.

In my early days as an apprentice in Germany, I had to memorize the common German chart of accounts, which had structure but was still complex and inflexible (no XML at that time). So I developed my own system. I always separated quantitative business information into five, easy-to-understand segments:

People expenses, including benefits, stock options, travel, and other people-related expenses;
Tangible fixed assets (i.e., physical infrastructure), including leases if the asset is used over a relatively long period of time;
Product expenses with no allocations (direct expenses only, based on unit tracing and tracking);
Financial assets and liabilities (including income taxes, interest income, and expense);
Communication expenses (including intangibles), such as advertising, marketing, legal, and other reputation-related assets and liabilities.

We can create net assets (i.e, equities) for all of these segments and prepare a Statement of Changes in Net Assets available to shareowners. Unit tracking is relatively easy for the first three categories (people, physical assets, and products). Valuations can be at various levels (historical cost, current value, etc.), and these valuations are used as a base for management reporting as well. It allows for multilevel reporting and unit-tracking based controls. The lumping of all product-related expenses into a cost of sales category is certainly outdated.

Financial assets lend themselves to current valuation, avoiding the need for "recycling" or a holding tank approach (recycling is reporting the same item of income, expense, gain, or loss in two different periods in two different performance measures -- for example, in other gains and losses and subsequently in the results of operating activities).

The communication section is the most difficult one to trace and assess, because assigning meaningful units of account is often complex. I suggest the use of current valuation to lessen the effect on the current mixed-attribute model. Note that cash flows in this category are often more dispersed from the transaction event than in the other categories. One single event (e.g., lawsuit or product announcement) can have a large effect on market caps.

The above segmentation is more similar to the direct method of cash flow reporting than the indirect method (IAS 7):

People Expenses: cash paid to suppliers and employees
Tangible Fixed Assets: cash flow from investing activities
Product Expenses: cash receipts from customers, less cash paid to suppliers
Financial Assets and Liabilities: cash flow from financing

In 2001, the newly formed International Accounting Standards Board (IASB) started a project on reporting financial performance with an initial focus on the income statement. It later renamed the project to its current title financial statement presentation to reflect that it encompasses all six of the financial statements, which are:

1. Statement of Financial Position, beginning of period
2. Statement of Financial Position, end of period
3. Recognized Income and Expense for period
4. Statement of Changes in Equity
5. Statement of Cash Flows for period
6. Notes comprising significant accounting policies and other explanatory information

The FASB has had similar projects on its agenda for a long time (Comprehensive Income).

I suggest the use of segmentation (i.e., the five categories as described above) in five of the six financial statements. The Statement of Changes in Equity should be a summary (net) of the five categories plus a detailed analysis of the transactions with owners per period.

Notes and other significant explanatory information should be aligned to the segment they belong (e.g., pension accounting policies and disclosures to people expense). XBRL is ideally suited to do this. The appropriate taxonomy could be set up that way. Just to give you a feel for how this would work: the IFRS taxonomy has about 2,000 valuation elements and 2,000 disclosure elements, but they are obviously aligned in a structure based on the current standards literature. Business reporting ratios (EBR) have to be aligned accordingly.

Revenue recognition and lease accounting are probably one of the most discussed and complex current reporting areas. As a mandatory audit procedure we confirm accounts receivable. Why not confirm revenue and leases to ensure mirror-image accounting as well? (see my comments on RosettaNet in Part 1 of this article). When performing quality reviews in my old days as an auditor, I discovered in one case that both sides accounted for the same transaction as a capital lease! The various VAT schemes around the globe and especially in Europe already indirectly confirm revenue.

Currently the FASB is completing their codification of the literature project. This laudable project will shed more light on the principles-versus-rules debate.

We need both principles and rules. That's where the extensibility of XBRL comes in. If we can map input data from XBRL GL to IFRS SME to XBRL IFRS and then to the codified US GAAP literature, we have come a long way in converging international financial reporting.

I compared the topical structure of the US codification project to the IFRS SME exposure draft. The main topics overlap for the most part; however, they are arranged in different order. There are 38 SME topics (from scope and concepts to transition to the IFRS for SMEs). The US GAAP codification has the following structure:

1. General Principles and Objectives
2. Overall Financial Reporting Presentation and Display Matters
3. Assets
4. Liabilities
5. Equity
6. Revenue
7. Expenses
8. Broad Transactional Categories
9. Industry Sections

Obviously, the next logical step would be to codify the current IFRS literature (standards and interpretations) and align it to the US GAAP codified literature and SME exposure draft. The current IFRS (incorporating International Accounting Standards, or IAS) includes 41 IASs (some are deleted) and 8 IFRSs (http://www.iasb.org/). There is already a derivation table in the SME exposure draft indicating the source (i.e., a particular IAS or IFRS).

The main literature (codified US GAAP, IFRS) is available in XML on the same platform (Sigma-link) and it would be interesting to map it as detailed as possible to the segmentation I have suggested. We would need to add a general category to my schema to park items of general principles and industry-specific rules from US GAAP.

For years I have advocated these formats and shown the following chart (right-click the thumbnail below and Open in a new window or tab):

Note that the information is broken down into quantity and value. Modern ERP and GPS systems are allowing us to trace and track quantities worldwide, from suppliers to customers and within an entity. Business combinations can be traced separately and we can look at consolidations in various formats (consolidated entities and de-consolidated entities). The drill-down power of XBRL will make some of the current accounting principles (business combinations, currency translation vs. currency transactions) easier to apply.

I recently attended a presentation given by a senior accounting officer of ARAMCO (arguably the most valuable company in the world). Besides showing us how they are tracking their ships with Global Positioning Systems (GPS), he walked us through the best SAP implementation I have ever seen. Their system could easily map to any XBRL taxonomy, either US GAAP or IFRS. In fact, they just changed their reporting from US GAAP to IFRS. It is also clear that systems (SAP, Oracle, and others) in combination with data warehousing will play a major role in the reform of financial and business reporting. XBRL will be an important factor in that process as well. (Right-click the thumbnail below and Open in a new window or tab.)

With XBRL we started a revolution in business and financial reporting. Different international environments (multiple currencies, different languages spoken) remain a challenge for business communication around the globe. However, we have come a long way of tracking and tracing information to allow for a more transparent business world. XBRL is assisting us to tackle these remaining problems of communication as well. We never had a farther reach and richness of data before. We just need to use the tools to make it more understandable.

Will XBRL Perpetuate National Differences in Financial Reporting?

Bob Schneider — Wed, 08 Aug 2007 04:54:11 +0000

Written by Bob Schneider Posted August 7, 2007

In my two last posts, I have argued with the views of Philip Broadley, Group Finance Director at Prudential and one of 11 financial leaders whose thoughts on key accounting issues were discussed in a recent KPMG report. My July 18 post refuted the idea that XBRL will bias users against half-yearly statements and toward the shorter time-span quarterlies. My July 25 article asked whether Broadley's fear that XBRL will make users focus on the numbers alone rather than an explanation of the numbers is well-founded.

In this final post on his comments, I want to discuss a question that Broadley asks in this excerpt from page 11 of the report:

"You need to report what management thinks, not just the numbers. I'd rather focus on getting the narrative reporting right than follow the XBRL approach." It is down to the culture again. "Will XBRL information from a company in Malaysia say the same thing as the information from a company in France?"

Given Broadley's sentiments toward XBRL, I think his answer would be "No, it won't. Interactive data will reinforce national accounting differences, making company data less comparable among firms in different countries."

I may be unfairly characterizing his position; in fact, it's unfair of me to wring so much meaning from a single sentence. I will grant that -- whatever Mr. Broadley's views -- his question is an important one. So leaving aside the equally compelling issue of whether some national accounting differences are not only inevitable but necessary, let me address the question: Will XBRL work to perpetuate national differences in financial reporting and make cross-border financial statements less comparable?

A major focus of the KPMG report was to measure the progress in adopting International Financial Reporting Standards (IFRS). The authors found that "Reporting in each country still bears the hallmarks of its previous national GAAP." As John Hegarty, Manager, Financial Management, Europe and Central Asia, for the World Bank states:

"German pharmaceutical companies will be more like German car companies than they will be like French pharmaceutical companies. The actual differences remain. We have to be realistic and accept that all of this won't work perfectly from today. It will take time."

The Economist had an interesting report on the issue in May:

Whether pure IFRS or not, all countries are prone to interpret the rules in ways that reflect their old national accounting standards, according to KPMG, an accountancy firm Kuwait and other countries in the Middle East, too, are said to be adopting IFRS with certain peculiarities. The worry is that if enough countries seek to tailor standards to their liking, there could be hundreds of different versions of IFRS instead of one set of international rules, which is the whole point, says Sir David Tweedie, the head of the IASB. We have to nip this in the bud.

Now how does Sir David view the role of XBRL in attaining the IASB's goal of a single set of international accounting standards? Here are his remarks at the Philadelphia XBRL conference last December:

Where does XBRL fit into the IASB's efforts on the standard-setting front? As I mentioned earlier, the IASB is committed to developing standards that meet the needs of users of financial accounts, in particular the investor community, to enable them to make rational economic decisions. We at the IASB and the IASC Foundation (our oversight organisation) view XBRL as an important tool that will enable these users to take full advantage of the increased comparability and transparency offered by IFRSs.

For Sir David, clearly XBRL is part of the solution, not part of the problem.

Let me turn to the views of Charles Hoffman, who is widely considered the George Washington of XBRL. In his book Financial Reporting Using XBRL (UBMatrix, 2006, p. 159), here's what Hoffman says about interactive data and comparability:

XBRL is comparable to the extent that users of XBRL in a certain situation desire to have comparability. Comparability is not an XBRL issue; it is a domain issue; how much comparability does a specific domain, or use, of XBRL desire. Comparability is a very emotional issue that people turn into a technical XBRL issue. It is a domain issue which will be determined by the domain.

I'm taking some liberties here in using this quote to support my argument. Certainly Hoffman isn't specifically addressing XBRL vis--vis IFRS standards, and clearly "domain" has wide applicability beyond financial reporting. Nevertheless, could there be a more straight-forward declaration of his feelings on the matter than "comparability is not an XBRL issue."?

Now you would think at this point that -- delighted to find seemingly strong support for my position that interactive data will not hinder cross-border comparability from both the world's leading accounting standards-setter and the Father of XBRL -- I would have the good sense to claim victory and sign off.

Well, I may not be dumb, but I am stupid. Because I can't help mentioning that I do see a way that the structure of XBRL could impede cross-border comparability of financial reports.

Describing the role of jurisdictions, XBRL says "Jurisdictions promote XBRL and organise or sponsor the creation of taxonomies, notably for the main accounting standards for business reporting in their area."There are 20 jurisdictions Japan, Canada, Poland, etc. -- including one for the IASB. Many if not all of the jurisdictions have created national taxonomies to reflect the accounting specific to their area.

As I reviewed the websites of the various jurisdictions, I came across this statement from XBRL New Zealand:

A draft taxonomy has been prepared in accordance with "old" New Zealand Generally Accepted Accounting Practice (NZ GAAP). This taxonomy will not be developed further because after 1 January 2007 all financial reporting entities in New Zealand will need to prepare financial statements under New Zealand equivalent of International Financial Reporting Standards (NZ IFRS)...XBRL-NZ intends to replace this taxonomy with an extension taxonomy to the approved IFRS taxonomy developed by the IASCF to recognise unique terms in the financial statements of New Zealand reporting entities.

For me, this raises the question: Will all jurisdictions follow New Zealand's example? Will all national GAAP taxonomies be allowed to gracefully decay as IFRS is adopted? Or do these GAAP taxonomies, in at least some jurisdictions, have constituencies that would like to see national taxonomies continue to reflect country-specific accounting practices, thus perpetuating the cross-border differences in XBRL-enabled statements that Sir David seeks to eliminate?

Comments from XBRL jurisdiction members, demonstrating that I'm both stupid and dumb, are most welcome.

Three common reasons for Not using XBRL: What CFOs should really know

Bob Schneider — Wed, 01 Aug 2007 02:18:40 +0000

Written by Mike Willis Posted on July 31, 2007

Mike Willis was the Founding Chairman of XBRL International and is a Partner with PricewaterhouseCoopers.

CFOs face a long list of issues all marked top priority. The temptation to cross off "adopt XBRL for reporting" is strong. Here are three common reasons why XBRL often gets pushed off the list of CFO priorities, and why CFOs should know more before they do so.

1. You want to tell your own story, and XBRL won't allow that.

CFOs want to control the company's message. They want to present the facts as they should be viewed by investors. Some believe XBRL provides a one-size-fits-all presentation where the company's unique story messages get lost. It is important to company management that unique company messages be communicated to the market in an efficient manner.

What CFOs should know is that although most firms do not tag their reports, intermediaries do tag all company reports without input or guidance from CFOs. Company-reported information is tagged in accordance with each intermediary's proprietary standard reporting template, rather than concepts agreed to and defined by the CFO.

Market intermediaries normalize, distort, omit, or simply change company reported information for distribution and resale to analysts, ratings agencies, auditors, regulators, and others. The result is a distortion of company information delivered days after it is reported. The data provided by intermediaries is incorrect as often as 30% of the time and incomplete 100% of the time.

CFOs can readily assess the level of intermediary alteration by attempting to reconcile their reported information with that obtained directly from intermediaries or at the publicly available finance pages at Google.com, Yahoo.com, or MSN.com. Talk with analysts who purchase intermediary data about the accuracy, granularity, completeness, and timeliness of company information purchased from intermediaries and you'll hear their complaints. Compare the volume of information provided by intermediaries with that contained within company reports, and you'll see how much is left out.

If CFOs really want to tell their own story, they should tag their reports themselves. Companies can thus be assured that their company-specific, unique information is being used and interpreted as intended.

2. You do not want to use a standard reporting template, which is what XBRL is.

Forcing unique or company-specific concepts into a standard reporting template restricts communication and inappropriately normalizes, aggregates, or otherwise homogenizes information, thereby diminishing its intended meaning and value.

What CFOs should know is that they unwittingly let their company's information be forced into the intermediary standard reporting templates. CFOs have no input, access, or visibility to the tagging of their reports by these third parties.

XBRL US GAAP Taxonomies look like a standard reporting template, since they contain a robust listing of mandatory and commonly used reporting concepts. However, appearances are deceiving. XBRL taxonomies are 'extensible,' i.e., they can be extended or customized to meet unique company reporting needs.

US GAAP Taxonomies are also designed to express required and commonly used reporting concepts. They are not designed to express every single reporting aspect occurring in every company report. Extensible taxonomies are a beginning point that companies can repeatedly leverage and extend to express their unique reporting concepts (e.g. unique revenue or expense items, unique company segments, etc.) at the lowest cost possible.

The extensibility of XBRL taxonomies provides CFOs with the flexibility to articulate unique and highly distinguishable company information. As a standardized language, XBRL enables communication of individual company concepts well beyond the scope of standard intermediary reporting templates.

If CFOs do not want to use a standard reporting template, they should consider extending the XBRL GAAP Taxonomies to express their unique company-specific reporting concepts. By leveraging the commonly used reporting concepts articulated in the taxonomies, CFOs can focus on differentiating their story by creating unique company-specific concepts, or extensions.

3. You want to reduce your reporting costs, and XBRL raises them.

The tagging of company financial reports takes time and increases costs. When tags are applied after the fact to completed company reports, incremental time, costs, and processes are incurred. CFOs should not, and do not have to, sustain incremental reporting costs to increase the accuracy, completeness, and timeliness of reported information for access and reuse by investors.

What CFOs should know is that XBRL enables significant reporting process cost and time reductions. John Stantial, Director of Financial Reporting at United Technologies Corporation ("UTC"), outlines in "ROI on XBRL" how to realize a 20%-plus reduction in reporting process time and costs. John has been tagging UTC company reports in XBRL for two years and understands the additional costs incurred by carrying out this tagging after the fact. As a result, he is moving tagging further back in the reporting processes to eliminate extra costs, enhance reporting processes, and reduce overall time and expenses.

Cost savings can be realized by moving standardization further back in reporting processes and not incrementally tagging completed company reports. Savings result from enhanced report production and review processes. XBRL Taxonomies can be imported into reporting applications and directly mapped to company reporting concepts. Further, rather than circulating multiple draft versions of company documents among reviewers, the review is conducted directly within the original reporting application (e.g. Hyperion Financial Management, Cartesis, etc.) and the final version of company information is exported in the XBRL format.

If CFOs want to reduce their reporting costs, they should embrace standardization earlier in their reporting processes and not defer tagging of completed company reports as an incremental effort.

Summary

The current business reporting supply chain is highly manual, consistently inefficient, and painfully costly for companies and investors. CFOs are well served to actively participate in development, use, and extension of XBRL taxonomies for reporting in order to:

1. More effectively tell their own story;
2. Ensure that unique reporting concepts are clearly articulated; and
3. Reduce reporting costs.

CFOs can further minimize the risk of reporting in XBRL by participating in the Securities and Exchange Commission's Voluntary Filing Program (VFP). Information about the VFP and the SEC's other interactive data initiatives can be found at the XBRL Spotlight page.

UPDATE�August 2, 2007

A recent decision by the SEC to allow companies to broadcast their quarterly results via RSS feeds will work to further reduce distribution and analysis time and costs. A recent article at the Register includes the following remark:

Embracing new technologies this week was Sun Microsystems, which - after months of lobbying SEC chairman Christopher Cox - got the OK to broadcast its quarterly results via RSS feed and through its website, in addition to the usual routes of filings and calls with Wall St investors.

This further standardization of the supply chain distribution platform adds to the cost effectiveness of the prospective reporting and analysis processes.

XBRL Will Boost Narrative Reporting

Bob Schneider — Thu, 26 Jul 2007 02:50:27 +0000

Written by Bob Schneider Posted July 25, 2007

In a recent post, I gave an overview of a KPMG report that presents the thoughts of 11 financial leaders on key accounting issues (most notably, for our purposes, XBRL). A few days ago, I noted my disagreements with the thinking of one of the leaders, Philip Broadley, Group Finance Director of Prudential. If I can restate his points I hope impartially they are:

(1) XBRL will bias users against half-yearly statements and toward the shorter time-span quarterlies;
(2) XBRL will make users focus on the numbers alone, rather than explanation of the numbers;
(3) XBRL will exacerbate reporting differences among various financial jurisdictions by accentuating their different accounting cultures and traditions.

In my previous post, I dealt with item (1). In this post, I'll discuss item (2), and follow up with a final post on (3).

Here's how the authors report Broadley's thoughts on XBRL and company numbers:

"The concept of XBRL, with its ability to pluck figures from a set of accounts and compare them with those from another company, doesn't fit with the Broadley approach. Accounts should be for explanation rather than information. You need to report what management thinks, not just the numbers. I'd rather focus on getting the narrative reporting right than follow the XBRL approach."

I don't agree with any of this. Analysts will always compare the numbers of one firm with those of another; it's what analysts do. The question is how well the numbers reflect actual business conditions and performance, and how comparable they are among different companies.

These are tasks for which interactive data is perfectly suited. If, in fact, there is an "XBRL approach" to financial reporting, it means that -- by providing data that is more accurate than what has been historically offered by data aggregators, and by eliminating data re-keying and the inevitable accompanying errors -- analysts will have much better data to work with, and much more time to refine those numbers to reflect business reality.

Not only will XBRL give analysts more time for focusing on "explanation" rather than "information," it will also be integral to both the creation and analysis of the narrative reporting Broadley prefers.

Like many accounting terms, narrative reporting is defined in various ways. It commonly includes the Management Discussion & Analysis (MD&A) section of the 10-K. It can take in such items as the CEO's letter in the annual report; discussion of strategy, objectives, legal proceedings, uses of capital, segment reporting, intangibles (such as the value of brand names and company reputation), and risk factors; and assessments of environmental, employee, and social conditions as they pertain to the company. Notably, it often encompasses the disclosure of key performance indicators (KPIs), which can be defined as "quantified measurements that reflect the critical success factors of an entity."

In a speech last year to the SEC Government-Business Forum on Small Business Capital Formation, Peter Wallison of the American Enterprise Institute addressed the value of XBRL in narrative reporting:

"We shouldn't leave the impression that interactive data is only useful for financial statement numbers. Interactive data, or XBRL, can also be used for text disclosures, and in the same way. As long as a text disclosure is consistently defined, it can be searched and displayed as easily as a number.

For example, many oil companies disclose their oil and natural gas reserves in their financial reports. This number usually appears in a footnote text discussion of the issue. As long as all companies define reserves and identify the text as a discussion of reserves, XBRL would allow a computer, in seconds, to compare all their reserves.

In the same way, XBRL will also make MD&A discussions in the prospectus more useful to investors by facilitating comparison between companies. For example, if an MD&A contains a discussion of market share, this data will also be searchable in all filings and displayed in seconds in a spread sheet. This will also make things easier for issuers, because the company's data system can be structured to keep track of data on market share or reserves, and plug it in automatically as the 10-K is being prepared."

Let's look at narrative reporting in another jurisdiction: Britain. The Financial Reporting Council (FRC) is the UK's "..independent regulator responsible for promoting confidence in corporate reporting and governance." The Accounting Standards Board (ASB) is the operating body of the FRC responsible for issuing accounting standards. In January, the ASB published a review of narrative financial reporting by listed companies in the UK. In their press release on the study, the ASB cited four areas that required improvement, including (a) better disclosure of forward-looking information; and (b) better identification of KPIs, both financial and nonfinancial.

In my previous post questioning any bias of XBRL toward quarterlies over the half-yearly interim, I cited the essay of the leading audit chiefs and their call for a new reporting model with forward-looking information, versus the historical data now provided in financial reports. The audit chiefs see XBRL as central to this change:

Just as the Internet is rapidly changing the way individuals and businesses engage in commercial and social activities, a major project under way in the financial arena the Global XBRL Initiative promises to revolutionize the way investors, governments and companies themselves use, analyze and generate information. This global XBRL initiative, or perhaps other reporting-related technologies, are likely at some point to revolutionize the entire company reporting model what information is presented and how, and how it is audited. Clearly, a range of intangibles that are not well measured, or not measured at all, under current accounting conventions are driving company performance. Investors and other stakeholders in business information understandably want to know what those intangibles are, and how they might plausibly affect how businesses perform in the future.

Let's look specifically at KPIs. Robert Eccles, an advisor to the Enhanced Business Reporting Consortium (EBRC), has written on this blog about his meeting with Chairman Cox in December 2006 "to talk about how XBRL could be extended into broader narrative reporting, such as for the MD&A and 10K, and for industry-specific key performance indicators." Mr. Wallison does a nice job of portraying the importance of XBRL in EBR and the role of KPIs:

Finally, there is enhanced business reporting. I would be surprised if many of you have heard much about enhanced business reporting, or EBR, since the idea is still in the germination stage.

It's an effort to make up for the deficiencies of GAAP that I described earlier by identifying the elements that drive increases in company value in each industry, and developing metrics that will measure a company's performance with respect to each of these elements.

The value drivers are called key performance indicators (or KPIs), and once they are in place for an industry it will be possible to compare companies on this basis as well as their financial performance in GAAP terms.

The relationship between XBRL and EBR is very close. XBRL is about format; EBR is about substance. If the substance -- the information about companies that goes beyond the financial statements -- can be developed effectively, XBRL provides the format through which this information can be quickly and inexpensively searched and used.

In summary, I feel comfortable stating that:

(a) XBRL does support explanation, not mere information;
(b) XBRL can report what management thinks, not just the numbers; and
(c) When it comes to narrative reporting, XBRL is not part of the problem, but part of the solution.

Despite my strong feelings on the topic, I know other readers may well feel differently about these matters. I encourage you to post your thoughts by clicking the Comments link below.

Does XBRL Doom the Half-Yearly Interim?

Bob Schneider — Thu, 19 Jul 2007 03:37:08 +0000

Written by Bob Schneider Posted July 18, 2007

In a recent post, I recommended a KPMG report that summarized the views of 11 financial leaders analysts, regulators, CFOs, standards-setters on global accounting issues. I promised to respond to their comments on XBRL, about which the leaders were specifically asked and were quoted at some length.

In a field as intellectually fertile as XBRL, it's not surprising that I didn't have to read very far to find remarks that demanded extensive reply. The first leader presented is Philip Broadley, Group Finance Director at Prudential; here are his thoughts on interactive data as offered by the reporter:

He is less convinced that technologies like XBRL have yet found a place in the financial reporting world. It is a question of what should the frequency of reporting be? he said. He is a strong supporter of EU internal market commissioner Charlie McCreevy's oft-repeated view that quarterly reporting will not be introduced in Europe. It would simply increase the possibility of manipulation, said Broadley. Let's fix half-yearly reporting first. And the concept of XBRL, with its ability to pluck figures from a set of accounts and compare them with those from another company, doesn't fit with the Broadley approach. Accounts should be for explanation rather than information. You need to report what management thinks, not just the numbers. I'd rather focus on getting the narrative reporting right than follow the XBRL approach. It is down to the culture again. Will XBRL information from a company in Malaysia say the same thing as the information from a company in France?

I'm always wary of criticizing the edited remarks of an interviewee, especially when an hour's worth of someone's utterances with their stops and starts, twists and turns are summarized in a single paragraph. Still, none of Broadley's remarks seem on target. If I can restate his points -- I hope not tendentiously -- they are:

In this post, I'll deal with item (1) and follow-up shortly with a second post on (2) and (3).

Quarterly financial statements have a long history in US financial reporting. The NYSE has required quarterlies for listed companies for over 60 years. In 1970, the SEC mandated the quarterly 10-Q. Although globalization of world capital markets, the speed of information delivery, and the convergence of accounting standards may put the quarterly versus half-yearly argument in greater focus, it certainly predates XBRL and much of the computer revolution. This year the EU issued new requirements for quarterly reports which, although not as comprehensive as the SEC 10-Q, do seem to indicate a trend toward interims of shorter duration.

If we limit the debate to the impact on investors, the tradeoffs between quarterly and half-yearly statements were summarized nicely in The Capital Market Implications of the Frequency of Interim Financial Reporting: An International Analysis, a study published last year by Rutgers University:

"More frequent interim reports could mean that security prices reflect the latest firm-specific information, leading to more efficient security pricing. [However] to the extent that more frequent interim reports force firms to make estimates in situations where more informed estimates are available only with the passage of time, the more frequent interim reports may be subject to more error (as viewed from the annual report standpoint)." Thus, investor response to the more frequent interim reports may induce greater volatility in security prices."

Thus it's the competition between timeliness and accuracy that's key to the debate. But where's the impact from XBRL? At the margins, interactive data might improve "informed estimates," and that might push users toward interims of shorter periods, i.e., quarterlies. But as the authors note, more informed estimates for allocating operating costs, income taxes, etc. are "available only with the passage of the time." Whatever stunning powers XBRL may have, trying to make the hands of a clock move faster is best left to the likes of Uri Geller and his paranormal cohort.

Indeed, I can think of two ways XBRL may strengthen the case for the half-yearly. First, XBRL speeds the closing process. Thus, if the half-yearly closing can take as few as six days, financial officers who prefer the longer time-span but sense investors think the interval between reports is too long can point to a fast closing in support of the six-month interim.

Second, as John White made clear in his presentation at the SEC Interactive Data Roundtable in March, XBRL will make the analysis and distribution of the information contained in interims much faster. "Not only preparers, but investors, analysts, journalists, etc, will all have instant access to the same documents once filed." Again, users who think the 180-day reporting period is just too long may be assuaged by the fact that, once published, the statements can be quickly analyzed and reviewed.

None of this is to imply that XBRL cannot deliver much more company financial information much more quickly. The term "continuous reporting" is a bit ambiguous; however, it comprehends releases of financial information on a weekly, daily, hourly, or even real-time basis. The concept has been around for a long time. Indeed, a Forbes article dated February 11, 1985, on "continuous computerized reporting" includes a prediction by Sandy Burton, former chief accountant of the SEC, that investors "could be tapping into a steady, computerized stream of information via their personal computers in only 10 or 15 years."

Certainly XBRL brings continuous reporting much closer to reality. In an essay published late last year (and which I commented on in December 12 and December 15 posts), the CEOs of the major audit firms declare that a "brave new world of company reporting is already visible." For the accounting chiefs, the key issue is not the length of time covered by interim statements. In fact, they're rather dismissive of all periodic reports, which they view as mere historical statements lacking predictive information:

"Financial statements are backward looking documents. They tell how a company has performed in some recent period. Perhaps some of the information contained in the financials is indicative of future performance, but much of it is not.In an environment of user-determined customization, users are likely to care less about the formats that have historically dominated the disclosure of company information balance sheets, income statements and statements of cash flows and far more about new formats that could be developed by our profession, analysts and users themselves."

Their argument, in fact, is that the continuous reporting made possible by XBRL will reverse the short-term outlook of investors:

Finally, and perhaps counter-intuitively, more frequently reported information may reverse some or much of the short-term-ism about which corporate managers and others have long complained. Once investors have almost real-time access to financial and other information about companies, forecasting quarterly profit numbers will no longer be relevant, while forecasts of daily or weekly profits will be pointless.

Whether this "brave new world" is in fact a utopia of transparent financial reporting or an Orwellian nightmare of information overload can and will be fiercely debated. But clearly the battle will be fought on terms much different than whether interims should be 90 or 180 days.

Financial Leaders Disagree on XBRL in KPMG Report

Bob Schneider — Sat, 30 Jun 2007 01:14:49 +0000

Written by Bob Schneider Posted on June 29, 2007

KPMG in the UK has released online a report titled International Financial Reporting Standards: The Quest for a Global Language that is essential reading. With special reference to IFRS, eleven leading figures in the financial world -- including standard-setters, CFOs, auditors, and analysts discuss the key issues facing global accounting (the full list of participants is at the bottom of the press release). Among the topics they focus on:

the complexity, comparability, and consistency of financial statements;
principles-based versus rules-based standards;
continued differences in national accounting standards, even among those countries that have adopted IFRS;
fair value accounting;
convergence of IFRS and US-GAAP;
the role of the SEC;
the usefulness of conceptual framework efforts;
the varied needs of financial statement users and how they can best be served;
the plusses and minuses of narrative reporting; and, of course,
XBRL.

These guys (and gal) don't mince words. Take this nugget from Ken Lever, Finance Director of Tompkins, plc:

"...'Even the US feels they want to head in a principles-based direction, he said. The US can be unnecessarily prescriptive. But that is the nature of the country. It seems they have their whole lives driven by rules. But we will head towards a principles-based regime."

For Americans imbued with a picture, accurate or mistaken, of a sclerotic, overregulated Europe where circus performers must wear hard hats and greengrocers can't sell excessively curved bananas, such zingers can be unsettling.

The opinions of these financial mavens are not only pungent, they are also highly diverse. But while this diversity exemplifies the richness and intricacies of international financial reporting, I also found it disconcerting. Here are some of the best minds in the financial world expounding on the most crucial reporting issues. Although on certain key points they concur, on numerous others whether rules will prevail over principles, the usefulness of fair value, the efficacy of a conceptual framework -- their views vary widely. In the herding-cats world of global accounting standards, I'm not sure if this "let a hundred flowers bloom" intellectual climate is the one most congenial for getting results. But I suppose it's inevitable, given the enormity and complexity of the issues to be resolved.

XBRL is by no means exempt to a wide assortment of views. In summarizing the thoughts of these leaders on interactive data, the report states:

The issue of electronic reporting languages like XBRL and other technology solutions in financial reporting divided opinion. Peter Elwin said he was deeply skeptical about XBRL. I have enough experience of data systems to know there is a huge potential to go off the rails, he said. XBRL looks very desirable. But all it is really doing is saving me the hard graft of digging out the detail myself. It doesn't change the way the numbers were produced in the first place. Likewise Philip Broadley of Prudential said that: It would simply increase the possibility of manipulation. But Robert Herz of FASB was an enthusiast. Once you can tag data and disassemble it that could change things, he said. Narrative reporting and financial reporting becomes easier with tagging, he said. Turnover? Would you like to see the six different components of turnover? Click! And so on. It will be a facilitator, said Lever. XBRL is just like a giant spreadsheet for data. It is a good thing. But it will take time to get there.

The individual comments of participants on XBRL are well worth your time. I don't want to steal the authors' thunder (not to mention their copy) by posting them all here. Instead, let me direct you to their location in the report, and also encourage you to (literally) read around their edges:

Phillip Broadley, Group Finance Director, Prudential -- Page 11, below Explanation not just information subhead

Peter Elwin, Head of Accounting and Valuation Research with JP Morgan Cazenove Page 15, Catch-phrases subhead, 2nd paragraph

Robert Herz, Chairman of the Financial Accounting Standards Board Page 23, above "Current" value subhead

Archie Hunter, Chairman of the audit committee of the Royal Bank of Scotland Group Page 25, Reconciliations subhead, 3rd paragraph

Kenneth Lee, Head of Accounting and Valuation Research for Europe with Citi Investment Research Page 27, below Opportunities through XBRL subhead

Ken Lever, Finance Director at engineering group Tomkins plc Page 31, Rules and principles subhead, 2nd paragraph

Cees Maas, Honorary Vice-Chairman of ING Group Page 35, 2nd paragraph

Sir David Tweedie, Chairman of the International Accounting Standards Board Page 45, 2nd paragraph

I'll write a follow-up post next week that discusses some of the leaders' more salient comments vis-a-vis XBRL. In the meantime, please feel free to post your own reactions in the Comments section of this article.

XBRL Speeds Closing and Reporting

Bob Schneider — Sat, 26 May 2007 01:28:40 +0000

Written by Bob Schneider Posted May 25, 2007

Close Fast, Close Smart (CIO Asia, May 2007) is an extremely worthwhile article about how companies can close their books faster and the resulting benefits. Shortening the period-end accounting process by a few days may not seem like a big deal. But as the article's author Galen Gruman states:

Increasingly, the speed with which an organization closes its books and reports its financial results is being looked at by practitioners, analysts, and investors as a defining metric for evaluating whether the organization possesses the best possible processes and enabling technologies. And it turns out that many companies don't, even those making huge IT investments and supporting equally large IT departments.

For large public US companies, faster closings aren't simply a matter of choice. Since December 2006, "large accelerated filers" (typically those with public floats above $700 million) have 60 days to file their 10-K's, down from 75 previously.

But the benefits of accelerated closings extend far beyond meeting SEC deadlines. As Gruman describes, fast closings demand that the company rethink and redesign its financial processes. In adopting the new technology and systems required, managers gain a near-real-time view of financial performance that lets them spot opportunities and problems much sooner. Because the relationships between all financial information are much better understood, managers can perform better analysis. And faster closing builds confidence among investors who assume, often correctly, that a company that can't get its numbers out doesn't have its act together, or may be trying to hide something.

Integral to speeding closing is ensuring compliance to Sarbanes-Oxley and a host of other regulatory requirements. Indeed, in one real-world example Gruman describes, SOX was instrumental in getting mangers to review the closing process because "it exposed all the touchpoints in the process where errors could creep in." One executive cited says that truly adhering to Sarbanes-Oxley's requirements "was impossible to do with spreadsheets, e-mail and PowerPoints" because of the difficulty of validating the accuracy and consistency of such disparate, individually maintained data.

This discussion reminded me of the XBRL-GL outreach call I wrote about a couple of weeks ago. In this talk, Walter Hamscher described how the onerous compliance regimes companies now face require them to rethink their information systems, because it's impossible to achieve compliance goals without built-in controls. In this environment, the adoption of XBRL can be extremely effective across a wide range of compliance processes.

I was therefore happy to see Gruman discuss the benefits of XBRL at some length. He focuses more on XBRL's impact on financial reporting than the closing process. But he also includes these comments:

XBRL has been touted by the SEC as a way to make information more easily accessible to investors and regulators, but there's a direct benefit to the enterprise itself XBRL also provides structure for validation rules, queries and analysis rules, notes Mike Willis, a PricewaterhouseCoopers partner. If XBRL were introduced throughout the enterprise's financial closing and reporting process, rather than simply used as a report format after the fact, users would gain new controls and insights into their data, Willis says. "They can automate analytic rules rather than auditing manually, which would reduce costs and speed the process," he adds. Plus, the use of XBRL would ensure that a company's reports reach their stockholders (and analysts) unfiltered by third-party aggregators. "It lets companies tell their own stories," says Willis.

It's always interesting when a seemingly mundane goal like closing the books a couple of days sooner can have a wide-ranging impact throughout the organization. This article offers additional testimony to the power and usefulness of XBRL, and it is well worth your time.

XBRL Can Reduce the Fraud “Expectations Gap”

Bob Schneider — Sat, 03 Feb 2007 01:42:34 +0000

Written by Bob Schneider Posted February 2, 2007

My favorite line of comedian Fran Leibowitz is "You know you're an adult when the phone rings and you hope it isn't for you."

Here's another telltale sign of adulthood: You realize the job you do isn't anything like what people think it is or what you yourself thought it would be.

Auditing is a prime example. Most first-year accounting majors would be surprised to learn that their first job out of school would be to help assure that financial statements are presented fairly. To the extent they know they'll have to work a while as auditors to get their CPAs, they probably figure they'll be looking to see if anybody has been stealing money from their clients. In other words, they'll be looking for fraud, which defined more precisely includes both the deliberate misrepresentation of financial statements as well as the improper use of company resources.

But for auditors, far from being their raison d'etre, fraud is a pain in the butt. Doctors don't like disease, and exterminators don't like vermin. But both recognize that they'd be out of a job if their respective nemeses were extinguished. Not so for auditors and fraud. With the exception of forensic auditing specialists, the external auditor would exist happily indeed, much more happily if fraud simply didn't exist.

Uncovering fraud while performing all the tasks of a financial audit -- including big-time frauds where management is on the swindle is really hard. At the same time, fraud creates enormous legal exposure for auditors. If even accounting majors think the independent auditor exists to find fraud, just imagine what the average juror believes. When the prosecutor asks "Where were the auditors?", their response that "Uncovering fraud is not our primary objective" is greeted with much skepticism.

The heads of the big audit networks addressed these concerns in their recent essay on their vision for the audit profession:

"There are limits to what auditors can reasonably uncover, given the limits inherent in today's audits. Specifically, unless companies or investors are willing to pay auditors to police all of a company's transactions, auditors are limited to using indirect means to ascertain whether fraud has occurred.These methods clearly are useful, indeed essential, to preventing and discovering fraud. But they are not foolproof, nor can they be expected to be. Hence, [an] expectations gap arises because many investors, policy makers and the media believe that the auditor's main function is to detect all fraud, and thus, where it materializes and auditors have failed to find it, the auditors are often presumed to be at fault. Given the inherent limitations of any outside party to discover the presence of fraud, the restrictions governing the methods auditors are allowed to use, and the cost constraints of the audit itself, this presumption is not aligned with the current auditing standards."

How XBRL Can Help
There is no way to eliminate entirely that "expectations gap." But I do think the widespread adoption of XBRL can go a long way to reducing it.

In his speech at the recent XBRL conference in Philadelphia, Ian Ball, CEO of the International Federation of Accountants, stated one of the direct benefits of XBRL for auditors: "Simple balance sheet statistical sampling efforts can be replaced by 100% validation routines or by deeper analysis of ledger-level data." If realized, this could be enormously important to auditors in both discovering fraud and ensuring external audiences they have done everything possible to uncover it.

Statistical sampling is essential to an auditing process that emphasizes gaining reasonable assurance at reasonable cost. But by necessity, only a small portion of all transactions are selected and reviewed, and so the possibility of fraud still looms. From a litigation standpoint, convincing jurors that auditors did their job when fraud existed but relatively few transactions were tested is a tough sell. Even if 100% validation is not achieved, expanding sample sizes and lowering materiality levels increases the chances that fraud will be discovered in the financial audit. To the extent 100% validation is possible, it will be a boon to the auditing profession.

"Deeper analysis of ledger-level data" would also yield huge benefits. The search for fraud is a hunt for the exceptional, and not in the good sense. It's finding some piece of evidence somewhere that something isn't kosher. Numbers and ratios that look fine for the entire company for the full year often compiled from disparate accounting systems, with manual data re-entry and sometimes poorly controlled spreadsheets -- can mask inconsistencies in the bowels of the organization for shorter periods of time. The introduction of XBRL as a single data standard for the firm enables the analysis of large data pools from deeply drilled levels at low cost, making the search for anomalies much more efficient.

The best solution to fraud, of course, is to make it hard to pull off. XBRL has substantial potential to improve internal control and thereby reduce fraud risk. The seamlessness of XBRL affords full-scale integration of company data with limited human intervention. Business rules both from the perspective of regulating the activities of employees as well as the constraints on the information entered into database systems can be more easily adopted and enforced. Because tagged data allows searches to be done much more quickly, control procedures that were formerly onerous can be instituted and performed without significant cost to the organization.

Finally, I think the benefits of XBRL-GL as a business reporting language as opposed to a mere financial reporting language (as discussed by David vun Kannon in his recent post on this blog) will be significant. Non-financial data -- such as whether and when an employee has taken vacation -- can be crucial in both detecting and preventing fraud. If this information can be easily expressed and manipulated with the financial data, analysis of employee activities will be enhanced, and discrepancies will be more visible. These advantages will be even more prominent if XBRL adoption becomes worldwide throughout industry, so that combined companies that formerly faced long lag times in merging data systems quickly integrate their data in the XBRL-GL standard.

Audit Chiefs Offer Vision on the Future of Financial Reporting and the Role of XBRL — Part II

Bob Schneider — Sat, 16 Dec 2006 00:13:46 +0000

Written by Bob Schneider Posted on December 15, 2006

In my post of December 12, I described the contents of Global Capital Markets and the Global Economy: A Vision From the CEOs of the International Audit Networks and discussed the comments of some critics. Here are some of my own reactions to the report:

(1) The initial worry among many financial practitioners was that XBRL would be used to implement a single chart of accounts for all companies, or at least those within a specific sector. Now we are hearing an opposite argument, namely, that adoption of XBRL will lead to the release of all kinds of company data that won't be comparable among peers.

In the important issue of standardization in financial and business reporting, XBRL is now being used on both sides of the discussion. I view that as a positive sign for interactive data. It helps it avoid being pigeonholed as simply a Trojan horse for those who want to impose greater standardization on financial reporting. It demonstrates XBRL's versatility and power. And it reinforces the point that XBRL is a data standard, not a financial standard, and it cannot be appropriated solely by one side in the standardization debate.

(2) Calls for radically re-defining the financial model are nothing new, as the CEOs themselves state in a sidebar on page 17 of the report. But those calls may come from a variety of factors, including changes in the business environment. For example, during the 1970s there was a widespread sense that, in such periods of rampant inflation, traditional accounting had lost its usefulness. The suggested solution was "current value accounting" that would adjust statements for price increases.

As price hikes declined in the 1980s and their impact softened, the campaign for statements that were fully adjusted for inflation died down. But the point is that radical change can occur in the business environment over time. The current accounting model has pretty much remained intact for more than 100 years and, all in all, has served capital markets well. If something is to replace it, it must be equally versatile and address the needs of financial information users for the very long haul.

Reading over the essay, I did not get the sense that the authors had tried to look at the possible changes in companies' operating conditions from that very long-term perspective. Perhaps the audit chiefs would reply that the flexibility of XBRL allows constant adaptation of financial reporting to changes in the environment. But I would have appreciated their thoughts on what that environment politically, economically, socially would look like, and what kinds of financial statements were appropriate to it.

(3) I think the CEOs made a mistake in not better defining what the radical reformation of financial statements would actually entail. As I've noted, the essay downplays the importance of periodic statements. But what exactly will the new reporting be like? The principle of periodicity that financial statements should be divided into periods of not longer than one year -- is one of the most basic, bedrock accounting principles, something new accounting students learn on the first day of class. If the CEOs are thinking of changing all that, they should give us a much better idea of what exactly is going to replace it.

(4) Finally, I think the authors made a mistake by coupling in a single report their concerns about the threat of legal liability with their vision of financial reporting. It reminds me of President Bush's Social Security initiative of two years ago. The inclusion of private accounts in the discussion muddied the debate and allowed opponents of reform to gain the upper hand. Private accounts may or (in my view) may not have been an ideological hobby horse of Republicans that would ruin the system. But the accounts could be effectively spun that way. By including discussion of auditors' legal liability, the authors seem to have fallen into the same trap.

Even so, just because an argument is self-serving, it doesn't mean it's wrong. Dismissing what the CEOs have to say about XBRL and the future of financial reporting because it happens to appear alongside a call for change in the auditors' legal position is misguided. If the report jump starts a sustained, serious discussion about the future of financial reporting and the role XBRL has to play, the CEOs will have done the financial community and themselves a great service.

Audit Chiefs Offer Vision on the Future of Financial Reporting and the Role of XBRL — Part I

Bob Schneider — Wed, 13 Dec 2006 05:29:56 +0000

Written by Bob Schneider Posted December 12, 2006

Following the meeting in Paris of the Global Public Policy Forum in early November, the heads of six leading auditing firms made public their perspective on the future of financial reporting and the auditing profession. Titled Global Capital Markets and the Global Economy: A Vision From the CEOs of the International Audit Networks, the so-called essay has attracted much attention, both in XBRL circles and the much broader financial community.

In the essay, the CEOs initially focus on the auditing field and declare their commitment to the reconciliation of�IASB and FASB standards, among other measures. A summary of these audit-specific recommendations appears in the PWC statement on the report.

But coupled with the initiatives tapered to the auditing field is a radical proposal for revision of the financial reporting model -- one made possible, in the authors' view, by the emergence of XBRL and related XML technologies. The CEOs declare:

"A brave new world of company reporting is already visible, and may be only a few short years away from widespread implementation and use. It is a world made possible by digitization and the Internet, which have already revolutionized the way goods and services are developed, manufactured or made available, and delivered throughout the world."

In a sidebar on page 16 of the essay, the authors introduce XBRL to readers and describe its benefits in general terms. In the body of the report, the authors cite (or imply) the advantages of using XBRL-based reporting for conveying information to investors:

(1) It can be done entirely through the Internet, affording access to billions of users;
(2) It is highly customizable, permitting users to extract just the information they need in the presentation format they want;
(3) It can convey information far more frequently than traditional statements, even on a daily basis (with the caveat that this information may be less accurate than audited data).
(4) It allows investors, through its tagging feature, to view a wide range of both financial and nonfinancial data, with the potential of revolutionizing the financial reporting model entirely. The authors cite such nonfinancial metrics as employee turnover, which if excessive might dissuade investors from buying an otherwise attractive stock.

On the other hand, perhaps recognizing the unknown and potentially convulsive consequences of discarding traditional statements entirely, the authors add:

"Even in the age of customized, personalized financial reporting that the new technologies will make possible, however, many investors, analysts and other stakeholders, also still will want standardized reports issued by public companies on a regular basis."

As might be expected, reaction to a statement with so many implications for financial professionals and investors has been mixed. The comments of Peter Williams in Financial Director of the U.K. are particularly trenchant. Williams notes the contradiction of applauding the harmonization of FASB and IFRS rules while at the same time suggesting that the whole effort will soon be superannuated by a radically new reporting model. In addition, he notes the likely aggravation of stock price volatility in an environment where a daily stream of varied company data, open to misinterpretation and misuse, is unleashed on world markets.

Commentators have also focused on the apparent self-interest of the CEOs in some of their argument. David M. Katz in CFO.com writes that the report:

"leads off with a set of proposed current and near-term solutions that seems more self-serving than visionary. Most notably, the report argues for curbing auditing firms' liability and relaxing the rules governing auditors' scope of service."

In a follow-up post set for publication December 15, I'll discuss my own reactions to the report.

XBRL Dovetails Nicely with SOX’s Surprising Benefits

Bob Schneider — Thu, 09 Nov 2006 02:02:21 +0000

Written by Bob Schneider Posted November 8, 2006

In the April 2006 Harvard Business Review, Deloitte executives Stephen Wagner and Lee Dittmar contributed the article The Unexpected Benefits of Sarbanes-Oxley.

An initial, cynical response to that title would be "Yes, SOX has provided an unanticipated boost to local economies from late-night pizza deliveries to accountants' offices." Even the less skeptical reader begins the piece thinking: Could the huge investment in SOX compliance been made without some benign side effects showing up somewhere?

But Wagner and Dittmar cite sufficient strong advantages, and back them up with enough examples, to make the case that the gains have been substantial. Wisely, they don't argue that SOX is really a blessing in disguise. Rather, they demonstrate that, in contrast to the usually negative narrative, the law has had important benefits.

What's any of this have to do with XBRL? As we read through the successes the authors described, it seemed nearly all of them dovetailed nicely with the increased adoption of XBRL throughout the organization. Here are the benefits the authors cite and how XBRL supports those objectives:

Strengthening the Control Environment Wagner and Dittmar well understand that internal control is less about individual procedures, important as they are, and more about the overall control environment that it is so central to an audit. Experienced CPAs acquire what they call the "auditor's knack," a canny sixth sense that tells them a day into an audit whether the client has its act together. If it doesn't, auditors have to greatly expand the range and number of their tests, because they can't trust the clients' numbers. But when the control environment is strong, testing can be reduced, audit costs can be cut, and auditors can focus on improving client procedures and operations.

XBRL can play a vital role in ensuring a strong control environment. It eliminates numerical mistakes. It reduces greatly manual intervention in accounting processes where error, intended or unintended, creeps in. It makes the exchange of data within the company flow more smoothly. Finally, it can be instrumental in creating the audit trails that CPAs depend on.

Exploiting Convergence Opportunities The investment in SOX can often be leveraged for compliance with other standards. The authors describe the experience of RSA Security for meeting ISO 9000 standards. They also discuss how SOX compliance converged with other regulatory regimes in the human resources area, and how "a single set of controls could be used for compliance with the various acts." Such harmonization can be greatly eased by adopting XBRL-GL, which enables reporting of a diverse variety of corporate information, from employee timesheets to health benefit plans to employee pay.

Standardizing Processes The authors cite the experience of consumer products maker Kimberly-Clark, where hundreds of executives around the world were generating manual journal entries. The process varied widely by division and location, "with some employees creating entries by hand, others keying them into Excel spreadsheets, and still other logging them into the company's SAP financial software program." Entering all such entries in XBRL would go a long way toward process standardization. Even where processes remained varied, the fact that all entries were made in the same data standard would enhance consistency and make reconciliation much easier. Another XBRL-related benefit would be that searches on journal entries would be much faster.

Reducing Complexity Wagner and Dittmar cite the case of Iron Mountain, a $1.8 billion records and information management company which over a ten-year period had essentially acquired more than 200 companies. "Some of the companies ran Unix while others ran Linux, Novell NetWare or Windows." With the easy interchange of data between entities, platform independent XBRL is a boon to M&A.

Strengthening Weak Links The authors write "Another source of complexity arises from outsourcing, partnerships, and shared-services arrangements known as the 'extended enterprise.'" They cite the difficulty of ensuring internal control when the partner company engages in activities that materially affect the financial statements. XBRL enables much faster reporting, which can be critical when monitoring activities with external entities. Information can also be entered once and delivered in many formats, which can be especially beneficial when dealing with external entities that require certain data formats.

Minimizing Human Error Ask most auditors what they consider the weakest part of internal control, and they'll tell you "Manual processes." One of the main benefits of XBRL is the elimination of nodes in supply chain management where human intervention is necessary. Moreover, and of special benefit to auditors, automated controls are highly reliable, so they can be tested less.

In these many areas, the addition of XBRL to the mix enhances the likelihood and the quality of success. In fact, the only two benefits mentioned in the piece where we were a little hesitant to extol XBRL's virtues were improved documentation (Sarbanes-Oxley required companies to update operations manuals, personnel policies, etc.) and increasing audit committee involvement. And we're certain less diffident writers with experience in these areas could have expounded on XBRL's advantages here as well.

Indeed, it may well be that XBRL's benefits are so pervasive that it is hard to describe a critical area of management operation where its advantages are not manifest.

Note: You can request a copy of the article from Deloitte; the Harvard Business Review is also freely available in electronic form from major libraries.

Powerful Trends Encourage XBRL Adoption

Bob Schneider — Thu, 19 Oct 2006 01:55:27 +0000

Written by Bob Schneider Posted October 18, 2006

The following predictions no doubt betray a flair for the obvious. But it is still a useful exercise to identify the forces that will propel XBRL forward:

SOX Will Be Mended, Not Ended No matter which political party is in power, the regulatory burden on U.S. firms continues to grow. According to a study by AMR Research, companies will spend more than $6 billion this year alone on Sarbanes-Oxley (SOX) compliance. SOX continues to receive much hostile fire; several days ago, former Fed Chairman Alan Greenspan called for most of it to be scrapped. But while the SOX burden on smaller companies may be eased and other tinkering is possible, it's unlikely that the law will be rescinded. As firms seek out longer-term solutions that require new technology to minimize SOX costs, they will focus on XBRL and the common platform it provides for business information.

The BRICs Will Keep Flying U.S. companies face increasing competition from emerging economies, especially those of Brazil, Russia, India, and China (BRIC). Together, these countries represent some 40% of the world's population, and they are expected to be among the world's largest economies in the decades ahead. In most cases, BRICs have well-educated populations, substantial natural resources, and relatively low wage costs.

U.S. business leaders and policymakers are asking: What competitive advantages can the U.S. economy sustain? America ranks at or near the top in global surveys of information technology adoption, but its continued supremacy is by no means guaranteed. To remain an IT leader, the US must continue to work at adopting the most important technology innovations. These will include XBRL, particularly in its Global Ledger (GL) variety. Information drives modern economies, but data transfer both within and outside the corporation is often impeded because of different IT systems and formatting. With its ability to incorporate all types of business data -- from journal entries to product descriptions to employee timesheets -- and to move it easily among different entities, XBRL-GL promises to be a boon to productivity.

Financial Markets Will Become More Globalized The world's financial systems are much more accessible to companies and individuals than they were ten years ago. Moreover, as regulatory barriers come down and communication channels speed up, financial markets are increasingly globalized. To give one example, in 2005 Americans put $8.47 billion into mutual funds dedicated to small and mid-size foreign companies, up more than 40% from record 2004 levels. These trends are likely to accelerate as countries raise corporate governance and transparency standards.

At the same time, cutbacks at the major equity research firms have reduced the number of security analysts and, in turn, the number of equities followed. As U.S. firms compete for capital and investor attention, there is an incentive to provide financial information in formats notably XBRL -- that analysts will be able to dissect economically. With other nations moving toward adopting XBRL-enabled financial statements, U.S. firms will want to make their own releases of financial information similarly easy to manipulate and analyze.

The Pace of Business Will Accelerate Information that used to lie happily dormant for months or even years is now made instantly available to the whole world through the Internet. Firms and individuals have come to expect that their information needs will be immediately satisfied; the investor's attitude toward financial reporting is the sooner, the better. In the same vein, security analysts are under increasing pressure to perform financial statement analysis faster. XBRL-enabled statements can provide real-time financial reports that are instantly available for analysis and can help companies keep up with the faster pace.

Nobody Doesn’t Like XBRL

Bob Schneider — Fri, 06 Oct 2006 02:00:23 +0000

Written by Bob Schneider Posted October 5, 2006

The technology challenges financial professionals have faced in the past several years have (mostly) come from bad stuff happening to (mostly) good people. The Y2K problem derived from early computer programs that understandably but inimically used only two digits to store years. Sarbanes-Oxley was a reaction to scandals that were large in size but few in number. The threat of terrorism developed from cultural and political problems that have little to do with deferred taxes and accounting for leases.

XBRL is happily different. It wasn't developed in response to calamitous events, but rather to make working with financial and business data more productive and efficient. Thus the natural constituencies for XBRL adoption are not limited to the relatively small groups of financial and IT pros that have done yeoman's work in combating problems they did not create. Rather, they include the full cast of actors on the financial stage.

With XBRL adoption, securities analysts can look forward to real-time release of financial statements that can be analyzed in spreadsheets without re-keying. Auditors can grab company data off the Internet and immediately get to work on comparing their clients' data to their peers'. Bank officers can spend far less time checking loan applications for mathematical error and far more time on analyzing what's happening in their clients' businesses. And staff at regulatory agencies like the SEC will be able to focus less on reviewing the accuracy of company filings and more on what they contain.

XBRL will benefit individuals too -- big time. In their current format, company financial statements at the SEC's EDGAR website require lots of manipulation before they are ready for analysis. XBRL-enabled statements will be a boon to small investors, who will import data directly into their spreadsheets and be able to view financial ratios and operating data immediately.

Of course, most small investors purchase shares through mutual funds. Here the SEC is also moving forward, pushing ahead to make key data of mutual funds available to the public online in easy-to-grasp, one-page summaries. Financial professionals and sophisticated investors could drill these documents for more detailed fund data.

We like the idea that XBRL benefits individuals for two reasons. First, spreading financial democracy by making investment data easily obtainable and transparent is a good unto itself. Second, creating a wider class of XBRL beneficiaries builds the political momentum for wide-scale interactive data adoption.

For the financial community, often seen as party-poopers, it's nice to be part of the in crowd.