A new U.S. Securities and Exchange Commission (SEC) requirement that financial documents include interactive data tags beginning in 2009 is provoking a hue and cry about unreasonable timetables and dubious return on investment. But most experts and many companies say the switch is relatively straightforward, with a huge upside: the power to transform internal business performance reporting.
The SEC proposed in May that over the next three years, U.S. public companies start submitting financial disclosures using interactive data formatted in eXtensible Business Reporting Language (XBRL), a business language related to XML. Instead of treating financial information as a block of text -- as in a standard Internet page or a printed document -- XBRL provides an identifying tag for each individual item of data. The 500 largest companies would go first, using XBRL for reports filed in early 2009.
The impact on the CIO and IT will depend on how their company uses XBRL, said Mary Knox, an analyst with Stamford, Conn.-based Gartner Inc.
Banks, for example, have for several years been required by the FDIC to use XBRL in their quarterly call reports. But when Knox asked bank personnel, including CIOs, how they were planning to use XBRL internally, "the great majority of banks had absolutely no idea they were using it [because the banks' report preparers had] done such a good job at making it invisible," she said.
Companies that file with the SEC might choose to use XBRL in the same way, for external filing purposes only.
"That, however, would be a great shame, because the XBRL promise is something far greater than improving external filing," Knox said. "The huge benefit that XBRL could provide is for internal use, for understanding one's corporate performance." She suggests that CIOs educate their CFOs and the people responsible for investor reporting on XBRL and "start baking it into the architecture of the firm."
Analyst Paul Hamerman, of Cambridge, Mass.-based Forrester Research Inc., agreed. "You can look at XBRL as an integration technology or as Web services type of technology that has uses beyond the SEC requirement," he said.
Hamerman said there may be some pushback, but "not near what it's been with SOX," as the rule proposal doesn't change the information requirements, just how that information is submitted. He recommends that CIOs or their staff contact their accounting system vendor to determine the vendor's ability to support the XBRL requirement.
The proposal makes good on the SEC's three-year effort to modernize its EDGAR database, the electronic data gathering, analysis and retrieval system launched in the 1980s to give investors quicker access to key financial information about public companies and mutual funds.
Last week, SEC Chairman Christopher Cox unveiled EDGAR's replacement, a new system called IDEA -- short for interactive data electronic applications -- that is based on XBRL and billed as a big idea whose time has come.
"Currently, most SEC filings are available only in government-prescribed forms through EDGAR. Investors looking for information must sift through one form at a time, and then re-keyboard the information -- a painstaking task. With IDEA, investors will be able to instantly collate information from thousands of companies and forms, and create reports and analysis on the fly, in any way they choose," the press statement reads.
For example, the SEC points out that users of interactive financial information could download it directly into spreadsheets, analyze it using commercial off-the-shelf software, or use it within investment models in other software formats. By using interactive data, currently static, text-based information can be dynamically searched and analyzed, facilitating the comparison of financial and business performance across companies, reporting periods, and industries.
The digitizing of business reports should indeed be a boon to investors, enterprising reporters or anybody else interested in understanding a company's performance. But the use of XBRL for business information can also potentially benefit companies internally, say evangelists like CPA Mike Willis, by automating what is still largely a costly, error-prone, manual process.
Willis, a partner at PricewaterhouseCoopers, was founding chairman of XBRL International, a consortium of more than 500 companies and agencies worldwide working to build the XBRL language and promote its adoption. He sees XBRL as a vehicle for business transformation in ways that are hard to anticipate today, much as it was difficult to anticipate the impact of HTML slightly over 10 years ago.
"We're talking about HTML in 1996," Willis said. "There were a lot of folks who didn't know what it was and who were very skeptical. 'Why do I need the Internet when I already have a network? Why should I put browsers on everyone's desktops when they're just going to play around?' That's where we are with XBRL."
XBRL describes information as it is moved from one software application to another. Like other technical semantic languages such as XML, it is designed to make information more accessible and reusable and, in this case, more valuable to management.
"Accounting systems are designed to summarize data and pass it upwards," Willis said. The supply chain of business data starts at the transactional level. That information is summarized and rolled up, eventually to management, who summarize it even further and send that information out to investors and stakeholders.
Company m anagement can typically tell you their revenue or how much they made this quarter compared with the previous quarter, but if you ask them how many widgets they sold, they often have no idea. "In many of today's systems/processes, the transaction data falls on the cutting room floor," Willis said.
This is why companies are investing so heavily in business intelligence (BI) software, he said -- so they can cost effectively access the transactional level and analyze that data for business performance in a timely fashion.
XBRL is designed to describe a wide range of business concepts, both for external and internal use. So, for example, US GAAP XBRL taxonomy describes common financial disclosures for company financial reports, but XBRL can also be used to describe all kinds of ledgers in the organization, Willis said, making "the information in those ledgers potentially more transparent, more accessible and more controlled by management."
Willis believes the economic consequences of a standardized business reporting supply chain will be similar to those seen in other standardized supply chains using technologies like barcodes and RFID (radio frequency identification tags): lower costs, increased volumes, accelerated frequency of delivery, higher quality products and new market opportunities.
The public response to the SEC's call for XBRL has been generally positive, but not everyone is convinced of XBRL's benefit to financial reporting.
Jay Starkman, a CPA in Atlanta, argues that "XBRL boosters fail to appreciate that financial analysis is an art, not a science." And, as such, XBRL "can never be sufficiently dynamic."
Starkman's detailed analysis of XBRL's shortcomings suggests that he has "no need" for XBRL. "When I want to look at a company, I download the filings I'm interested in – and I read," he said. "In summary, XBRL is a complex, bloated, incomplete and expensive proposition. Its allure is based on unproven technology with an unfulfilled promise."
Let us know what you think about the story; email Linda Tucci, Senior News Writer.