A new report out from Columbia Business School is likely making anyone involved in the corporate reporting process feeling like they just spent months building a ballpark in a cornfield, only to find that no one seems to be showing up.
The report suggests that the massive and costly effort to attach identifying tags to financial information—known as eXtensible Business Reporting Language, or XBRL—might have been a colossal waste of time. That's because the investors and analysts that were supposed to reap the benefits of XBRL through greater ability to compare and analyze financial information don't seem to be using it.
According to the report's authors, Trevor Harris and Suzanne Morsfield of Columbia Business School, analysts and investors remain skeptical about XBRL and have many concerns about its utility. The main complaint, according to the study, is that the data is still unreliable and fraught with errors. “We could not identify any users or potential users who were comfortable with the reliability of the XBRL-tagged data currently available,” the authors write.
To this end, the SEC has been very vocal about the need to clean up mistakes and tagging errors, issuing several rounds of “observations” and “frequently asked questions” on the topic. And last month Susan Yount, a staff member with the Office of Interactive Disclosure at the SEC, hinted that the Commission could look for a more punitive response if errors persist. Making the point that companies could face liability for continued problems, she said: “Limited liability applies only to filers who make good faith efforts to comply with the rules and who promptly correct errors when they are made aware of them.”
If the reliability problem isn't fixed soon, the intended audience for XBRL, namely analysts and institutional investors, could soon give up on it. “Users are not enticed simply by the notion that the data are ‘free,'” the authors write. “Data quality, reliability, and the availability of easily accessible analysis tools are key drivers of their interest in incorporating new data or methods into their existing workflow, and of their technology-driven uses of information.”
One of the biggest problems with XBRL is that companies are still including too many company-specific tags, known as “extensions,” when they code their data. The thinking goes that they have several unique situations that can't be fit into the existing definitions. The SEC has rightfully pushed back hard on this problem, imploring filers to use existing tags when at all possible.
What's in It for Filers?
Certainly part of the problem lies with filers. They tend to think that the whole project is an exercise in tedium, and therefore they aren't vested enough in the process to truly make it work. “Most filers we surveyed doubt whether any investors are using their XBRL data and believe they are bearing an unnecessary incremental cost with any benefits going to data aggregators who resell the data and can reduce their own data collection costs,” the authors write. They found that companies aren't using their own XBRL interactive data for internal decision making or for benchmarking with peers. Until that changes, filers might not have enough skin in the game to really make XBRL work.
Another reason that analysts and investors aren't quite jumping on the XBRL bandwagon is that it is limited to financial filings and doesn't cover lots of information that they feed into their various models and analyses. I'm not sure too many will favor an expansion of the program, but as long companies aren't mandated to tag information in earnings releases, MD&A, and other information, its usefulness might be limited. “The primary focus on data in the SEC filings of annual and quarterly financial statements seriously limits the perceived ongoing usefulness and relevance of the data,” the authors write.
Finally, there are still too few analytical tools that make use
of XBRL. There are efforts underway to remedy this problem. The XBRL U.S. consortium, an advocate of XBRL use, put together a contest and a $20,000 grand prize
for the development of XBRL analytical tools in 2011. The consortium said at the time that it was hoping to inspire some new ideas on how to develop freely available software tools that will enable investors and users to better access and utilize XBRL data. How such efforts fare could be the difference between whether XBRL is successful or becomes obsolete.
Certainly, it's way too soon to dub XBRL a failure or to predict its demise. But the window of opportunity won't be open forever, either. If regulators can't convince—or cudgel—filers to fix problems, investors and analysts could abandon XBRL forever, and search for their own ways to make financial data more interactive. In fact, Big Data, which allows structured and unstructured data to be analyzed on the whole, already offers lot of promise in this area.
“We still have some hope that XBRL data can become useful to investors and analysts. However, we also view XBRL as at a critical stage in its development,” the report's authors write. “Without a serious reconsideration of the technology, coupled with a focus on facile usability of the data, and value-add consumption tools, it will at best remain of marginal benefit to the target audience of both its early proponents and the SEC's mandate—investors and analysts.”
The fact is that just because you build it doesn't mean they'll come. You've got to make it great. And with XBRL, it's not entirely clear that regulators and, more importantly, filers have enough vested interest to improve XBRL to make it useful enough to get a broad swath of its intended audience to use it regularly.