In the latest of our conversations with players in the compliance and governance realm, we talk to Mike Willis, founding Chairman of XBRL International and a proponent of extensive use of XBRL in financial reporting. Compliance Week asked Willis to share his thoughts on the future of eXtensible Business Reporting Language, the chance of the SEC mandating its use, and how companies can prepare now for a future tagged in XBRL. The conversation is below.
On Sept. 25, SEC Chairman Christopher Cox said he has asked the SEC staff for a recommendation on mandating XBRL, with a possible proposal coming in early 2008. What would that mean for U.S. public companies?
It means they will be filing their 10-K and 10-Q reports in the XBRL format.
The roadmap outlined by Chairman Cox means that U.S. public companies should immediately begin to improve their understanding of how XBRL enhances compliance processes, controls, and costs. Participation in the SEC Voluntary Filing Program is strongly encouraged; you can learn more at www.sec.gov/spotlight/xbrl.htm.
The current processes to assemble and review reports are largely manual, time intensive, costly, and error-prone. As a result, companies initially may manually tag their company reports. Over time they will incorporate XBRL within their compliance processes and realize a more automated, more cost-effective, and more controlled report assembly-and-review process.
Standards like XBRL are specifically designed to enhance processes, lower costs, and improve outputs. Understanding how this happens is the “mandate” for U.S. companies.
The SEC’s voluntary XBRL program hasn’t been too popular. After three years of special incentives, the Commission still has only 42 companies participating. Why do you think that is?
There are many common beliefs about XBRL that seem reasonable to assume are correct, yet may actually limit participation in the Voluntary Filing Program:
XBRL forces registrants to use a standard reporting template rather than allowing them to “tell their own story;”
XBRL is an information format and doesn’t really change reporting processes;
XBRL requires a significant investment of resources which aren’t available, due to SOX process enhancements;
XBRL tools are immature and require a significant understanding of the technology;
XBRL creates a degree of transparency where external parties (regulators, for example) can drill down into the ledger levels of corporate information;
XBRL is an IT topic rather than a reporting one and, therefore, is irrelevant to reporting experts;
XBRL is driven by regulatory mandate rather than economic benefits; therefore, we should wait until it is mandated to adopt.
Compared to other historical voluntary reporting programs, such as segment reporting or International Financial Reporting Standards, XBRL adoption is significantly more popular and has demonstrated a more accelerated adoption timeline. This year, around the world, more than 2 million companies will use XBRL for reporting purposes.
Skeptics say the SEC is pushing XBRL to help it meet the SOX requirement that the Commission review registrants every three years; others say this is another “Full Employment Act for Auditors and IT Consultants” that nobody (including institutional investors) is really clamoring for. What are your thoughts about that?
These arguments miss the point and reflect a fairly narrow view.
Chairman Cox has been very clear about the SEC’s intent with interactive data. It directly aligns with the primary objective of the SEC: to protect individual investors. In making reported information easier to access, validate, and analyze, XBRL enables investors to protect themselves more effectively and identify reported concepts and trends that may not be cost effectively available to them today.
From a process perspective, the SOX requirement (Section 408) is very similar, if not identical to, the economic requirement for corporate controllers, internal auditors, and external auditors to perform timely and cost-effective review and analysis of data contained in a variety of internal databases and documents. XBRL benefits accrue to all participants, not just the regulators.
In 1996, not many folks were clamoring for registrants to publish their reports in HTML, but companies did so anyway to reduce their reporting costs and to communicate more effectively with their stakeholders. XBRL is the next step down that path of lower cost, more effective processes, and better communications.
Investors (sell-side, buy-side, hedge funds, and some individuals) are currently obtaining reported information from data aggregators and distributors. These structured data providers commonly omit roughly 30 percent of information reported on the primary financial statement tables and roughly 95 percent of the disclosures in the notes and MD&A. Would investors like to have 100 percent of reported information provided in a highly structured format that allows them to access and analyze reported information more quickly, completely, and cost effectively? I think they would.
Cox has estimated XBRL costs at $5,000 to $25,000 per company. That sounds similar to the SEC’s famous prediction that SOX compliance costs would average only about $34,300, and we all know how that turned out. How can we be sure XBRL won’t go the same way?
These cost estimates were determined based upon the actual experiences of participants in the Voluntary Filing Program. XBRL is designed to reduce the costs associated with compliance processes. Project experiences to date have proven that the degree of cost savings and process enhancements are significant. These are outlined in a number of white papers available on the XBRL.org Web site.
How hard is this going to be to implement? Let’s say I'm the CFO of a $2 billion power company with a few overseas business units. What are the steps I would need to take to get ready for mandatory XBRL filings?
It depends on how you define “implementation.”
If you bolt it onto the end of the reporting process, the cost is relatively low and the effort is easy and incremental. To date, most of the participants in the Voluntary Filing Program have taken this bolt-on incremental approach. If you consider reengineering reporting and compliance processes to realize the benefits more fully, then implementation may actually cost more; the benefits, however, will be more significant.
In either approach, CFOs should talk with their software vendors about XBRL support and also with knowledgeable and experienced service providers.
Speaking personally, where we have included XBRL within our processes, the timeline for a positive return on investment has been immediate, in that the realized savings far exceeded the project investment costs.
Talk about the “tags” in the new XBRL taxonomy. They’re mapped to GAAP, and FASB is reviewing them, but what’s the assurance that the tags won’t ultimately lock companies into an inflexible chart of accounts?
The “X” is XBRL is for “eXtensible,” another acronym spelling oxymoron.
The U.S. Generally Accepted Accounting Principles Taxonomy is a starting point for company reporting concepts, and preparers should create company-specific extensions to address their unique reporting concepts.
While XBRL can be used to articulate a “standard chart of accounts,”' that isn’t the intent or purpose of the U.S. GAAP Taxonomy. The public taxonomies are designed to address common reporting concepts; unique company specific reporting concepts can be and should be created via company extensions.
Companies should also realize that they are currently being forced to use the “inflexible” chart of accounts of the data aggregators and distributors who parse their periodic company reports and sell their reported information as structured data to the market. To understand how inflexible the current process is and the degree of distortion of company reports, compare the publicly available data at any of the finance sites (Yahoo, Google, MSN) to the information actually included in company reports.
Similar to the Universal Product Code (that is, product bar codes), XBRL is an information standard that standardizes how business information is communicated. The bar code did not force all retailers to restrict their product lines; it lowered the cost of managing inventory enabling a sixfold increase in the diversity of products available.
XBRL will improve the level of communication between companies and their stakeholders as it provides a highly structured language for unambiguous expression.
The juiciest stuff in the financial statements always appears in the Management Discussion & Analysis or the footnotes—and it’s rarely stated clearly. How are XBRL tags going to pluck out that sort of information?
Through the application of a relevant MD&A taxonomy for these “juicy” concepts.
Similar to the Conceptual Accounting Framework upon which GAAP taxonomies are built, MD&A concepts can be described in a broader reporting framework. The Enhanced Business Reporting Consortium has published an XBRL taxonomy for just such a framework. MD&A concepts can be extended to meet the company-specific reporting needs at the industry sector level, or the key performance indicator level.
An example of this type of effort is the Investment Company Institute’s “Risk and Return” taxonomy outlined at http://xbrl.ici.org that provides reporting concepts for this type of “Risk and Return” information critical to mutual fund investors.
Is XBRL only for the Ks and Qs, or will real-time 8-Ks or other documents be affected?
10-Ks and Qs will soon be a relatively small piece of the XBRL reporting pie.
XBRL is a very flexible and robust language that can be used for a wide variety of business information concepts. Companies should consider what other documents they currently produce that includes the information contained within the Ks and Qs, such as annual reports, press releases, summary prospectus, company data currently provided in Excel templates, and many others. All of these currently incremental documents may be “rendered” from a single company XBRL report. This is one example of how XBRL can be used to lower reporting costs.
Give one example of how companies might use XBRL to improve their own operations or internal controls, rather than just make their statements more useful to external parties.
XBRL can be used to automate many of the currently pervasive and highly manual spreadsheet internal aggregation processes, lowering your process cost and time while improving your controls.
The XBRL Global Ledger can be used to articulate an internal corporate standard chart of accounts (SCOA). This “XBRL SCOA” can be applied across a range of internal data warehouses, dramatically enhancing the transparency of this information for internal management access and analysis. A simple demonstration of this is available at www.iphix.net/resources/nunavut.htm.
XBRL can also be used to express analytical concepts or controls, abstracting the business rules from individual software applications providing a more effective and efficient way to universally manage and execute these important controls and rules across the wide range of internal data warehouses.
You’re the founding chairman of XBRL International, so clearly you’re committed to the technology. Leave us with some inspiring words that public company executives can hang onto as they begin this journey.
This journey is about dramatically enhancing compliance processes and fully realizing economic benefits. It is not about XBRL.
Asking the right questions about the opportunities for process enhancements is the key to fully realizing economic benefits. To ask the right questions about process design, it is important to have an accurate and more complete understanding of what XBRL enables—not what it is.
Starting sooner rather than later will enable companies to be ready for any prospective mandate while also assessing the depth and range of compliance process improvement opportunities.