XBRL – a Work in Process
For the uninitiated, XBRL (eXtensible Business Reporting Language) is a freely available and global standard for exchanging business information. More importantly, it has become the standard by which publicly traded companies are required to report their financial statements to the SEC.
Now in its fourth years since the SEC mandate, all publicly traded companies are required to tag their financial data with XBRL and file it with the SEC. The limited liability provision is also expiring this year, which means that XBRL exhibits will have the same liability provisions as regular filings. In other words, officers and directors of companies could be held liable for a material misstatement or omission in their XBRL filings.
Last week we attended The XBRL and Financial Analysis Conference held at the Zicklin School of Business at Baruch College in New York City. Overall, I would give the conference good grades. It was well attended and many of the key participants in the space participated sharing their insights on the current and future states of XBRL. There were two underlying messages that I took away from the conference. First, XBRL holds great promise. When (and if) leveraged to its full potential it provides greater transparency, access, speed, accuracy and context to financially reported data at an enterprise or cross sectional level. True believers expect it to revolutionize not only financial reporting but how the investing public consumes and extracts value from reported data. The second message from the conference was simply there is still a lot of work to be done before this state can be achieved. Key themes that emerged from the conference include the following:
Standardization – As it is applied today (at least in the US) XBRL is unnecessarily complex and in conflict with its primary goal of creating greater standardization and thus comparability in financial reporting. The language as conceived has somewhere in the ballpark of [20,000] potential tags, which gives reporting entities significant flexibility in defining their financial data. Further compounding this issue is the fact that entities can create their own extensions, thus making the taxonomy virtually unlimited. This opens the door to abuse. Said another way, if companies want to be opaque they simply have to be creative when tagging their data. The good news is that based on participant accounts many companies are looking to their peer groups and conforming their tagging practices both in the spirit of compliance and as a CYA measure. Let’s hope this practice becomes mainstream.
Accuracy and enforcement – Despite the expiration of the limited liability protection, it seems that XBRL filings are still often wrought with errors. Granted the errors are generally not in the form of fraudulent data, but more typically related to scale (e.g. thousands vs. millions), dates, share counts, etc. All of which can be normalized and corrected. Most chalk these errors up to learning curve and expect the frequency to decline as reporting entities become more proficient at or fluent in XBRL. Others were more skeptical. Dan Gode, Clinical Associate Professor of Accounting, New York University’s Stern School of Business, expressed that without a clear enforcement mechanism filing companies and specifically CFOs and CEOs will not take XBRL seriously, ultimately endangering its efficacy. Dan’s solution which other participants also endorsed was including the XBRL tagging and filing process as part of the Sarbanes Oxley review and audit process. I tend to agree with this point of view. Without a credible enforcement mechanism it is unlikely that XBRL will truly capture the attention of the C-suite or Board room and reach its full potential.
Data Aggregators – As I see it, the true winners today are the data aggregators. This may seem somewhat counterintuitive as XBRL could be viewed as a category killer for this group. The reality is today they are its beneficiary. Before XBRL filings the data aggregators had to employ scores of analysts to scour the public filings and manually extract, standardize/transform/cleanse and load the reported company data into a database at which point it became available to its clients in the form of summary financial statements, analytics, etc. Today, with the use of software tools the XBRL tagged data is extracted in real time (once filed) and loaded into databases. I suspect the process of cleansing the data for errors (see above) still requires some manual processes or at least review/quality assurance, but doesn’t come close to the labor intensive model that was once employed. It will be interesting to see how this drama unfolds in the future.
Consumer tools, or lack thereof – Despite some real strides from firms like Rivet Software and CalcBench there are few consumer tools available today that can truly extract all the benefits promised by XBRL. In retrospect, over the last four years the focus has been on the development of issuer tools that automate or at least streamline the process(es) of tagging financial data in XBRL and rightfully so. Arguably, that is the 1st half of the equation that needed to be tackled first. In my view, the true power of XBRL is extending these tools to the investing public, whether that means on the trading desks of Morgan Stanley, the desktop of day-traders or the dorm rooms of aspiring traders. Until these tools are developed, refined and employed XBRL will continue to move sideways. The good news is that the pundits have spoken and the focus has shifted. The vision is there and now it comes down to execution.
In summary, I would characterize XBRL as being in the 3rd or 4th inning of a nine inning game (at least in the US). But if the global financial community is a leading indicator XBRL as a language and standard hold great promise and will continue to evolve in the US. We believe that in the coming 12-24 months XBRL will mature and winners will begin to emerge on both the software and services side of the equation. Ultimately, we expect it to lead to more transaction activity in the space in league with RR Donnelley’s acquisition of Edgar Online last year at this time.
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