Can SEC Mandate XBRL?

Five milestones on the road to success revealed.

July 12, 2007
by Liv Watson

Since transparent corporate reporting is a means of achieving the ultimate goal of protecting investors, encouraging capital formation and promoting healthy capital markets, it is easy to understand why the U.S. Securities Exchange Commission (SEC) sees great value in eXtensible Business Reporting Language (XBRL). In capital markets, better information usually makes for better choices and the best information means a disclosure framework that is readily accessible, easily understandable and comparable. To benefit from an enhanced information environment we need data that can be shared interactively. This, however, demands that everyone in the financial and business reporting supply chain embrace one single global information standard platform.

The Uphill Road

XBRL has to overcome some hurdles, however, before it can be considered mandated. XBRL is a supply chain-driven open-information platform standard for financial and business reporting information. Like any supply chain standard there are several key elements that must be in place before one can benefit from its productivity enhancements. The Universal Product Code (UPC) symbol is a typical example of a standard that created enormous productivity enhancements throughout the retail supply chain. Grocery stores have used the UPC symbol effectively to improve internal operations ranging from pricing to checkout scanning to inventory and assortment management.

Before the SEC can even consider mandating XBRL as its legal filing format, it must envision the future EDGAR System and how the standards we are setting today will affect business in the coming years. Like any successful supply-chain standard, several of milestones need to be overcome before true productivity enhancements can be ensured by all.

Key Steps Required for Success

There are five key steps that XBRL needs to overcome before it can be mandated successfully.

  1. Strong governed consortium that produces credible results and act as the neutral facilitator of its members. XBRL is being developed by an international nonprofit consortium with the representation of major companies, organizations and government agencies with over 500 members represented by 27 countries. XBRL is being mandated already in several parts of the world such as Spain, China and India. Gaining agreement on a UPC symbol was no doubt a success, but if we could learn one thing from its success, it is that it took a strong transparent governing structure to manage both supply chain participants and their competitors and act as the neutral facilitator of its members. XBRL International has been around since 1998 and is growing everyday with members and jurisdictions representing the whole financial and business reporting supply chain and the marketplace can very clearly point to the consortium as a fundamentally strong organization acting as the neutral facilitator of its members.

  1. Key stakeholders support the standard. If getting the support from well-respected executives in the market place was the only key element to success then XBRL would be a slam dunk. Securities and Exchange Commission Chairman Cox is one of the greatest supporters. The AICPA provided the infrastructure to host the XBRL International organization until last year when it was spun off to become an independent not-for-profit organization. However, we need many more influential leaders in the community to step up and encourage others to participate in XBRL’s development so that we can truly start saving billions of dollars annually.
  1. Technical specification delivers reliable product to the market. Widespread trust that technology will prevail as the de facto standard is very important. This is why once everyone has placed their input into the technical standards development, they must go back to their firms and implement the standard into their core business-reporting processes. Only then can we one day claim that over 90 percent of financial and business reporting information is available in XBRL.

    XBRL is not integrated into to every accounting, auditing and reporting application today. However, many of the key financial supply chain players such as IBM, ORACLE, Hitachi and Hyperion have recently announced XBRL-enabled solutions. Intermediaries such as EDGAR Online, Inc., a Connecticut company whose business it is to extract information from SEC filings and resell it corporate and individual users, has used the XBRL technology to build enhanced applications and totally converted SEC’s EDGAR database into XBRL.

    As SEC Chairman Christopher Cox noted at last year’s American Enterprise Institute Conferences in Washington, EDGAR Online “has given us an idea of what the future could be like. It has embraced interactive data and has already tagged more than 10,000 companies’ statements — including all the 10Ks, and all the 10Qs — going back several years.”

If EDGAR Online, Inc. can benefit from using the technology standard to generate timely accurate granular XBRL-tagged data so can other companies. Companies should not wait for XBRL to be mandated by the SEC to enjoy its benefit. In fact, you should start integrating the XBRL technical specification into to your core reporting processes and participate in the SEC’s XBRL voluntary filing program. The XBRL Voluntary Program was launched as a tentative first step for testing the specification. The program encourages all of the participants to help the SEC assess the potential for using interactive XBRL data both within and outside the Commission.

  1. Commercial strength taxonomies fully integrated into business reporting applications. XBRL needs commercial strength taxonomies “UPC” codes for accounting standards concepts before XBRL being mandated by the SEC. This year Chairman Cox funded XBRL US, Inc. with $5.5 million to develop the XBRL-US GAAP taxonomies to be delivered later this year.

    The XBRL-US GAAP taxonomies will allow companies to file their 10K and 10Q in the XBRL information format with the SEC’s XBRL Voluntary Filing Program. However, it does not address how these taxonomies will be maintained and updated. On July 2, 2007 the SEC established an advisory committee that will focus on the “Improvements to Financial Reporting.” The committee will examine the U.S. financial reporting system with the goal of reducing unnecessary complexity and making information more useful and understandable for investors. The committee will come back with a recommendation to the Commission on how to make financial reports clearer and more beneficial to investors, reduce costs and unnecessary burdens for preparers and better utilize technology to enhance all aspects of financial reporting. Clearly XBRL is going to get a recommendation on how to proceed as part of the final recommendation.

    Personally, I think the big question is; “If India, China, Spain, Sweden, Thailand, Taiwan, Singapore and other major capital markets around the world mandate XBRL, can the U.S. capital marketplace afford to sit by the sidelines and let transparent more accurate interactive data be available from other equity marketplaces? I think it is safe to say that it really does not matter if the SEC mandates XBRL or let the market forces prevail because either way companies need to understand that this is in their own best interest.

  2. Users achieve cost savings creating industry wide adoption. Until XBRL, no worldwide effort existed to develop a global standardized financial and business reporting information platform. When the vision was first introduced there was no way of estimating the cost savings by adopting a standard versus the cost of working with unstructured financial and business reporting content. However, we can qualify some of the costs as:
    • Time wasted in unsuccessful searches/retrieve and analyzes of the data.

    • Low return on investment in information collection/storage efforts, such as data warehousing and content management, because users cannot find information.

    • Poor decisions made due to inaccurate or incomplete information.

    • Frustrating user experiences potentially damaging the company’s reputation risk.

Although today XBRL has more than 500 members, we have ways to go before we can claim that over 90 percent of financial and business reporting information has been XBRLized.

To benefit from an enhanced information environment with the key elements listed above we need data that can be shared interactively. This demands that one global information standard platform be embraced by everyone in the financial and business reporting supply chain. The real reason for adopting XBRL is because it is the only such global initiative. To experience enhanced efficiency when using financial and business reporting information, we all need one global information platform to represent the whole supply chain and XBRL is it!

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Liv Watson is an accountant and VP of Global Strategy, EDGAR Online, Inc. (NASDAQ:EDGR), a provider of global business and financial information.