Second wave benefit of xbrl liv watson brian mc_guire

Second wave benefit of xbrl liv watson brian mc_guire

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  December 2006 ISTRATEGIC FINANCE 43 XBRL B Y B R I A N L . M C G U I R E , C M A , C P A ; S C O T T J . O K E S S O N ; A N D L I V A . W A T S O N U.S. and international corporations are still in the early stages of implementing eXtensible Business Reporting Language (XBRL) as a common computer language for reporting, exchanging, and analyzing financial and busi- ness reporting data. At present, many reports are pro- duced electronically but in a format (plain text or HTML) unsuitable for automated data extraction. Down- stream users of these reports are stuck with a great deal of manual work selecting, extracting, and arranging data for their own proprietary systems. When XBRL is fully implemented, this manual effort will be eliminated. XBRL data is tagged with standardized descriptions and data formats, which permit automated import, classi- fication, and analysis of the data across industries and, eventually, nationalities and accounting regimes. The “X” in XBRL stands for eXtensible, and companies are per- mitted to extend the open-source, standardized tax- onomies to meet their own unique reporting practices. Because of this standardization, any company’s report can be imported and analyzed using any XBRL-enabled tool. A wide selection of tools will soon be available because XBRL data is based on open-source XML (Extensible Markup Language) technology and is independent of platforms. FIRST-WAVE XBRL Although XBRL is broadly hailed as revolutionary, its adoption has been more evolutionary in its incremental standards development and almost stationary in its implementation. A handful of companies are publishing XBRL data, but most are watching from the sidelines. There’s more movement internationally, but it’s hardly developing at a vigorous pace of adoption. Real progress is taking place in the areas of standards evolution and the development of new XBRL-enabled software packages. The technology is proven, the stan- Second-Wave Benefits of XBRL
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  dards are attainingmaturity, and the promise of greater transparency and efficiencies throughout the financial reporting supply chain is compelling. In evaluating the progress of XBRL implementation, we should, in fairness, make allowances for some major distractions, such as crises in the accounting and investment banking profes- sions, and for the skeptical attitude toward hyped “revo- lutionary” technologies. Certainly, companies should be realistic in acknowledg- ing the efficiency of any emerging technology. Smart com- panies recognize the importance of developing systems prepared for critical, timely information that generate greater interoperability and more powerful analysis across all software data formats. XBRL is designed to vastly improve transparent reporting. It simplifies the manipula- tion, analysis, and comparison of data in corporate finan- cial reports, helping companies attract and retain investors as it provides reassurance of regulatory compliance. Yet XBRL isn’t without controversy. The specification has been criticized for being complex—the documenta- tion of the specification is more than 151 pages. Tax- onomies aren’t at commercial strength yet and are still evolving. But this is about to change because U.S. Securi- ties & Exchange Commission Chairman Christopher Cox has allocated $5.5 million to XBRL-US to develop tax- onomies for all companies in order to enable filing in XBRL in 2007. Most feel that XBRL will increase transparency by stan- dardizing accounting classifications, thereby improving comparability. In addition, improved efficiencies lower the cost of analysis, increasing the level of analysis that can be performed per revenue dollar. XBRL’S PREDICTED SECOND WAVE The adoption of XBRL as the data standard format for reporting and analyzing filed financial reports is part of XBRL’s first wave. The second wave of XBRL benefits should include: Corporate Operations x Growth in outsourced accounting x Consolidation of subsidiaries Auditing and Financial Reporting x Automated bridges between accounting regimes x Continuous auditing/assurance x Continuous (real-time) reporting of financial data Other XBRL Applications x Automated corporate tax filing x XBRL carried as a payload by transactional XML languages x Digital rights management x XBRL-based reporting of projections and nonfinancial metrics Let’s look at each of these possibilities and attempt to make a prediction whether application may be expected in the near future (the next five to 10 years). We’ll assess each in terms of current momentum, strength of the value proposition, and translation of that value through benefit and/or coercive force to the implementing corporations. XBRL for Corporate Operations There are several potential uses of XBRL by corporate finance departments. XBRL functions as a platform- independent import/export format between systems that generate general ledger transactions and the general ledger systems themselves. XBRL captures data at the most granular level of accounting recognition and acts as a bridge between systems and between the report (in XBRL) and the detailed ledgers. XBRL for Outsourced Accounting One possible use of XBRL would be to support out- sourced accounting. Accounting firms performing this service today often exchange data with clients in a num- ber of different formats. XBRL would let firms use any application to support all of their clients, thereby increas- ing efficiency while reducing the cost of their service. Some have suggested that the increased efficiencies might also increase the use of outsourced accounting, perhaps even permitting the creation of offshore XBRL-based accounting industries in India and China. Growth will occur because the efficiencies yielded by XBRL will be modest relative to the total cost of the service and because data exchange often isn’t necessary when the ser- vice is provided locally (as it usually is). Why will offshore accounting be successful? Because XBRL has the potential to make the outsourced functions seamless. At their core, many accounting functions are already seamless in terms of business processes defined by simple rule sets (for example, “Pay vendor XYZ 30 days after goods receipt to bank account ABC”). Providing standardized data—such as purchase receipts and vendor invoices embedded with transaction dates and payment rules—is the final step. An XBRL-enabled offshore accounting industry is pos- sible. Just as programming jobs are being transferred en masse to India and China today, back-office accounting and finance jobs could move in large numbers to other 44 STRATEGIC FINANCE I December 2006
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  regions tomorrow. Inboth cases, the driving force is labor costs, and the enablers are common technical languages and clearly definable specifications. As an enabling tech- nology, XBRL won’t be the cause of this transfer, but it will permit the acceleration of the shift as XBRL-enabled software becomes widely available. XBRL for Consolidation of Subsidiaries Another potential use of XBRL is for consolidating sub- sidiaries’ proprietary accounting applications. Today this involves costly system integrations of the subsidiaries’ complex applications. Corporations are striving toward greater homogeneity in their accounting platforms, and XBRL is well suited for consolidation across accounting regimes. Each detail data element in XBRL can be assigned multiple accounts corresponding to local vs. consolidated accounts, permitting not only consolidation but also the auditing of consolidated data back to the originating accounts. Because the investment will be borne largely by soft- ware vendors, the cost to corporations will be low, and the benefits will be obtained through modest incremental changes. XBRL-based consolidation could be widely used in the next five to 10 years. Another use of XBRL could involve joint-venture accounting. Because XBRL is so well suited for consoli- dating disparate financial data within a corporation, it will do just as well consolidating financial data between corporations. You can expect to see XBRL used in consol- idations in the next five to 10 years. XBRL for Auditing and Financial Reporting Publicly traded companies are required to file audited financial statements with the regulatory agency oversee- ing each capital market in which the corporation’s securi- ties are traded. These financial statements must be submitted in accordance with the local GAAP. Many multinational corporations, therefore, must prepare mul- tiple financial statements, one for each accounting regime in which they would like their stock traded. XBRL as an Automated Bridge between Accounting Regimes One possible outcome of XBRL is the development of a taxonomy independent of accounting regimes. The result would be an ability to publish XBRL data once and then to effortlessly create reports according to any GAAP with- out any intermediate translation. The alternate scenario assumes that no GAAP-independent taxonomy is devel- oped. In that case, XBRL tools will ease the translation of data between reporting regimes. As we’ve seen, XBRL is international and will tag indi- vidual ledger postings with context. XBRL can be pub- lished with specific references to XBRL reporting simultaneously to multiple XBRL taxonomies. For each detail data element in XBRL, fields can be assigned multi- ple times. There is, therefore, a complete technical solu- tion for tagging data at the lowest level of accounting recognition with multiple-GAAP identifiers. And there’s decreased complexity when you roll up this data to any of several reporting taxonomies. As with consolidations, however, XBRL’s unique posi- tion as an international standard will drive its adoption by software companies. Companies already using their enterprise resource planning (ERP) system for translation across accounting regimes will naturally find themselves using XBRL for that purpose after a major ERP upgrade. Large-scale use of XBRL for this purpose is very likely in the next five to 10 years. XBRL for Continuous Data Assurance Second-wave XBRL may deliver additional transparency by enabling expanded and more efficient assurance servic- es. Because XBRL will standardize the exchange of base- level accounting data, such as “debit Accounts Receivable $200, credit Sales $200,” auditors can import huge sets of accounting data from any of their clients into their own proprietary software in the same way, regardless of the client’s technology platform. While auditors can import such data today using delimited text format data extracts, for example, XBRL may increase what is possible, specifi- cally, the long-awaited continuous data assurance. In the wake of accounting scandals and collapsed stock values, there’s certainly a strong value proposition for any initiative that can deliver increased transparency at a bearable cost. Because XBRL captures data at the lowest level of accounting recognition, it’s a natural candidate as a continuous auditing technology platform. The question then becomes: Can cost-effective continuous auditing be implemented, and can the potential value translate to realizable value? XBRL implementation could happen in one of two ways. One way is through third-party software that enables companies to map account numbers and other data to XBRL taxonomies. The second way is through the company’s accounting software, assuming it’s XBRL capa- ble. Either way requires a one-time major effort to map accounting data to the XBRL taxonomies, but neither December 2006 I STRATEGIC FINANCE 45
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  requires major customdevelopment or major ongoing support. Therefore, the cost to corporations would be modest relative to the benefit to the company (lower cost of capital and higher market valuation), to the account- ing firms, and to the investing public. Forces in favor of implementation will include stake- holders and the potential for reduced cost of capital to be enjoyed by any company, which will substantially reduce its audit risk. If there’s an increase in audited financial data available, you can expect that companies then will be encouraged to disclose more. In the eyes of management, however, more disclosure leads to more criticism, losing control over communications, and entering a chaotically reactionary relationship with the market (Wall Street). We can expect a bitter struggle by management against continuous auditing. Continuous assurance may emerge first in enforcement of debt covenants. A large banking institution might soon require continuous online XBRL feeds of certain account- ing data or ratios instead of lagging quarterly financials. The modest investment cost could soon be returned in lower borrowing rates, while banking institutions could offer lower rates in return for less uncertainty. Much depends on the Financial Accounting Standards Board (FASB), SEC, Public Company Accounting Over- sight Board (PCAOB), and the International Accounting Standards Board (IASB). Together these institutions need to articulate a vision for continuous monitoring that is incremental and long term. Perhaps continuous assurance could begin with monitoring certain high-risk categories such as revenue, A/R, and inventory. Continuous assur- ance could also begin with monitoring certain ratios (for example, A/R or inventory turnover). Regardless, continu- ous monitoring is a reasonable next step in the evolution of assurance services and can be adopted in modest, incre- mental steps. XBRL for Continuous (Real-Time) Reporting of Financial Data Will this continuous assurance ability of data also be reported continuously? It has been said that all the basic building blocks that are necessary for continuous, Web- based corporate reporting already exist (ERP, XBRL, Web services, and the Internet). Online, real-time reporting requires five fundamental elements: 1. Reliable systems (such as SysTrust); 2. A common method of disseminating information (such as XBRL); 3. Industry-specific financial and nonfinancial data (such as Performance View, the Value Measurement and Reporting Collaborative); 4. Corporate accountability, including management integrity and solid enterprise risk management (such as WebTrust, Online Privacy, Code of Conduct Audits); 5. Understandable disclosures (such as the FASB Disclo- sure Project, the SEC Plain English Goals, Enhanced Business Reporting). Value to market takes place only if quicker, more com- prehensive reporting leads to better investor decision making, which, in turn, leads to better decision making by management. But there’s a major limitation to continuous XBRL-enabled reporting: Companies in capital markets resist full, timely disclosure. This resistance could be over- come as companies need to achieve full transparency to obtain complete access to the capital markets and to achieve the lowest cost of capital. Continuous reporting could provide considerable value to investors and analysts, but that value won’t overcome the reluctance of manage- ment to give up control over this information. Other XBRL Applications Preparation of corporate tax returns includes a cumber- some and often complex manual process prone to human error. Many visionaries have seen XBRL-enabled tax filing as a major second-wave XBRL application. XBRL for Automated Corporate Tax Filing From a technical standpoint, there are two ways that XBRL can be used for tax filing: (1) as a consolidation platform using a proprietary XBRL taxonomy and (2) as a vehicle for actual submissions to tax authorities using an official taxonomy. An implementation by General Electric provides an illustration of XBRL as an open-source consolidated plat- form. General Electric’s IRS filing consisted of more than 40,000 pages originating from 150 distinct general ledgers. Using XBRL-enabled software, General Electric could automate and streamline its global tax operations. XBRL for tax reporting appears highly likely because the IRS recently joined the XBRL-US, which could further drive companies to adopt this XBRL technology. XBRL Carried as a Payload by Transactional XML Languages XBRL is a reporting language, not a transactional lan- guage. It’s concerned with content and context, not the delivery of this information. As a reporting language, however, XBRL is well suited for being carried as “cargo” 46 STRATEGIC FINANCE I December 2006
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  by a hostof transactional XML languages. XBRL report data can easily be embedded into other data due to the containerization of XML data. Transactional data of many types, including market data, securities trading, ebXML (an XML-based language for e-business), or banking transactions, will find good reasons to carry con- tainers of XBRL reports as “payload” or as context for the transactional data being sent. In general, any transaction or report concerning an entity having a financial status is a candidate for carrying XBRL data. Most exciting is the use of XBRL as a payload by “adja- cent” XML languages. Adjacent languages are based on XML and address subject matter that is closely related to business reporting or that has been adopted in business processes that involve an important type of business reporting. Because XBRL International has relationships with a host of standards-setting organizations such as Market Data Definition Language, Research Information eXchange Markup Language, Statistical Data and Meta- data eXchange, Organization for the Advancement of Structured Information Standards, United Nations Cen- tre for Trade Facilitation and Electronic Business, and Business Information Technology Services, technical compatibility is imminent in most cases. Considering the up-front work done by XBRL Interna- tional and other organizations, the technical simplicity, and the low cost, the use of XBRL data as a payload by these and other languages can be expected in the next five to 10 years. XBRL Adopts Digital Rights Management Capabilities According to Zabihollah Rezaee and Charles Hoffman (“XBRL: Standardized Electronic Financial Reporting,” Internal Auditor, 2001), today’s published XBRL data can easily be downloaded, modified, and passed to others fraudulently without the organization’s consent or knowledge. First-wave implementation of XBRL will like- ly result in unencrypted XBRL data being posted on cor- porate websites and various trusted sources, such as EDGAR Online. Data obtained from these sources gener- ally will be considered safe, but consider the following scenario. Someone creates a cloned site of the Microsoft earnings release website that has a URL spelled slightly different from the actual site (say, http://www.microsoft- corp.com/msft). The individual posts fraudulent XBRL data to this site, then posts messages on various message boards, alerting them to purported newly published financial reports. Markets could be manipulated fraudu- lently, just as in recent highly publicized cases of message- board fraud. The scale of the potential fraud is larger with XBRL because of the greater possibility for automa- tion and decreased human review. These concerns give trusted source data-aggregators, such as EDGAR Online, higher value. WHAT’S THE FUTURE? It has been said that the impact of revolutionary change is usually overestimated in the short term and underesti- mated in the long term. Yet the pattern actually encour- ages progress because overblown hype about short-term gains drives adoption and investment, often delivering what matters most—long-term economic benefit. Unfor- tunately, what falls in between the hype and the benefit phase is disappointment and cynicism. During this phase, investment must continue if the long-term benefits are to be realized. The risk with XBRL isn’t that first-wave implementation won’t occur but that a long, hesitant, and contentious first-wave implementation will: (1) hinder XBRL’s second wave of investment, standards develop- ment, and adoption and (2) will drive potential applica- tions to specialized XML languages. It falls largely to the data aggregators, the accounting profession, and the SEC to speed the first wave along. The U.S. needs a long-range vision from the SEC, the FASB, and the PCAOB that will provide direction and incremental steps. First, we need a timeline for mandated first-wave implementation. Second, we need a vision for future reporting, such as broadened disclosure, real time. Finally, we need mandated incremental steps toward con- tinuous monitoring and enhanced business reporting. In the long run, XBRL’s promise of greater transparen- cy and immediacy, along with its efficiency and ubiquity, will be fulfilled. Ten years from now, XBRL and its suc- cessor technologies could be judged as revolutionary and significant as the computerization of accounting. s Brian L. McGuire, CPA, CMA, CBM, CITP, Ph.D., is a department chair of accounting and business law professor in the College of Business, University of Southern Indiana, Evansville. You can contact him at [email protected]. Scott J. Okesson is a senior financial analyst, FFMS, at Mead Johnson Nutritionals. You can contact him at [email protected]. Liv A. Watson is vice president, Global Strategies, at EDGAR Online, Inc. You can contact her at [email protected]. December 2006 I STRATEGIC FINANCE 47