When a software company says it can make useful business information available “at the click of a mouse”, it always pays to be suspicious: truly valuable insights are rarely that easy to come by. But when the claim is being made by Christopher Cox, chairman of US financial regulator the Securities and Exchange Commission (SEC), a higher degree of scepticism is required.
The SEC is busy trying to persuade the companies it regulates to start submitting their financial returns in a new format: eXtensible Business Reporting Language (XBRL). The idea is that XBRL can take the mass of impenetrable accounting and compliance information that companies produce and turn it into analytical gold. Whereas paper-based return are static and of little value, investors can take XBRL data and cut and dice it any way they want; producing their own unique and dynamic reports to zone in on the parts of a company they are most interested in, and to make better comparisons between companies. That’s the theory.
Companies have been less enthused about the idea, partly due to concerns about the money they will need to invest before they can generate XBRL reports. Undaunted, the SEC is pushing ahead, trying to win companies over. Its latest plug for the technology is a tool on its website called “Financial Explorer”. This lets investors “quickly and easily analyze the financial results of public companies,” the SEC says. “Financial Explorer paints the picture of corporate financial performance with diagrams and charts, using financial information provided to the SEC as interactive data” (you can try it for yourself here: http://22.214.171.124/viewer/home).
The software takes the work out of manipulating the data by eliminating tasks such as copying and pasting rows of revenues and expenses into a spreadsheet. That frees investors to focus on their investments’ financial results through visual representations that make the numbers easier to understand.
Financial Explorer is not the only XBRL tool that the SEC has made available. Its Executive Compensation viewer lets investors compare what 500 of the largest US companies pay their top executives. An Interactive Financial Report viewer helps investors to gather, analyze, and compare financial disclosures filed voluntarily by public companies using XBRL. To date, there have been 307 such filings from 74 companies.
The SEC expects more companies to join its voluntary XBRL filing scheme. “XBRL is fast becoming the universal language for the exchange of business information and it is the future of financial reporting,” says Cox. “With Financial Explorer or another XBRL viewer, investors will be able to quickly make sense of financial statements. In the near future, potentially millions of people will be able to analyze and compare financial statements and make better-informed investment decisions. That’s a big benefit to ordinary investors.” David Blaszkowsky, director of the SEC’s Office of Interactive Disclosure, said investors who went to the SEC’s website and tried out the new tools would get “a first-hand glimpse of the future of financial analysis.”
For now, that is a future no company is compelled to join; XBRL is voluntary. But the SEC is expected to make XBRL filing compulsory, and a decision is likely before the summer. Other regulators are waiting to see what the SEC does. In the United Kingdom, the Financial Services Authority and the London Stock Exchange have been dragging their heels on XBRL; in Japan, the Tokyo Stock Exchange will make it mandatory in April.
Corporate resistance in the US is based on the not unreasonable concern that companies will have to go through another massive change in their financial reporting processes. Most have only recently digested the Sarbanes-Oxley Act, and many have had to start producing accounts under International Financial Reporting Standards. The SEC – and other regulators that see XBRL as the future – need to convince companies about the benefits.
If the SEC wants to learn some lessons about how to do that, it might benefit from a visit to the Netherlands. The country is taking a very different approach to adopting the technology – one that some say is much more likely to be a success. While the SEC has been pushing XBRL as a way of making information available to investors in an easy-to-use format, the Dutch have gone down a different road, says Harm Jan van Burg, who works at the country’s Ministry of Finance and is managing the country’s move to XBRL.
In the Netherlands, the focus from the start has been to reduce the administrative and compliance burden on companies, he says. For the Dutch, the move to XBRL is just one part of an ambitious government plan to cut business red tape by 25 percent, which the government reckons would save companies around €350m a year on compliance costs.
Creating a system that allows companies to file XBRL accounts will “revolutionise financial reporting,” says van Burg, but the project is much wider than that. Companies also file returns to a host of government departments, covering areas such as tax, economic statistics, and employee payroll information. Often, they end up providing the same information more than once, or have to recalculate data to fit with definitions provided by government departments, which can vary from one agency to the next. The government is backing XBRL as a solution to this mess.
The first stage of the project was to create a national XBRL taxonomy. Every government department now uses the same definition of core terms, such as what constitutes an asset. Creating the taxonomy has forced government agencies to reconsider what data they really need to collect from companies. They originally asked for the taxonomy to include 200,000 terms, but serious pruning has got that down to around 8,000.
The next stage of the project is to get companies to actually use the taxonomy and to start filing returns in XBRL. Progress here has been slower than expected. The original idea was that companies would start to file XBRL reports in 2007. Only a few took the option – about 100 or so. Speaking in February, van Burg said the gateway had received “practically zero” filings so far this year. “I’m not scared that my numbers in January and February are not very big because most companies don’t file in the early months of the year,” he said. His prediction is for 2.5 million returns by the end of the year, which is “less than we wanted” but on target to achieve a goal of at least 10 million a year by 2010.
Success depends on how the software evolves, says van Burg. “The signs are really positive,” and most of the accounting software used in the Netherlands is now XBRL-enabled, but that’s only happened very recently. Now it’s for companies to decide whether to use the technology, he says.
To exceed 10 million filings, around half of all the companies registered in the Netherlands will have to file under XBRL. The government’s job is to “create a regulatory situation where businesses can be as efficient as possible,” says van Burg, but whether to use it or not “is always the choice of individual businesses.” XBRL filing is entirely voluntary.
Van Burg is confident that the filings will flow in because the business case is so strong. That’s not true in the US, he says. The SEC approach to XBRL relies too much on what he calls “filing in a single situation” – i.e. companies filing records to the SEC but nowhere else. “The business case would be much stronger if not only the SEC accepted XBRL, but also the IRS and other institutions that want financial information,” he says.
The situation is similar in the UK, he says, where companies can file XBRL to Companies House, the repository of corporate data, and the tax authorities, but the two do not share a common taxonomy. “If there were a national taxonomy the benefits would be far greater,” says van Burg. The Dutch model – where government agencies work together – “is exportable to any country,” he says, and is close to the approach taken in Australia and New Zealand. “But it needs strong political support because you have to deal with a bunch of agencies that are used to imposing their data models on businesses.”
There are other weaknesses in the US approach, he believes. The XBRL taxonomy under development is too complicated, and that there is still a lack of XBRL-enabled accounting software. Indeed, the XBRL community has put too much emphasis on how the data will be used and not enough on getting it produced in the first place, he says. “The US needs to concentrate very hard now on the accounting software market so that it can create XBRL reports. Until that happens on a large scale, XBRL will never be big.”
However, there are doubts too about how big XBRL will become in the Netherlands, despite its supposedly superior model. The country’s corporate trade associations are still only lukewarm on the idea. The Confederation of Netherlands Industry and Employers “sees possibilities in the use of XBRL” as a means of reducing administration costs, says its senior adviser on fiscal affairs, Janny Kamp. But the organisation only signed up to support the project after receiving a promise from audit firms that they would pass-on the efficiency benefits to their clients, she says. The confederation also demanded that there would be no extra reporting obligations and no requirement to use XBRL.
Jan Pasmooij of Dutch accountancy body Royal NIVRA accepts that it has taken time to convince the business community of the benefits of XBRL. Trade bodies were critical of the estimated cost savings published at the start of the project, but are on board now, he says. Listed companies, however, “are not interested at the moment.” Pasmooij, who wrote the original proposal for the Dutch XBRL model back in 2003, says they will eventually use the technology because it will benefit their internal reporting. Small and medium-sized companies, meanwhile, are not likely to deal with XBRL themselves, because they outsource the preparation of their accounts and tax returns to accountancy firms. That makes such firms an important audience to win over.
Pasmooij points to the example of tax filing. In 2000, the government made it possible for companies to file their tax returns electronically, but few accountancy firms used this option. It was not until electronic filing – using a system other than XBRL – became mandatory that firms invested.
“I think we will see a slow take up,” he says. “We will see the first movers now, who think there will be an advantage in future. Smaller practitioners will move later. The big firms will look at what’s happening with the SEC; for them it is important what is happening world-wide.”
That raises a question: does the government have to make XBRL mandatory, if it wants it to be a success? “When you talk with the politicians they say no,” says Pasmooij, “but I think it will start voluntarily, we will learn and fine tune, and then for the future it will be mandatory.” Over the long term, it’s not economically efficient for the government to run two parallel systems, he says – one using XBRL and one still filing on paper. “For us 2008 is very important. The proof of the pudding is in the eating. We have the taxonomy available and an infrastructure to support the electronic exchange of information. Now it is up to the accounting and tax firms to start working with XBRL.”
The SEC hasn’t got to that point yet. If it does decide to make XBRL reporting mandatory, it will still need to persuade companies that the necessary investment is worthwhile. Simply imposing the project on them is unlikely to result in a successful outcome.