Written by Bob Schneider     Posted on November 30, 2008

Matt Kelly and Gary Purnhagen have weighed in — at opposite ends — on whether there will be an XBRL mandate this year. They know much more than I do about how the SEC works, and I have little insight to add to their remarks. FWIW – and I’m not saying it’s worth much – here’s whatever evidence I’ve seen in the public realm in the past several days:

11/25 InfoWorld published The XBRL Mandate is Here: Is IT Ready?; both the title and the content made it sound like a mandate is a fait accompli. But it appears the author merely jumped the gun in declaring metaphysical certainty on implementation.

11/21 In the course of writing up an interview with Charlie Hoffman, a reporter calls the SEC and asks if there will be a mandate. A spokesman says “…the commissioners may have an announcement within a month.”

11/21 In a Business Wire webcast on preparing for an XBRL mandate, David Blaszkowsky, Director of the SEC’s Office of Interactive Disclosure, is asked “When does it happen?” He replies ‘Our commitment is to bring this before the commission in the fall, recognizing we are deep in to the fall….This is an important issue to the chairman and this will be reviewed. You’ll see some news shortly, I expect. No, I’m not ready to give a particular date.”

11/18 Chairman Cox discusses XBRL in his valedictory speech to the FEI; here are his entire remarks on the subject:

This focus on the investor’s minterest in global comparability is also evident in the aggressive support of the IASC Foundation for eXtensible Business Reporting Language — a priority shared by FEI. In the same way that IFRS might someday soon make financial statements understandable to investors anywhere on earth, the 30 different spoken languages that will someday soon be embedded in XBRL data tags attached to public company financial statements could let any investor read an IFRS financial statement from any country in his or her own native language.

This account says Mr.Cox “highlighted” the XBRL initiative in his speech. But compared with the emphasis interactive data has received in the Chairman’s past speeches, and because there’s nothing in his remarks about a mandate, I think “mentioned” is a more appropriate word.

Nevertheless, I did find it positive, if unsurprising, that an XBRL requirement was included in the November 14 release of the proposed rule for the adoption of  IFRS by U.S. issuers. In the Milestones to be Achieved Leading to the Use of IFRS by U.S. Issuers section, there is “Improvement in the Ability to Use Interactive Data for IFRS Reporting,” including this language on page 28:

“…the state of development of an IFRS list of tags for interactive data reporting will be a consideration in the Commission’s determination of whether to require the use of IFRS for all U.S.issuers…the Commission staff is actively involved in the improvement and monitoring of the IFRS list of tags via participation in the IASC Foundation’s XBRL Advisory Council. The Commission believes it is appropriate to consider the IASC Foundation’s progress in the development of IFRS taxonomies prior to proceeding with rulemaking on IFRS for all U.S. issuers.”

I don’t want to read very much into this. Facilitating the use of interactive data had been part of the prerequisites for IFRS adoption announced earlier in August; it would have been surprising had it been left out of the proposed rule.

Nevertheless, I think it does provide evidence that, after considerable investment in resources, XBRL has become part of the infrastructure — if not the culture — of the SEC. Infrastructure can, of course, be discarded or fall into disuse. But since it’s in place, there may be enough momentum to decide to just go ahead and use it.

Kurt Ramin recently submitted a Comment on the SEC Study of Mark to Market Accounting, which urges a rethinking of the current financial reporting regime and discusses the potential of XBRL in creating transparent and understandable financial statements. Readers who enjoyed the posts on XBRL and Financial Reform that Kurt wrote for us last year will want to be sure to read his essay.

Written by Neal Hannon     Posted on November 21, 2008

Neal Hannon is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Active in the XBRL community since 2000, he served on the first XBRL US steering committee and has written over 60 articles on XBRL. You can contact him by email.

The US GAAP taxonomy as published on April 28, 2008, is 13,000-plus elements deep.  The reason the taxonomy is so detailed and deep, according to the SEC’s proposed rule 33-8924, is to promote the uniform use of a common set of tags.  Here is a passage from the proposed rule:

"One of the principal benefits of interactive data is its extensibility—that is, the ability to add to the standard list of tags in order to accommodate unique circumstances in a filer’s particular disclosures. The use of customized tags, however, may also serve to reduce the ability of users to compare similar information across companies. In order to promote comparability across companies, our proposed rules would limit the use of extensions to circumstances where the appropriate financial statement element does not exist in the standard list of tags. We are also proposing that wherever possible, preparers change the label for a financial statement element that exists in the standard list of tags, instead of creating a new customized tag."   (Emphasis added)     

The XBRL US GAAP Preparer’s Guide, published by XBRL US, is very neutral on the subject of extensions.  It recognizes that extensions are likely to be created and gives several methods of extension creation, but also offers this note of caution:

Rule: Use elements from the XBRL US GAAP Taxonomy whenever possible.

Needless to say, companies who are focused on expressing the accounting intent of the management team in XBRL will find a compelling desire to create their own extensions to the taxonomy. To illustrate, let’s look at a company that has been an active supporter of the SEC’s Voluntary Filing Program, EDGAR-Online.  EDGAR-Online’s recent form 10-K and 10-Q filings had the following item on the bottom of the statement of income:

The numbers represent quarterly ending numbers for 2007 and 2008.  According to the way EDGAR-Online presented the information, finding the proper XBRL element was a challenge.  Two possible candidates exist in the US GAAP taxonomy:

1. WeightedAverageNumberOfSharesOutstandingBasic  and
2. WeightedAverageNumberOfDilutedSharesOutstanding

Neither standard XBRL element by itself fit the unique presentation of terms shown on the EDGAR-Online form 10-K and 10-Q.  The EDGAR-Online team decided they had to create an extension to the taxonomy.  The result was:  

edgr:WeightedAverageNumberBasicDilutedSharesOutstanding

This new element combined the Basic and Diluted shares outstanding concepts into one element that matched their financial statement presentation.

A brief search of the authoritative literature associated with weighted average shares outstanding, Financial Accounting Standards (FAS) 128 paragraphs 8 and 40, found that if companies have a capital structure which dilutes shares outstanding for the purpose of calculating earning per share, the amounts would have to be separately reported on in a footnote disclosure. EDGAR-Online indicated that the number of weighted average shares outstanding basic and diluted were the same on their financial statements. 

The US GAAP taxonomy offers two choices, either basic shares outstanding or diluted shares outstanding.  The wording used in the EDGAR-Online’s financial statements indicates that for EDGAR-Online, the number of basic shares outstanding and the number of diluted shares outstanding is exactly the same.  Therefore, EDGAR-Online chose to create an extension element to report the combination of the two elements into one. 

EDGAR-Online could have chosen one of the US GAAP elements and changed the label.  For example, they could have chosen to alter the label for the following:

If they changed the standard label to read, “Weighted Average Number Basic and Diluted Shares Outstanding” while keeping the presentation linkbase, the reference linkbase, and the calculation linkbase the same as before, the adjusted standard label would have matched the way the company presented the item on their face financial statements.

A quick look at the authoritative references for the “basic” and the “diluted” weighted average shares outstanding indicates that a changed label in this circumstance should not cause any questions to the accounting treatment of the label adjusted element.  

According to the folks at XBRL US, the current stream of XBRL filings in the extension of the SEC’s voluntary filing program will be reviewed for possible inclusion in the next major release of the US GAAP taxonomy, which is due out early next year.  Perhaps we will see the EDGAR-online extension for weighted average shares outstanding make the updated taxonomy in 2009.

Second Thoughts

The people at EDGAR-Online decided to make a change in how this item is presented in their latest quarterly filing.  The November 11, 2008, 10-Q EDGAR-Online filing includes a separate line item for Weighted Average Number of Shares Outstanding, Basic and Weighted Average Number Of Diluted Shares Outstanding.  According to the company, the new presentation will be a clearer representation of the XBRL to analysts. 

Clearly, the choice of XBRL tags is an important decision driven by a multitude of considerations beginning with the accounting treatment and ending with the analyst’s or investor’s view of the chosen tags.  In any case, companies should first choose the correct accounting treatment of an item in their financial statements and accompanying footnotes and then choose the XBRL element that best represents management’s accounting intent.

Christian Dreyer, CFA, kindly agreed to the following interview. Chris is a past president of the Swiss CFA Society, a 1,700-member-strong association of finance professionals in Switzerland. He is Managing Partner of Tertium datur AG, an advisor specializing in pan-European pension funds. Previously he was CFO of an IT outsourcing firm and head of investment research at a Swiss state bank. He is also on the IASB’s Strategic Advisory Council for XBRL and publishes the European Pensions//iorp.eu blog.

1. In your article Cheaper, Smarter, Faster: Benefits to Analysts from XBRL, published in September 2006, you noted that analysts were still largely unaware of XBRL. Do you think the level of recognition is now much higher? Do you think the level of awareness differs between US and European analysts?

In essence, that assessment is still true. The CFA Institute conducted an extensive member survey about XBRL in summer 2007. The change in awareness among its membership is insignificant. Some 59% of over 850 respondents consider themselves unaware of XBRL. The lack of awareness is highest in Latin America at 71%, and lowest (but still too high) in the USA with 53%; Europe, Middle East, and Africa (EMEA) was at 66%. I am reasonably confident that awareness will pick up quickly when XBRL disclosure becomes mandatory and, at the very latest, when up-to-date fundamental information of a comprehensive investment universe become available. Before that, there is hardly enough return on invested time for an investment professional, especially in these times of financial crisis.

UPDATE from Chris on 11/22/08: The CFA Institute has just published the results of its latest Monthly Question survey for October. These results indicate that, if anything, awareness has become worse, with 75% of 1346 respondents saying that they were not familiar with XBRL. Note that in this survey, the CFA Institute asked about familiarity rather than awareness, which may be more easily denied, but I doubt that this explains fully the decrease in awareness of no less than 16 percentage points.

2. In expressing their skepticism of XBRL for financial reporting, some CFOs have said “The analysts aren’t asking us for this.” Assuming that statement is true, why aren’t more analysts asking for XBRL statements?  Do you think it’s a good argument against XBRL mandates?

It’s a classic chicken-and-egg problem: analysts are not aware of XBRL, therefore they do not ask for it. They will not pay much attention to it as long as there is no clear perspective about an impending, large-scale availability of XBRL formatted information. XBRL has to become part of the infrastructure of financial markets, just like the payment system. This requires coordinated, if not mandated, action with a lot of sustained, visible momentum. Analysts will not design and maintain a parallel research process for a subset of XBRL formatted information.  It’s all or nothing, really. That’s why scope and momentum behind the movement to XBRL are critical.

3. Some XBRL supporters have said that having XBRL statements would have helped prevent the current financial crisis. Others note that call reports of US banks have been in XBRL format for a few years now, without any apparent benefits for discerning weaknesses of the financial system. Do you believe that publishing XBRL statements for all financial institutions might have helped avert the current financial crisis? Or do the skeptics, in pointing to the availability of XBRL call reports, have a powerful argument?

IMHO, the answers are No and No. The credit crisis has causes that are outside of the domain of financial reporting and reported numbers as per today’s reporting standards. XBRL is "just" an efficient vector for such data. I’d be very reluctant to use the crisis as an argument to promote XBRL, because the linkage is marginal at best. We’ll hopefully see improved reporting standards with more transparency, less Held-To-Maturity trickery, and a lot more fair value as a consequence of the crisis. At that point, we’ll see all that information using XBRL.

4. Which investment professionals – quantitative analysts, buy side analysts, sell side analysts, or portfolio managers — do you think will benefit most from the introduction of XBRL statements? Which will benefit least?

Tough call. I’d have a go at Homi Byramji’s excellent presentation at the recent London conference (the slides are now available, and we hope to have a podcast as well). At this point, finance professionals are reasonably satisfied with the information and tools they can buy from suppliers like Thomson Reuters and others, despite of all the known shortcomings (i.e., delay, errors, normalization).

That said, there are some intriguing results from the CFA Institute survey I mentioned before: across all respondents (including portfolio managers, investment advisors, academics), the split between "most to all" manual extraction of information from company sources as opposed to purchases from third-party suppliers is almost even at 52:48. Looking at more specialized investment analysts, however, there is a remarkable shift towards manual extraction. It seems paradoxical, but automation is lowest for those respondents who perform analysis on a regular and recurring basis. The only reason I can think of for that is that the data supplied by third parties is insufficient for the information requirements of those specialists. They will probably be better served by XBRL information "as reported,” assuming that disclosure neutrality holds.

But then, third-party suppliers will not sleep. They’ll improve their offering by building XBRL data into the plumbing of their systems. Through this, finance professionals will get access to XBRL-grade information through the known and tested user interface of the suppliers’ toolboxes without having to bother about XBRL — for a price. Those incumbents will be quite formidable and deep-pocketed competitors for newcomers to beat.

But that’s not the end of story. The really interesting, potentially disruptive innovation (for investment research) might happen when a large universe of XBRL instances resides in the cloud and is accessible to semantic Web services, driven by the cognitive surplus of "amateur" investors outside of traditional finance firms. But before that can happen, a number of challenges need to be overcome. I’m watching closely.

5. There’s been much discussion about how XBRL will change the nature of financial reporting by facilitating EBR, real-time delivery of KPIs, and enhanced narrative reporting. How do you see the impact of XBRL on innovative methods in financial reporting?

It’s a prerequisite. Financial reporting today is too much about presentation, too little about substance. That can only change when presentation becomes virtually irrelevant in XBRL instances. There is a risk, however, that XBRL introduces additional complexity into the reporting process that is not warranted by supply chain needs. One case in point is the use of extensions, which needs to be severely curtailed in order to retain comparability. Also, innovation has about as bad a name in finance today as creative accounting had in post-Enron days — our heartfelt thanks go to the crisis, again. But once the crisis has blown over, we can get back to the business of innovating its reporting, as described in the CFA Institute’s Comprehensive Business Reporting Model, for instance.

6. Can you perceive any differences between Europe and the US in the speed and nature of XBRL implementation that arise from different business cultures and different attitudes toward government?

Generally, business cultures and attitude towards government vary widely between countries in Europe, so it’s virtually impossible to identify a single European culture or attitude that could be contrasted with its US counterpart. But those influences will be at work in individual countries, of course.

7. You have been a keen observer of XBRL and the financial community for many years. Have there been any surprises for you in the speed and nature of XBRL implementation, or has it proceeded about as you had expected?

Does it sound conceited if I say “no surprises?” My first exposure to XBRL was about six years ago. At that point, XBRL was just another wannabe standard arising from the technology domain. There was little reason to believe it might grow to the role it has today, because it was a technical specification that was not complemented by a commensurate business standard. All that changed when the IASB adopted XBRL as its reporting medium of choice to stop killing trees. That’s when I changed my mind. It has been exciting to watch the momentum of XBRL grow since then, and I’m looking forward to its fruition.

Written by Lane Leskela     Posted on November 13, 2008

Lane Leskela, PCM, MIA, is the Vice President of Technology Programs at The Open Compliance & Ethics Group (OCEG). Lane is responsible for managing OCEG’s Technology Council Programs, including the GRC Blueprint®, GRC Roadmap®, and GRC-XML® Provisional Jurisdiction of XBRL International. OCEG is a 15,000-member global nonprofit focused on guidance, standards, benchmarks, and tools for integrating governance, risk, and compliance (GRC) processes.

The current economic environment is crying out for sustainable technology standards at the core of information governance. Profound losses in the financial markets were the result of weak governance, failing risk management, and little regard for the consequences. The time has come for the methods needed to identify and manage risks, ensure oversight, and enforce corporate policies and procedures to exploit XBRL. In this extremely challenging economic climate, OCEG foresees increased demand to leverage the expanding taxonomy for financial reporting purposes to meeting the challenges of operational risk and compliance management as part of the natural evolution of XBRL.

OCEG sees the inevitable combination of people skills, business practices, and information technology necessary to improve governance, risk, and compliance management, not as ends in themselves, but as serving the organizational necessity of Principled Performance®. Principled Performance centers on bringing the mandated requirements (regulatory, legal, and contractual) for an organization’s operations together with the voluntary commitments (business practices, customer expectations, service levels) that help focus the organization on internally and externally directed improvement.

The complete portfolio of processes directly related to GRC include organizational and IT governance, business strategy, all levels of risk management, quality management, financial and IT audit, legal obligations, security, compliance monitoring and reporting, social responsibility, and ethical culture. Synchronized planning and communication between multiple business departments, decision-makers, business partners, suppliers, and customers is the key to successfully leveraging GRC across an extended enterprise of any size and shape.

To this end, diverse organizations with broad international experience and constituents are building the basic definitions and structure that will comprise a comprehensive taxonomy for GRC XBRL. Critical work on aspects of the emerging taxonomy and messaging standards for GRC have been undertaken by organizations that include the Fujitsu Research Institute, AIIM’s StratML Work Group, and the International Standards of Accounting and Reporting (ISAR) group of the United Nations’s Council on Trade and Development (UNCTAD).  Moreover, OCEG’s GRC-XML Work Group is now the Provisional Jurisdiction for this area in XBRL International.

Along with bringing together the major contributors to the emerging XBRL taxonomy for GRC, OCEG envisions stewardship for this new GRC-XML Jurisdiction over five defining domains:

1.    Common Financial and Operational Risk Controls
2.    Corporate Social Responsibility and Transparency Metrics
3.    Issue and Incident Management Taxonomy
4.    Performance Management Reporting
5.    Corporate Policy and Organizational Strategy Taxonomy

The construction of XBRL standards in each domain will address information standards based on Authorities with respect to:

1.    Policies and processes modeling regulatory authority guidelines for laws, rules, and regulations
2.    References and translation procedures based on authority documents
3.    Object definitions, elements, and specifications derived from authority documents
4.    Metrics that define standardized process performance and risk indicators

As painful as the current economic environment is for most businesses and markets, the opportunity for a deeper commitment to developing GRC components for XBRL has emerged. Over the next few years, as business performance improves and economic value ultimately rises, long-term efficiencies will be supported by a more coordinated set of information standards that inherently integrate risk and compliance processes. Advancing compliance and risk management capability across markets and industries is a deeply important and global role that is now assigned to XBRL.

Written by Gary Purnhagen     Posted on November 4, 2008

Gary Purnhagen has more than 20 years’ experience in helping firms in diverse industries meet document processing challenges, including SEC disclosure. His engagements have included responding to the SEC’s EDGAR program, use of the Internet and other digital media for information dissemination, and most recently XBRL. He is an independent consultant assisting firms in embracing innovation and responding to the SEC’s pending mandate of XBRL.

In his recent post, Matt Kelly of Compliance Week argued that nobody believes the final XBRL rule will come out before SEC Chairman Chris Cox leaves office. While I respect Matt’s insight, and he does bring up many legitimate concerns, I disagree completely with his conclusions. I believe there is a high probability that the SEC will adopt a final XBRL rule this year, and the first mandated group will be required to begin submitting XBRL exhibits beginning early next year. Furthermore, I do not think I am the only one who believes that.

The fact that Chairman Cox cancelled his appearance at the XBRL International Conference in Washington D.C. in October does not diminish my confidence in the successful adoption of XBRL under his direction. Many observers had pegged the conference as the forum for the Chairman to make some announcement regarding the final rule, and they believe his canceling his appearance could only mean adoption of XBRL was in peril. I for one was not expecting Mr. Cox to make that announcement at the conference, primarily because that is not how rulemaking takes place at the SEC. The process is underway; there really is no need for Mr. Cox to continue to cheerlead this initiative.

A Voluntary Filing Program (VFP) has been conducted, rules have been proposed, and a new SEC system called IDEA has been announced that is based on XBRL. The proposed rule has been available for review, the SEC has received over 80 comment letters, and I suspect the SEC is currently finalizing the rule. Delays are the norm with SEC rulemaking. I agree with Matt that we are getting to the eleventh hour, but there still is time. Any day now, we will see a quiet announcement from the SEC that a meeting of the Commissioners is scheduled to consider the recommendations from the Division of Corporate Finance to adopt XBRL rules. Those rules will be adopted.

The recommendations should largely follow the proposed rule. Possible modifications could include delaying the first mandated filing from the 10-K to the first 10-Q. In addition, I hope they do not end the VFP, so that companies can begin to submit tagged financials without the liability associated with “official filings.”

Since Senator McCain called for Cox’s head when the financial crisis took off, there have been those who have felt that Cox could be fired, thereby putting XBRL into a limbo state. If Cox were fired, I could see where XBRL could fall into such a limbo state. I do not believe that Cox has to worry about that though. If McCain had the power to get Cox fired, it would have happened already. The fact is Cox is a bright young star in the GOP. He has a future at a state- or maybe even national-level elected position. Moreover, having championed XBRL will be an asset to him.

Consider this scenario: Senator Obama, who has said that he will include Republicans in his administration, wins the election and asks Christopher Cox to stay on to help XBRL become a reality. Stranger things have happened.

Written by Matt Kelly     Posted on October 28, 2008

Matt Kelly is editor-in-chief of Compliance Week, a magazine and online newsletter on corporate governance, risk, and compliance. Prior to his role at Compliance Week, Kelly was a reporter and contributor on corporate compliance and technology issues for magazines such as Time, Boston Business Journal, eWeek, and numerous other publications.

Occasionally the technology of XBRL gets a giant boost forward. The recent XBRL International conference in Washington, D.C., was not one of those times.

For months, XBRL officials had promoted the conference as the denouement of a great movement, when XBRL enthusiasts who had wandered corporate corridors for years would finally arrive in the promised land. Christopher Cox, chairman of the U.S. Securities and Exchange Commission, was to be the keynote speaker on the first day of the conference — and there, everyone knew and nobody spoke publicly — he would unveil a final rule to mandate XBRL reporting in the United States.

Then Cox canceled. No final rule came forth. And I, like so many others at the conference, went back to wander the corridors. Mostly to bug the vendors for some free pens.

It’s hard to describe exactly how much of a letdown the XBRL conference was. Without Cox, the collective conversation meandered back to the same old topics hashed over since I started attending XBRL International events three years ago: the great untapped potential of XBRL technology, and Corporate America’s utter lack of interest in tapping it until the SEC requires companies to do so. The same old faces were singing the same old songs, and that’s about all.

Of course, you can’t fault Cox for canceling and putting XBRL on the back burner. With the U.S. financial system in shambles, the SEC chairman has more important demands on his time (mainly, getting called on the carpet by Congress almost every week). Either Cox and his staff need more time to develop a full final rule, or they can’t devote enough time to a final rule — because critics in Congress and elsewhere will immediately crucify Cox for fiddling with XBRL while Wall Street burns.

Either way, the end result is no rule. And without that mandated motivation, XBRL will go nowhere in the United States.

Now speculation is turning to whether the SEC will enact a final rule at all, and the answer may well be “no.” The XBRL rule originally proposed five months ago called for the 500 largest public U.S. companies to start filing XBRL-tagged financial statements in the spring of 2009. At the time, most financial reporting folks familiar with XBRL thought that deadline was at least theoretically possible — if the SEC’s final rule explained all the details about validation, auditor assurance, errors, grace periods, and so forth. If the SEC could deliver that final rule by, say, an international XBRL conference in mid-October, the schedule would be tight but still feasible.

Now we’re staring at November, the end of the fiscal year for most large companies, and the end of the White House administration that happened to put Chairman Cox in office. Cox’s own tenure will probably end on January 20, 2009. And we have no rule.

Cox has now become the bureaucrat who cried XBRL once too often. Quite simply, nobody believes the final rule will come before he leaves office, and nobody is particularly worried about it. One school of thought is that the SEC will pass a final rule that requires compliance starting with quarterly reports sometime in fiscal 2009, rather than the annual report for 2008. Another theory is that Cox will unveil a roadmap for XBRL adoption and let his successor decide specifically when to put it into force. Some do still believe the SEC will stick with its promised timetable to mandate compliance with fiscal years that end on or after Dec. 15, 2008 — but those folks are quickly becoming the crackpot fringe.

Me? Like lots of other SEC watchers, I’m starting to wonder whom a President-elect Obama will name as the next SEC chairman, and what that person’s priorities will be. I don’t know that XBRL will be one of them.

Written by Lily Bi     Posted on October 23, 2008

Lily Bi, CIA, CISA, is Director, Technology Practices at The Institute of Internal Auditors (The IIA).  Bi is responsible for developing the Global Technology Audit Guides (GTAG®) series and spearheading other initiatives to position The IIA as a leading provider of IT audit guidance for internal auditors.

Financial statements, IFRS, XBRL…it has been a lot for internal auditors to catch up with. Being responsible for providing assurance service, the internal audit profession is pushed forward to face the challenges of both technology and regulation. The mandate of filing financial reports in interactive data format, specifically XBRL, is not only an emerging trend, but a reality that companies throughout the world have to face today. And it raises some important questions: What is the current status of XBRL adoption? What is internal auditors’ involvement in the XBRL implementation process, if any? Is there a need for guidance developed by internal audit professionals?

As the globally recognized, guidance-setting body for the profession, The Institute of Internal Auditors (The IIA) conducted an XBRL survey in early September to find out the answers to these questions. More than 200 chief audit executives worldwide, such as audit generals and directors, participated in the survey. Here are some of the key results:

Familiarity  The survey tells us that 51% of internal auditors don’t have any XBRL knowledge at all; 42% only know the very basics.

Adoption   Only 8% of respondents say that their companies are currently filing financial reports in XBRL format, but more than 37% say that this will happen in the coming three years.

Internal auditor’s involvement   Among those companies who file financial statements in XBRL format today, only four respondents say they play some role.

Adoption approaches   The survey results indicate that 52% of respondents’ companies chose an in-house approach, and 48% chose a co-sourcing or outsourcing approach when implementing and creating financial reports in XBRL format. No respondents say XBRL is used in the company’s internal process other than financial reporting.

Financial reporting standards    The majority of the respondents state that they use country-specific accounting standards, such as US-GAAP; only 17% currently use IFRS.

Need for guidance Almost 90% of respondents say The IIA’s coming XBRL paper is needed to provide knowledge and guidance for the internal audit profession.

From a technology perspective, XBRL is a ten-year-old computer language for business reporting. But the survey states that internal auditors currently have not been engaged in helping their companies to convert financial reports in XBRL format. By definition, internal auditing is an independent and objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. With mandatory mandates either in place or under review in countries like US, Canada, Australia, Belgium, China, Denmark, Japan, France, Netherlands, Singapore, and United Kingdom, and more to come, there will be an inevitable impact on the internal audit profession.

Management in an organization has overall responsibility for ensuring accurate and complete financial statements in XBRL format.  Internal auditors can help management implement XBRL and provide objective assurance on the implementation process. To do so, internal auditors should first understand the new interactive reporting format, the mandate requirements, and pros and cons of various implementation approaches.

In addition, the business reporting supply chain starts from initial transactions, internal consolidation and reporting, to external financial reporting.  Many organizations use XBRL at the end point of this supply chain because of the urgency of compliance with a regulator’s mandate. But XBRL as an interactive business reporting language can be used to serve throughout various stages in organizations’ business reporting supply chains. This will potentially give internal auditors great opportunities to access deeper business data, perform data analysis more easily, improve profiling and risk assessments, and identify potential issues. As an audit tool, interactive data will ultimately accelerate continuous auditing and monitoring.

The IIA’s forthcoming XBRL guidance paper, which will be released in January 2009, will address these topics.

Written by Neal Hannon     Posted on October 15, 2008

Neal Hannon is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Active in the XBRL community since 2000, he served on the first XBRL US steering committee and has written over 60 articles on XBRL. You can contact him by email.

Neal wishes to thank Walter Hamscher for his assistance in preparing this post.

What is the difference between level 1 block tags and level 4 tags as defined in the SEC’s proposed rule for XBRL financial reporting? The answer lies in the details of the footnote itself. Footnotes and disclosures contained within footnotes are an essential part of financial statements adding more detail and understanding to the financial condition of a company.

What are the footnote tagging requirements according to the SEC’s proposed rule? The SEC’s proposed rule identifies four levels of tagging:

1. Each complete footnote tagged as a single block of text;
2. Each significant accounting policy within the significant accounting policies footnote tagged as a single block of text;
3. Each table within each footnote tagged as a separate block of text; and
4. Within each footnote, each amount (i.e., monetary value, percentage, and number) separately tagged, and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged.

The image below shows when each type of tagging will be required as proposed in the SEC rule. (As with all the thumbnails in this post, click it to open the image in a new tab or window.)

What is Block Tagging (Level 1)?

According to the SEC proposed rule, Level 1 tagging means tagging each complete footnote as a single block of text. Block tagging may also include the embedding of HTML tags for formatting purposes.

Using block tagging, XBRL tags are placed around an entire block of text and numbers. The simple process of block tagging a note to a financial statement would involve the following steps:

1. Select the block of text you wish to tag. This could be the note explaining a company’s application of fair value or their disclosure of investment securities.
2. Select the text block tag from the XBRL taxonomy and create your text block in your XBRL tagging tool of choice. Most companies will choose: FairValueDisclosuresTextBlock

Here is an abbreviated example of block tagged note number 2 from the Bank of Hawaii’s recent form 10-K:

The actual text of the tag is considerably longer than the above sample but illustrative of how a block tag works, including HTML for formatting purposes.

Level 2 Tagging

Level 2 tagging requires that each significant accounting policy within the significant accounting policies footnote be tagged as a single block of text. The tagging methodology for level 2 will be the same as level 1.

Level 3 Tagging

Level 3 tagging should be considered as part of level 4. As written in the proposed rule, each table within each footnote will be tagged as a separate block of text and be combined with all Level 4 requirements as detailed below.

Level 4 Tagging

At level 4, which is applicable to all companies after their initial year of block tagging, the proposed rule requires companies to deeply tag every footnote. Within each note, any monetary value, percentage, or number will need to have an XBRL tag applied; however, it is not necessary for that level of tagging to exactly preserve the original formatting or layout, because it is assumed that if the level 4 tags are available then the level 1 tags are too.

Here again is what the SEC’s proposed rule says about level 4 tagging:

(4) Within each footnote, each amount (i.e., monetary value, percentage, and number) separately tagged and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged.”

If the company is following IFRS, as issued by the IASB, the IFRS disclosures will also need to be tagged. Companies may also want to expose additional information contained in detailed footnotes that go above and beyond US GAAP requirements.

So level 4 tagging means preparing an XBRL tag for:

1. Each and every number, monetary value, percentage, etc. contained within a footnote;

2. All GAAP required disclosures; and

3. Company-specific disclosures that go beyond GAAP requirements

The third item hasn’t been specifically asked for in the proposed rule but preparers may want to include them in their XBRL exhibits.

XBRL Implications for Level 4 Tagging

To capture each and every numerical disclosure included in a footnote, companies will need to use the dimensions capability of XBRL. XBRL software tools with dimension capability such as Fujitsu XWand, Rivet Dragon Tag and UBMatrix Report Writer have the capability to produce the correct XBRL. Clarity FSR also has dimension capability.

To address the need to separately tag each narrative disclosure, accountants will need to identify which lines within the footnote are being driven by US GAAP and Commission regulations. The accountant will need to dissect the narrative to discover the correspondence between what is disclosed and US GAAP. Level 4 tagging requires each narrative GAAP disclosure to be separately tagged.

The US GAAP taxonomy contains thousands of elements specifically created to capture required narrative disclosures. The task of the accountant will be to match the accounting intent in the required disclosure to the correct element in the US GAAP taxonomy. If management’s accounting intent as represented by a particular disclosure within a footnote cannot be matched to an existing XBRL element, the company will have to create an extension to the taxonomy.

Here are the steps required for level 4 tagging:

1. Identify and tag each amount of all numerical disclosures (i.e., monetary value, percentage, and number). Multi-dimensional data often found in tables is tagged using the dimension capability of XBRL.

2. Identify and tag all narrative disclosures that are present in the note due to disclosure requirements in US GAAP or SEC regulations.

3. Block tag all remaining textual disclosures that are not driven by US GAAP requirements.

It’s likely that companies will want to extend the taxonomy to capture required disclosures that are not currently represented by elements in the US GAAP taxonomy. This need will be driven by the many different interpretations allowable under US GAAP that meet the test of complying with GAAP disclosure requirements. Accountants will make the judgment call concerning whether management’s accounting intent in the disclosure under XBRL review is correctly represented by an existing US GAAP taxonomy element or there is a need to create a new extension.

Bank of Hawaii Level 4

Let’s take a look at a portion of a footnote tagged to level 4 requirements for Bank of Hawaii.

Here is the table for Gross Gains and Losses from the Sales of Investment Securities as presented in the 10-K. The raw XBRL appears below the table:

Here is a pivot table created by the US GAAP taxonomy team at XBRL US to demonstrate how the above XBRL (tagged with dimensions) data could be displayed in Excel:

Level 4 Required Disclosures

The second type of level 4 tag is for required US GAAP disclosures. Here is an example of a required US GAAP disclosure embedded in the text of a note for Bank of Hawaii from a recent form 10-K:

Investment Securities

Investment securities are accounted for according to their purpose and holding period. Trading securities are those that are bought and held principally for the purpose of selling them in the near term. Trading securities, comprised primarily of mortgage-backed securities, are carried at fair value, with realized and unrealized gains and losses recorded in noninterest income. Held-to-maturity investment securities comprised of debt and mortgage-backed securities, that management has the positive intent and ability to hold to maturity are reported at amortized cost. Available-for-sale investment securities, comprised of debt and mortgage-backed securities are those that may not be held-to-maturity and are reported at fair value, with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income. The estimated fair value of a security is determined based on current market quotations. A decline in the fair value of investment securities that is considered other than temporary is recorded as a reduction in noninterest income. Realized gains and losses are recorded in noninterest income using the specific identification method. Interest and dividends on investment securities, including amortization of premiums and accretion of discounts, using the effective interest method over the period to maturity, are included in interest income.

The underlined text is a required US GAAP disclosure. The financial reporting accounting team will be able to identify the sections of text inside a note that are driven by US GAAP requirements and those that are not. It is likely that some companies will elect to separately tag each and every line of text as printed in the footnotes.

Looking at the US GAAP taxonomy, the following element was identified as a proper accounting fit with the above disclosure:

From the US GAAP taxonomy:

AvailableForSaleSecuritiesBasisForValuationOtherThanEquitySecurities

Once identified as the proper tag, the next step is to marry the appropriate text to the taxonomy element. The results (without HTML formatting tags) look like this:

The XBRL in the image would be added to the instance document submitted to the SEC to comply with level 4 requirements.

Summary

Block tagging simply takes the text and numerical displays from a note to a financial statement and adds a block text tag to the information. The resulting XBRL will be compliant with the SEC’s first year notes tagging requirements but will yield little or not additional information. Level 3 tagging, required in the second year of participation, places each table occurring in a Note into a separate element. Level 4 tagging, also required in the second year of participation in the new SEC program, requires detailed tagging of the notes including each amount (i.e., monetary value, percentage, and number) separately tagged and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged.

The financial reporting team will be called upon to not only tag each amount but to also extract from the language inside a note to provide required narrative disclosures driven by US GAAP. The first time this task is completed, the accounting team will need to be deeply involved in the XBRL creation. Only members of the team that created the disclosure will understand the intent of the item and therefore know how to properly match it to the US GAAP taxonomy.

Written by Bob Schneider     Posted on October 12, 2008

A few months ago, Toshinori Kobayashi of Japan’s Financial Services Agency contributed three posts (on May 5, June 6, and July 1) on the FSA’s implementation of XBRL for financial reporting. One thing that struck me about the XBRL adoption in Japan was that — unlike in the US, where SEC Chairman Chris Cox has been at the forefront of the implementation effort — there was no mention of any involvement by the Minister of the FSA. In email correspondence, Mr. Kobayashi confirmed that the role of the political leadership of the agency had indeed been quite limited through much of its development stage.

In Japan, XBRL adoption was treated simply as a technology decision that did not require much political muscle from the top. And as a technology decision, the logic for XBRL adoption is straightforward:

1. The financial reporting arm for a nation like Japan collects and manages an enormous amount of data.
2. To manage huge amounts of data, the IT world is moving toward the adoption of computer languages that structure data to give it context and meaning, and offer flexibility, extensibility, greatly enhanced search, and other advantages.
3. In the field of financial reporting, a huge investment in money, time, and energy has already been made in developing one such language, namely, XBRL.
4. Many countries — large and small, developing and advanced — are adopting XBRL, further strengthening the argument for implementation in those countries that have yet to do so.

However, as I mentioned, in the United States, Chairman Cox has expended much of his energy and political capital in championing interactive data. His assumption of the role of XBRL evangelist made me recall these thoughts of Walter Hamscher from our recent interview:

Consequently, it is a lot easier for some countries — the Netherlands has a thrifty culture, as does Japan — to look at something like XBRL and figure out pretty quickly that, yeah, this is good for everyone; it will be more efficient and therefore we will all benefit, so let’s do it. Now, I am not saying it is trouble-free and that everybody in these countries has jumped on the bandwagon right away. But, by contrast, in the United States, so many other things pile on to our considerations around business and government decisions, things that really have nothing to do with thrift or efficiency.

In this light, it’s not surprising that in the United States XBRL was viewed, not as a technology decision, but as a major policy initiative (with political overtones) that required a forceful voice at the top. The strong resistance and controversy that met Sarbanes-Oxley (SOX) — a wide-scale and multifaceted response to corporate malfeasance — was likely one factor that compelled the SEC to see that XBRL adoption might follow the same path.

The concern I have is that when XBRL is viewed as a major policy initiative with such high visibility by the agency’s top managers — rather than as a technology improvement implemented at lower management levels — expectations may be raised unreasonably high, especially at a time when there’s a desperate search for solutions to problems in financial markets. Given that surveys of financial professionals still show many have little knowledge of XBRL, I’m not sure it’s widely understood that XBRL financial statements are GAAP financial statements, with all their accompanying limitations. To the extent that GAAP accounting fails to provide sufficient clues about the true exposures and underlying weaknesses of financial institutions and corporations, putting GAAP statements into XBRL isn’t going to help matters.

Chairman Christopher Cox has been a strong friend of the XBRL community. We can only be thankful to Mr. Cox for the leadership he has displayed in championing interactive data and bringing an XBRL mandate close to reality. I only hope in doing so he hasn’t raised hopes too high of what XBRL can accomplish in the current reporting framework.

Written by Daniel Roberts     Posted on October 2, 2008

Daniel Roberts is the former Chairman, XBRL-US Steering Committee, and member of the AICPA and XBRL International working groups on assurance over XBRL. He is the former National Director of Assurance Innovation for a Global 6 accounting firm. Mr. Roberts can be reached by email.

This is the second installment of a two-part article; the first part was published last week.

Role of the Audit

What is the role and purpose of the audit?  Simply put, to provide an independent opinion on the financial statements as provided by a company.  Note that this includes both publicly-held and privately-held companies, as audits are performed on the financial statements of privately-held companies to be provided to their financial institutions.

The audit provides comfort to the regulator and investor that the financial statements, when taken as a whole (an important concept that we’ll come back to), provide a fair and accurate representation on the state of the business. Various regulators require audits of companies’ financial statements, and banking institutions require audited financial statements from their nonpublic clients.

To the reporting company, the audit itself is overhead of the purest type.  It is a cost of doing business that cannot be avoided, and with Sarbanes-Oxley, it can no longer be offset by financial benefits identified by the auditor while performing related or even unrelated engagements. This naturally creates conflict between the company purchasing audit services (and what they are willing to pay) and the extent of work that the auditor feels compelled to perform in order to provide the audit opinion.

The client wants to keep audit fees to an absolute minimum; however, they also want to ensure that adequate work was performed to enable them to sign their SOX declarations with confidence.  Let’s go to the courtroom.  The discomfited CFO is in the witness box:  “Can you please explain to the court why you thought it would be acceptable to only have assurance on the printable version of the accounts, but not on the version that is actually used by investors? What were you trying to hide?”

With this picture firmly in mind, while they will not want to see any increases in their audit fee, it is pretty clear that CFOs will either agree to inclusion of the XBRL in the audit scope or they will ask for the XBRL submissions to be included in the scope of the audit.  Clients and auditors will decide that there is too much risk in providing unaudited XBRL to the SEC, regardless of the SEC’s currently not requiring such an audit.

The SEC’s Game

The SEC does not want to state categorically that XBRL data is subject to a requirement for assurance. They have gone so far to as to recommend that the XBRL that is required to be provided by companies will actually be treated as “furnished,” as is currently the case with the Voluntary Filing Program (VFP).

The SEC’s Proposed Rule on interactive data (XBRL), page 63, states:

We expect that each filer would be in the best position to determine the appropriate manner in which to assure the accuracy of the interactive data it would be required to submit and the viewable interactive data that would result. We also expect that software providers and other private sector third parties would help develop procedures and tools to help in that regard. As an adjunct to those private sector efforts, we plan to make available to filers, on an optional basis, the opportunity to help assure accuracy by making a test submission with the Commission or using software we provide to create viewable interactive data.

Basically, the SEC is saying that it is up to the filer to determine the level of assurance that they require, thus being able to say to the markets that XBRL does not require assurance; therefore, the unknown expenses associated with an audit are not the responsibility of the SEC to estimate.

What Assurance Might Look Like

I don’t represent any accounting or auditing firm, but I did spend four years as an active member of the AICPA and XBRL International working groups on assurance and XBRL. Contributing to these discussions and the outputs of these two groups leads me to the following thoughts.

Auditors will include the XBRL instance documents that will be provided to the SEC as part of their audit scope.  They will, for the first year or two, struggle with the concept of materiality.  What is material in the XBRL world?  The mistagging of a piece of information might be material if it influences the analysis of reported information.

Companies should expect the auditor to begin by including the processes that exist to create the XBRL version of the financial statements (and footnotes) as part of the SOX 404 internal controls review.  This should be an insignificant addition to the overall audit.

With regard to the stability of the XBRL mapping, there is an assumption today that — once a company has created a template for tagging their financial statements (having mapped all financial statement line items to their respective XBRL elements) — there should be few changes to the tagging in future periods.  However, a company may choose to change their tagging; as such, a change of tagging between periods, while it may be perfectly accurate XBRL, may raise auditor flags, and therefore become “material.”

So, should the auditor look at every financial statement element and confirm the choice of XBRL taxonomy element? Well, if every line item on a financial statement was checked to source, this would impose a significant burden on the auditor and company.  Would any change to the default XBRL element labels to reflect the actual labels or line item titles used by the filer constitute a material change worthy of review? Will all changes to the presentation order or calculations be considered “material”?

There will be many different answers, and we should expect to see auditors determining how they will perform their sampling of which elements they will review in detail. As a rule of thumb, companies should expect that all company-specific extension elements will be treated as material, and the requirement for the extension will need to be documented by the company. Discussions within the various XBRL assurance working groups seemed to arrive at a consensus that where a company creates an extension element instead of using an existing taxonomy element that represents the same accounting principle, such extension elements would “cause a problem for the auditor” and may impact the auditor’s willingness to provide a clean opinion.

Auditing of XBRL will happen, and companies should take the opportunity presented by the lead-in time before XBRL is mandatory to ensure that their assurance provider is as ready as they will need to be.

So what should companies do? First, they should ask their auditors early in the process to explain exactly how they will be including XBRL in their audit, and the expected impact that this will have on overall audit cost and activity. Then, they should ensure that the auditor is able to clearly provide them with a list of all information that will be required to make the audit of the XBRL as smooth as possible. The only caveat is that the auditor cannot participate in any of the XBRL creation or tagging choices made by the company.

Auditing of XBRL will happen, and companies should take the opportunity presented by the lead-in time before XBRL is mandatory to ensure that their assurance provider is as ready as they will need to be.

Saeed Roohani is Professor of Accounting at Bryant University and one of the leading authorities on XBRL education. He is Program Chair of both the 9th Global XBRL Academic Competition and the 8th Bryant XBRL Conference to be held on October 13. The initial installment of our two-part interview was published as Part I; the second part appears below.

(8) In what ways does academic XBRL research affect the day-to-day activities of accounting practitioners, such as CFOs, comptrollers, and staff accountants? Or, to put it more bluntly, why should financial professionals in the field care about XBRL research?

Those of us who train individuals as accounting and financial professionals need to feel confident about what we teach and train, so we need to know to what extent XBRL will help companies, regulators, investors, and creditors. Research supplies the evidence to support those assertions.  In that respect, financial professionals have a vested interest in knowing the extent to which XBRL is useful and other possible benefits of XBRL reporting.

True, it is sometimes hard to match exactly XBRL academic research with the everyday activities of an accounting practitioner. But it would be a mistake for CFOs and comptrollers not to be interested in XBRL research. At a minimum, research is an independent assessment of what goes in the real world..

(9) One of your particular research interests is continuous auditing. What role can  XBRL serve in implementing continuous auditing? Does XBRL have specific qualities that make it peculiarly suited for continuous auditing needs?

One major reason I got involved in continuous auditing (CA) was to clarify that existing CA models and approaches presented in the literature would face major challenges if applied in the context of the independent audit of financial statements.

There’s two main reasons for that. First, you cannot really be independent if you as an auditor stay with the client on a continuous basis.  Also, you would have to create an audit module and install it in a client’s computer system, and this is prohibited under Sarbanes-Oxley.

It is now established that CA is best suited for internal auditing, as opposed to external auditing.  XBRL GL is mainly focused on internal reporting and auditing.  Also, XML facilitates the communication of disparate systems within a company where the only solution used to be implementing a new ERP system.  With disparate systems, internal auditors have to audit input and output of each system separately, and make the reconciliation. So XBRL is peculiarly suited for internal CA needs because all systems today can communicate in XML, and thus XBRL.

(10) What impact do you think the adoption of an integrated approach (as opposed to a bolt-on approach) for implementing XBRL will have on a company’s system of internal control? 

Internal controls deal with business rules and internal operations of an entity, and companies are required by law to have adequate internal controls in place. If I understand the question correctly, the integrated approach is more suitable to meeting objectives of internal controls, because such controls and their intensity vary from organization to organization and from industry to industry.

(11) What effect do you believe an XBRL mandate will have on US capital markets?  Do you believe it will help smaller companies gain valuable exposure and help reduce their cost of capital? Or do you think the impact will be slight?

Like anything new, the initial impact will be huge and worldwide.  However, it is not an event to which one may want to measure stock market reaction. One major argument for XBRL reporting is that we will have more transparency, and more transparency allows investors to reward (i.e., buy the stocks of) companies that are willing to share timely and reliable information.  XBRL provides a digital and real time information communication mechanism to the investing community; but the company’s CFO still decides what to disclose and to what extent to be transparent.

It is important to recognize that XBRL does not force CFOs to disclose more than what they want.  On the other hand, experience suggests that investors punish companies that are not transparent and have weak corporate governance.

I think smaller companies eager to grow stand to gain more from adopting XBRL because they have to get on the radar of analysts, who will be using XBRL for comparing performance indicators.  Also, even a small company may want to operate at a global level, and most exchanges and regulators around the world are now looking toward XBRL reporting.

(12) You’ve been involved with XBRL almost since its inception. As you look back over the past ten years or so, has anything surprised you, for example, in the course of its development or the pace of its adoption?

Yes, it took us a bit longer than expected. But now that we have a better and robust business reporting standard, perhaps we have secured future success.  In terms of organization and the human factor, XBRL has moved from being mostly a volunteer-based community to mostly a consultant-based community.  For example, at earlier conferences we had dinners at local restaurants with everybody knowing each other and having cozy chats. XBRL conferences are now so big that dinners are often in big ballrooms!  I miss the old times!

Written by Daniel Roberts     Posted on September 24, 2008

Daniel Roberts is the former Chairman, XBRL-US Steering Committee, and member of the AICPA and XBRL International working groups on assurance over XBRL. He is the former National Director of Assurance Innovation for a Global Six accounting firm. Mr. Roberts can be reached by email.

This is the first installment of his two-part article on XBRL and the assurance function; the second half will be published next week.

Background

About two years ago, the CFO of a large firm told me that his company would not participate in the SEC’s XBRL Voluntary Filing Program (VFP) until he had assurance regarding the XBRL that his firm would provide to the SEC.  He knew that the SEC did not require assurance, and that the XBRL would be “furnished not filed.” Nonetheless, he would not publicly participate until he knew that his financial reports in XBRL would not contain any errors.

He did this by having his staff perform their own assurance engagement based on the guidance provided by the PCAOB in 2005. When I asked him why, he said “It’s not the SEC that requires the assurance; I require the assurance”.

Earlier this year, the SEC released a Proposed Rule recommending a timetable for the adoption of XBRL for reporting by SEC registrants.  Notably missing from the recommendations is the requirement for reports provided in this new format to be audited or reviewed as is required for current SEC filings.

Participants in the SEC’s existing VFP are not required to have any assurance provided over their VFP filings. At the Interactive Data Roundtable on March 19, 2007, Chairman Cox said that to require assurance over these filings would be “crib death” for the voluntary program, and potentially for the XBRL initiative (see page 59 of the transcript).

Still smarting from their terrible underestimate of the costs that Sarbanes-Oxley (SOX) would impose on businesses, the SEC has taken every opportunity to emphasize the low cost of XBRL implementation.  The shock of SOX assurance costs, and the fact that such costs for XBRL are such an unknown, have probably been the major reasons for the SEC to avoid the subject of assurance over XBRL.

At the same time, primarily from a lack of a deep understanding of XBRL by their professional standards groups and what I’ll call “standards overload,” the accounting industry also has not developed guidance on how to provide assurance over XBRL.

This lack of clarity has resulted in a lack of guidance for industry as a whole, and it is leading some people to state that assurance over XBRL filings will not be required, that auditing firms will not want to provide that assurance, or that filing companies will be unwilling to request or pay for such assurance.

For regulators and investors, the XBRL “version” of the financial statements will most likely become the primary version, or at least the version that investors will rely on.  As a result, a failure to provide an audit opinion on the version of the financial statements that are used as primary statements by the investor community would certainly undermine the very assumption that there is a need for an audit in the first place.

Auditor Conservatism

Auditors by nature are a conservative, cautious bunch.  Not only are they trained to be, but their standards specifically state that they are required to be. When companies fail, shareholders, clients, and creditors frequently go looking for the deepest pockets…and that includes the auditors. All firms carry significant reserves for potential legal costs, knowing that any claim, even if not supported by a court, can still result in millions of dollars in costs to the firm.

And — of course — there is the still-fresh memory of the collapse of Andersen, one of their peers.  All the major firms are now homes to large numbers of former Andersen partners and staff; to these individuals, caution and risk are both real, and have had a painful impact on them.

The best way to minimize the risk of a lawsuit is to ensure that the auditor has traced all financial statement figures all the way back to source transactions.  Needless to say this is not possible, and therefore the concept of “materiality” comes into play.  All “material” financial statement figures will be confirmed to a level of granularity where the auditor can have some confidence that the figures are accurate.

When considering the work to be performed by the auditor, there is a natural desire, from the perspective of minimizing their risk, to expand the scope of audit work to cover as much potential risk as possible.

XBRL as a New Risk

New technology brings new risks. If there is anything that is certain, it is that the introduction of XBRL, a new reporting technology that today is rather poorly understood by either the auditor or the filer, will be viewed as an area of significant potential additional risk. Auditing standards professionals in the accounting and auditing firms will understand the risk (or at least understand the uncertainty associated with new technologies applied to financial reporting.)

When XBRL becomes mandatory, the auditor that says “Okay, we’ll only audit the HTML version of the financial statements” will be taking on a huge level of risk.  As a result, we should expect the professional standards and risk management functions within the auditing firms will insist on auditing the XBRL as well, or they will refuse to provide an opinion on the rest of the financial statements in any other format.

It’s a smarter position.  Picture a future courtroom.  On the stand is the audit partner who signed off on the opinion.  “Can you please tell the court why you chose not to audit the information that your own literature has been saying for years will be the information that will actually be used by the investor to make investment decisions?”  I doubt that is a question that any audit partner will want to have to answer.

It stands to reason we should expect auditors will take the most cautious approach when presented with the question of whether to audit the XBRL or not to audit the XBRL.

Written by David vun Kannon     Posted on September 17, 2008

David vun Kannon was one of the first Co-Chairs of the XBRL Specification Working Group and has been an Editor of every version of the XBRL Specification. He is a Director for PricewaterhouseCoopers, LLP.

These are exciting times in the XBRL community. We can see uses of XBRL growing around the world, more companies becoming involved, and more being written about XBRL.

But instead of shouting “I’m king of the world!,” I think now would be a great time for a little reality check.

There are some odd traditions in the computer science field. One of them is reusing titles of well known papers and books. One of the classic papers that pushed us along the road to better coding practices was titled “GOTO Considered Harmful” (not a caution against any Japanese person named Goto, but against so-called spaghetti code). Another classic title is “What Computers Can’t Do,” which attacked the symbol-manipulating tradition in Artificial Intelligence.

Now, the title “What XBRL Can’t Do” is cool in a geeky kind of way, but what I’d like to talk about is more like “What XBRL Isn’t Even Interested In Doing, and Doesn’t Try.”

The B and the R of XBRL really define its scope, and it is important to realize that XBRL has a scope, and that the scope is not infinite. B is for Business — this drives the existence of the fact context. For every fact in an XBRL instance there is an entity, a time period, and a scenario for which that fact is true. XBRL is terrible for representing abstract math. 2+2=4 requires no entity, period, or scenario. So MathML is safe from encroachment by XBRL.

The R stands for Reporting. XBRL is not about transactions. OK, so what is reporting and what is a transaction? Here is a simple heuristic. Take whatever it is that you are trying to use XBRL for, and write it out as a sentence:

“The assets of Mumble, LLC on Dec 31, 2005, were $7.”
“On Dec 31, 2008, Mumble, LLC calls the outstanding 7 3/4 bonds of 2015.”

The first example uses a stative verb — it is reporting a fact.
The second example uses an active verb — it is a transaction. If I changed “calls” to “buys” the transaction would change from a corporate action to a more familiar market operation, but it would still be a transaction.

So there are a large number of transactional XML languages — FpML, EBXML, etc. — that are safe from encroachment from XBRL

I hope no one thinks I want to restrict XBRL to just financial reporting. I don’t. There are lots of other kinds of reporting that I think are important — internal controls, corporate social responsibility, and health care are examples. XBRL could be applied fruitfully in all of these areas, because they are valid examples of reporting.

Also, reporting frequently shows up inside transactions as part of an object description. So there is a place for XBRL as a part of a transactional system if the application needs a very capable description format. Using XBRL when the object descriptions are fixed would be overkill.

There is still a lot of “low hanging fruit” in the areas of reporting and metadata management. Enough that we don’t have to go picking someone else’s cherries!

Written by Gary Purnhagen     Posted on September 12, 2008

Gary Purnhagen has more than 20 years’ experience in helping firms in diverse industries meet document processing challenges, including SEC disclosure. His engagements have included responding to the SEC’s EDGAR program, use of the Internet and other digital media for information dissemination, and most recently XBRL. He is an independent consultant assisting firms in embracing innovation and responding to the SEC’s pending mandate of XBRL.

I’ve been reading with interest the various takes on the SEC’s press conference introducing IDEA last month. They generally range from “ho-hum” to “there isn’t much substance,” and that EDGAR will be around for some time. EDGAR will be around for a while, just like travel agents are still around. I don’t use them anymore, but I’m sure others do. I like the value and convenience of Travelocity or Orbitz. They provide me with a better model than visiting or calling a travel agent. And I suspect that IDEA will in fact be a far better model than EDGAR is for most consumers of disclosure information.

I cannot deny that the timing of the press conference coincided with the end of the formal comment period for the SEC proposed rule for mandating XBRL. And this announcement certainly had a PR component. Nevertheless, my take is that the SEC is assuming that disclosure information will be tagged with XBRL and is planning on taking advantage of how this enabling technology can change the model of disclosure.

Up until the unveiling of IDEA, I viewed XBRL as the full realization of EDGAR. With EDGAR we had the Electronic Data Gathering and Retrieval but no Analysis. XBRL alone will give us the ability to automate analysis but EDGAR is based within the context of disclosure via documents; access to the information would still have been awkward. To the SEC’s credit, they are moving far beyond the old model to a platform that will allow new ways of interacting with the information as we wish and have yet to envision. IDEA puts XBRL into a larger context and the committee that Professor William Lutz is heading up, 21st Century Disclosure Initiative, will give us the direction for IDEA.

Dr. Lutz has stated that his group is starting with a blank page and asking the questions of what information do we want, how do we want it, and how should the SEC provide it. This is innovation at its finest. It is taking advantage of new technology to not just mimic the old way of doing things with some improvements, but rather realizing the full power of XBRL as an enabling technology and imagining how it can improve how we work with this information. All of this helps to further the argument for the rulemaking for XBRL.

IDEA also makes economic sense. The SEC is spending $48 million on the current EDGAR system contract. Much of the data that is gathered, stored, and retrieved is useless information. IDEA will streamline the data mining that takes place and the applications that will be created will have easier interfaces for small investors.

I began this article by mentioning most writers were skeptical of the whole IDEA concept. One observer who I think not only got it right but has been providing us with glimpses on where IDEA and XBRL will take us is John Turner of CoreFiling. You can read his articles on the topic at his Insight blog.

Written by Neal Hannon     Posted on September 9, 2008

Neal Hannon is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF).  Active in the XBRL community since 2000, he served on the first XBRL US steering committee and has written over 60 articles on XBRL. You can contact him by email.

An initial review of the public responses from large company preparers to the SEC’s proposed rule on interactive data indicates a hint of fear surrounding the detailed or deep tagging of notes to the financial statements.  The current proposed rule calls for “block” tagging in year one.  However, in year two the SEC is asking companies to provide detailed tagging for the notes to financial statements.

Here’s the relevant text from the proposed rule:

We are therefore proposing that the footnote disclosures in the traditional format filing be the same as in the interactive data format. This would be accomplished by tagging the footnotes using four different levels of detail:

(i) each complete footnote tagged as a single block of text;
(ii) each significant accounting policy within the significant accounting policies footnote tagged as a single block of text;
(iii) each table within each footnote tagged as a separate block of text; and
(iv) within each footnote, each amount (i.e., monetary value, percentage, and number) separately tagged and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged.

At Level IV, which is applicable to all companies after their initial year of block tagging, the proposed rule requires companies to deeply tag every footnote.  Within each note, any monetary value, percentage, or number will need to have an XBRL tag applied.

Additionally, whenever authoritative GAAP literature or Commission regulations require a company to disclose something, that item will need to be separately tagged.  If the company is following IFRS, as issued by the IASB, those disclosures will also need to be tagged.  Companies may also want to expose additional information contained in detailed footnotes that go above and beyond US GAAP requirements.

So going deep into tagging means preparing an XBRL tag for:

1. Each and every number, monetary value, percentage, etc. normally contained within a footnote;
2. All GAAP required disclosures; and
3. Company-specific disclosures that go beyond GAAP requirements

XBRL US has several examples of Level IV tagging. The notes for the 3M Company and Bank of Hawaii are particularly useful in demonstrating Level IV tagging.

The Problem with Going Deep

To get an idea of the perceived magnitude of the problem, here are a few selected quotes from the comments in response to the proposed rule:

(a) “We believe that the detailed footnote tagging requirement will require an order-of-magnitude increase in the effort required to comply with this aspect of the proposed rule.”

(b) “If the Proposed Rule is adopted, a permanent, not a temporary, exception for detailed tagging of financial statement footnotes should be allowed due to the volume of information in the footnotes, the complexity of the information, and the required time it would take to properly tag that information.”

(c) “In addition, each amount (i.e., monetary value, percentage, and number) within each footnote would be required to be separately tagged (level (iv)). At this proposed level of detail, we estimate that approximately 5,400 data elements would be required to be tagged in the Annual Report on Form 10-K for FirstEnergy and its registrant subsidiaries when the proposed rule takes full effect.”

(d) “When the rule takes full effect under the current proposal, we estimate that Southern Company and its five subsidiary registrants would be required to tag approximately 6,800 data elements on the Form 10-K, many of which are company-specific items requiring taxonomy extensions.”

(e) “The company has observed from its VFP participation that the most detailed level of tagging results in a high number of company-specific extensions and the need to create a large extended taxonomy file along with related linkbase files. A number of footnote disclosures (i.e. Share-Based Payments, Postemployment Benefits, Business Combinations and Segment Reporting), often containing multi-dimensional tables, lend themselves to a higher degree of company customization.”

(f) “However, we observed from our experience in the VFP with detail tagging of footnotes, that the SEC’s 100 hour estimate to detail tag the first filing in year two could be understated by as much as three to four times. Selected disclosures (multi-dimensional in nature) require significant effort in creating custom extended link roles and related presentation, calculation and definition linkbases.”

(g) “We estimate that performing detailed footnote tagging of our annual financial statements as authored in the Proposed Rule would result in approximately 2,500 tagged elements compared to approximately 500 tags required to meet the year one requirements.”

Clearly, there is plenty of angst when it comes to Level IV tagging.  The activity may take huge amounts of coordination between legal teams, accounting experts, and preparers of financial statements, all taking place during the time-constrained closing process. The question we need to examine is, What is the best way for a company to comply with Level IV tagging?

Completing the Deep Route

As a new US professional football season gets under way, many teams are concerned with the threat of the deep pass.  What is the best defense?  When it comes to deep tagging, a good compliance approach will work as well as any NFL defense coordinator’s game plan.

Here’s where to start. First and foremost, to successfully carry out deep tagging will require an accounting team with skills in XBRL tagging, accounting know-how, and plenty of collaboration with the legal department as well as both the internal and external auditors.  If a team starts with an XBRL software tool that permits the tagging to be accomplished as a normal part of the closing process, the entire effort will be significantly reduced.  Remember, getting the tagging right is a matter of properly matching management’s acco