Review the Future

It’s been a while – the XBRL world is hectic at present, to say the least. This post first appeared a week ago on the Hitachi Blog, run by Bob Schneider and Wilson So (a must read if you are not already subscribed). I’m concerned about the assurance framework for XBRL at the moment, and that’s what this post is all about. You can read more about the topic in a downloadable whitepaper, titled Assurance Considerations for Interactive Data.

Fresh back from the latest international XBRL conference in Vancouver, I think the writing is on the wall. The SEC’s Voluntary Filing Program (VFP), the sandbox that lets registrants furnish their quarterly and annual financial statements in XBRL format in a low risk, low pressure environment to the EDGAR system, is going to close down. Why? Because it is going to be replaced, with mandatory XBRL filings for large corporations toward the end of 2008 or early 2009. All other registrants will follow before long.  The immediate message that all SEC registrants should take away is that now is the right time to participate in the VFP: while it’s still available, still low risk, still low pressure.

Mandatory XBRL filings will undoubtedly involve (no doubt with a short transition) explicit or implied assertions about the accuracy and utility of the financial information contained in them. 

That’s why it is important that financial executives, regulators, and auditors alike work together to determine how XBRL documents can be independently reviewed.

The SEC’s efforts are creating a domino effect, with securities regulators around the world either monitoring what is happening or implementing their own programs. Increasingly, policymakers are seeing this development as a question of national competitiveness. For an admirable analysis of this phenomenon, read the keynote speech made to the conference by Peter Wallison, who serves on the Pozen Committee of the SEC.

Japan’s Financial Services Agency is moving to mandatory XBRL-based disclosures, including the equivalent of earnings releases (made through the Tokyo Stock Exchange) for all listed companies as early as April 2008. One-quarter of Japanese companies are participating in a pilot program – that’s fully 1,000 listed companies.

Contrast this with the few dozen companies, or less than 1% of EDGAR filers, that have participated in the SEC’s VFP program so far. Perhaps the VFP will become substantially more popular at the point that it is crystal clear mandatory filing is on the way, but at present it looks as though the US market is letting slip a great opportunity to get comfortable with this technology. Let me repeat: It’s not too late! Sign up now.

It won’t be very long before it is those documents – the bar-coded financial disclosures – that will be the primary materials consumed by financial market systems to help analysts and investors make decisions about the best way to invest. This is vastly more sophisticated than today’s processes that rely on slow and inaccurate re-keying of a subset of the financial information published by companies.

Is the American market ready? Well, the framework is not far away. Thanks to a Herculean effort by XBRL-US, the new US GAAP taxonomies have just been completed in draft. Public review of these taxonomies is well under way. The software situation is beginning to shake out. The education process for CFOs and IROs has a long way to go, but it is accelerating quickly.

However, there is one area that still really seems to need a kick along: audit and assurance.

While there are a number of committees working on this issue within the audit profession, and the regulators are examining the issues actively, this is an area that needs rapid attention from preparers as well as the broader audit profession. Not just in the US (in fact, all the action is currently stateside) but internationally as well.

First, there needs to be acceptance of something fundamental: XBRL disclosure will require (a small amount of) additional review, above and beyond today’s audit. Suggesting that this step is unnecessary would be a serious disservice to the investing public as well as the professional financial markets. Publishing information in XBRL is more complicated than transforming an existing report into PDF or HTML. It isn’t like today’s EDGARising of existing reports into a specific layout. It involves management making decisions about which "tags" they need to use for which concepts. It is like having a supermarket of goods without bar codes that need to be labelled correctly.

You need to put the bar code for Heinz tomato soup on the Heinz tomato soup can, not the (similar-looking) Heinz potato soup can. Just as in the grocery store, once you’ve selected your bar codes the first time around, the process becomes much easier next time. And, as you’ve guessed, if you can get the manufacturer (in this case, the consolidation or ERP system) to put the bar codes on at source, everything becomes easier again. Whichever way the bar codes are applied, the information that has been marked up this way gains hugely important utility and gives rise to a wide range of efficiencies. Investors are going to rely on these tagging decisions, so they need to be reviewed by someone independent.

To be clear, this isn’t a huge area. There have been a few suggestions from frankly rather badly informed pundits that XBRL assurance will amount to another Sarbanes-Oxley. That is probably a bit mischievous.

What’s really involved? Auditors (and investors) are concerned with identifying areas of risk that might introduce material misstatements into financial statements as a whole. XBRL introduces a small number of new types of risk. First, there is a pretty wide range of basically technical issues that need to be tested. Examples include determining whether the correct date and the correct currency have been associated with concepts being disclosed. Most of these tests can be automated, in part or in full.

While management no doubt can run through these kinds of tests, it would be best if an independent expert also conducted these reviews.

More substantively, there are a number of areas that require professional judgement from an independent expert. These relate to decisions about the manner in which financial statements are marked up, or tagged. Since XBRL encourages companies to create extension taxonomies (i.e., customized definitions about financial concepts being disclosed by particular companies), this is not quite the same as choosing between bar codes of tomato and potato soup. But the analogy is not a bad one. Specific areas that require professional judgment include:

  • Determining whether a company has chosen the correct tag to mark up a specific disclosure.
  • Determining whether a company has correctly decided to extend a taxonomy with a custom definition.
  • Deciding whether a company has associated the right values with its chosen tags.

(As mentioned in the introduction, a lot more detail, some examples, and some tentative recommendations can be found in the white paper I’ve prepared on this topic.)

So what needs to be done? The business community needs to accept that a small incremental piece of audit work is part of interactive data. It is likely to involve some small additional costs at the outset which should be more than offset by a range of savings in the short term.

The "assurance supply chain" community (i.e., the audit profession, its regulators, and its clients) need to identify the tests that should be applied to draft XBRL versions of financial statements. Work needs to be done with securities regulators as well as software vendors to make sure that anything that can be fully automated is automated. And the audit profession and its regulators need to agree on an audit or assurance standard that will govern this kind of work. Most important, auditors then need to be educated in the new procedures. If this education process is not in full swing by the summer of 2008, the "assurance supply chain" might have failed the investors and analysts that it serves.

XBRL Formula: Start Your Engines

It’s a hard road, taking standards forward, but also a rewarding and ultimately positive one. This is a call for your help. The XBRL Formula Working Group has been working hard on a tightly related set of specifications that allow for the definition and creation of facts (numerical or Boolean) using XBRL instance (data) documents as input. The Public Working Draft (PWD) is now out and it needs input from engineers and technical architects with a firm grounding in XML Schema, XPath and XLink. The rewards? Kudos, good karma and (ok, this is a stretch but you never know) possibly undying adulation from a grateful world.

Formula is a pretty obvious add-on module for XBRL: creating analytics and imposing sophisticated validation constraints, with a full set of mathematical functions at your disposal to produce exactly what is needed. There have been proprietary efforts to use XBRL in this way and now, learning from those implementations, the consortium is seeking to define a standardised approach.

Who will use it? Regulators, banks and others collecting large amounts of financial and performance information will use it to impose complex validation rules to both improve the quality of data that arrives and automate the promulgation of those rules so that they can be executed in a distributed manner.

Professional analysts, broker/dealers, hedge and mutual funds as well as a wide range of financial infomediaries will use the formula specification to define proprietary analytics that can be used to add value to raw performance information.

What needs to be done? Well, the specifications themselves need a thorough review. There is a range of functions that need to be written. The largest chunk of work involves creating a conformance suite of tests that can be executed by software that support the specs. Obviously it will work best if the volunteers creating the conformance suite are also creating conforming software. And even better if the volunteers doing that work are not the same people that wrote the specifications in the first place. Practical, sometimes tough work. Need a way to convince management that it’s a worthwhile use of your time? Proven time and time again to be the very best way to learn XBRL at a deeply technical level.

Fall into any of those categories set out above? Pitch in please! Member of the XBRL consortium and either haven’t contributed to a working group yet or tend to do your analysis in-house? Step up to the plate! Software vendor that plans to support this stuff in your products? No excuses: Now’s the time. Join in!

Please make Tony Fragnito very welcome

It’s a very real pleasure to welcome Tony Fragnito to the XBRL consortium. Tony started in his new role as CEO on Monday, although he attended the international conference last month where he was introduced to the deep end of the pool. Tony brings a formidable set of skills and terrific experience in managing associations. His initial statements about priorities and improvements to the professional capabilities of XBRL International are a breath of fresh air.

Beer from Munich

A month has passed since the Munich XBRL conference and for some reason the slides have not yet been posted. I’ve had a few requests for my talks, so here they are.

Michael Ohata and I gave a joint talk about XBRL International, with my section on the background to and current priorities of the Standards Board. I’m going to write some more about that elsewhere in the near future, but for the moment, here are the slides (PDF).The bottom line is that while we have a terrific community, we still need more volunteer experts who are responsible for XBRL technology inside their own shops, simultaneously working inside the consortium to help improve the level of testing and review that is conducted on modules that cover requirements such as versioning, formula and rendering.

Ralf Frank (who is the very articulate MD of the DVFA) and I co-chaired a day and a half long session on External Reporting. The track brought together professionals that work with business reports from a number of perspectives (exchanges, analysts, infomediaries, credit ratings agencies and the audit profession). I spoke about managing expectations in an XBRL-enabled world. Today the first thing that investors see (and that the entire process is geared around) is EPS. The day you get an entire earnings release marked up in XBRL you can do a lot more analysis than has ever been possible in the past. Sorry about the lack of beer – but I got your attention, didn’t I? Drop me a line if you want to discuss, disagree, or explore.

See you in Munich!

Speaking of Germany, I’ll be back there in a couple of weeks… will you? Have you registered for the 15th XBRL International Conference? I’m involved in the External Reporting track running over Tuesday afternoon and Wednesday (5-6 June). Lots of good speakers, a great panel session and real focus on the challenges and opportunities created for today’s external reporting professionals. Hope to see you there.

Oh yes — and some very cool stuff from CoreFiling.

MicroXBRL anyone?

You might be interested in looking at, or contributing to, our MicroXBRL wiki.

There have been discussions about rendering around the XBRL consortium for many years and now, inside the consortium, there is an effort to capture them. The problem, from our perspective, is that accountants and report preparers need to be able to make their reports look exactly the way *they* want them to. Providing an XBRL data file together with a file containing a range of rendering metadata isn’t terribly attractive either to the preparer, or to the software vendors that have to support them. So instead, drawing on the ideas of the folk over at Microformats.org as well as the SVG
group (including Jonathan Watt) we are experimenting with a much more direct approach. Publishing XHTML files that render the report the way the user wants, and embedding XBRL tags right inside those files. It’s simple. It meets the major user requirements. It can probably be extended to allow fancier requirements to be met as well. Your input is welcome!

Analysis for Fun and Profit

On Tuesday, Chairman Cox announced an early release of some open source
software that allows you to analyse information that has been filed with the
SEC in XBRL format. It’s a web based demonstration environment, available here.

So, this is an interesting start. It’s a hint at some of the power that is
available when analysing XBRL information. It highlights some of the things
that still need to be done to improve the framework for filing XBRL with the
Commission (or indeed, any regulator). I think it also provides a bit of a
wake-up call to the consortium about the so-called "rendering"
problem.

Some of the obvious issues include:

  • Requiring meaningful labels for logical groupings of concepts. In the XBRL
    specification we call these "extended link roles". At CoreFiling we
    call them "Groups" because the other name is not very helpful.

  • Enforcing a single entity identifier.

  • Determining and enforcing a single versioning/taxonomy life cycle strategy so
    that it’s easy to construct a time series across multiple filings by the same
    company.

  • Imposing an “order” constraint on disclosure segments and contexts, and equally
    important, imposing a consistent framework for segment identifiers, for
    individual filers, across time.

Marc van Hilvoorde is leading a working group that is coming to grips with some
of the issues to do with rendering. Rendering is a really tricky area. At one
level, accountants that prepare financial disclosures need them to look exactly
"so". Developing a specification that can provide really precise
rendering descriptions could take quite some time be impossible. Those
consuming the data, on the other hand, are really just looking for a broad
brush approach, that will help set out tables and headings etc., so that the data can be easily conveyed to the user. It is this latter area that Marc’s
group is going to be thinking about.

I gather that that there will be another, independently developed analysis
tool, that will also be open source, that the Commission’s contractors are
still working on. Cool! Bring it on. Oh! One other point. I believe the data in
this current trial is being batched up overnight. Fair enough, it is early
days. One reason for that is that the SEC’s RSS feed is only updated every
night. What about sorting that out, guys? Once it’s been filed, it should be
available… shouldn’t it?

Welcome, Mark Bolgiano

A very welcome face at the conference was Mark Bolgiano, the new XBRL-US
Executive Director. In the unlikely event that we didn’t scare him away with
the proverbial information fire hose, he will be starting on 11 December. Seems
like a very capable guy coming into the middle of the XBRL-US group at a
crucial time.

Thank-you Kurt

This week marks the last few days of Kurt Ramin’s role as chairman of XBRL International. An awful lot has happened over the last couple of years. Thank-you Kurt for all of the effort that you have put in, especially in relation to the development of the IFRS taxonomies and the explosion of interest in the standard across a phenomenal number of countries. Very much helped along by your dedication – not to mention a truly ludicrous travel schedule. But don’t go away… there might be some truth to the suggestion that we all want you to keep on biking flying.

Welcome, Michael Ohata, to the helm. I’m looking forward to the next year or two: I’m sure it will be tremendous.

Wanna grok XBRL?

I’ve got my XBRL consortium hat firmly on here.

I know we are starting to get the attention of the technical community when W3C folk like Dan Connolly start posting del.icio.us comments like this one:

XBRL specifications

nice use of URIs… their schemas resolve, they have good persistence policies in their schemas. nice looking test suites. Looks like quality work. Hmm… their use of taxonomies goes beyond XML Schema and uses XLink; I wonder if it maps nicely to RDF/OWL

Thanks Dan! There will be a lot of people that have worked really hard over a number of years glad to hear you say it. And these posts here and here from Tim Bray, really help the cause.

But like Tim says, XBRL is not exactly the simplest thing to get your hands around. We set out to capture the semantics of business reporting. Not a subset of it, and that means that 80/20 has never really worked for us. We didn’t think that investors or corporations would be very grateful if we had said “XBRL lets you instantly, accurately and unambiguously define and disseminate some of what you want to disclose to the market.” So the specification turned out to be a bit bigger than anyone would really have liked.

Furthermore, real users working in real projects, from Korea to Spain, to the UK, Canada and the US want more! Like versioning, formula, functions and (gulp) rendering. So, in April the International Steering Committee announced the creation of the XBRL Standards Board, charged with improving the quality, consistency and stability of XBRL International IP. XBRL’s technical product has always had some formal guidelines to help things along, but now that the standard is in such extensive use, it’s far more important that we consult at each step, take account of what the market has developed independently and really focus on how easy the work is to implement.

So right now, inside the consortium’s mailing lists, we are consulting on a technical roadmap, a brand new, shiny set of policies and procedures (modelled on what we thought were the best bits of OASIS and W3C practices) and are calling for participation in a number of brand new working groups.

Not a member? Join! It doesn’t matter where you are, your contribution can make a difference.

Work at one of the 480 organisations that are already members and want to get stuck in? Great!

Either way, sign-up for one or more of the Working Groups. There is no better way to really understand a standard than to be part of its development (even if you are just lurking in the background). While the XBRL 2.1 specification is stable, these new work products (like formula, functions and versioning) are all new (optional but very useful) modules to XBRL. You can get involved from the ground up. And learn about the base specification while you go along. See you soon in a working group conference call! Or come along to Philly!