XBRL in the United States is currently most visible in regulatory reporting to the SEC. Many organizations have assigned the responsibility for XBRL to the financial reporting department, but is that the only area that should be involved? Is there a role for internal auditors in complying with SEC XBRL requirements and utilizing XBRL to gain internal reporting efficiencies? Let’s explore the internal auditor’s potential role in XBRL.
The management of an organization is responsible for ensuring that accurate and complete financial statements are produced. In this context, management is also responsible for XBRL formatted financial statement accuracy and completeness. The internal auditor can play an important role in providing some oversight to the XBRL financial statement preparation process including:
- Providing comfort that internal controls over the XBRL process are adequate
- Validating that business and financial data is tagged to appropriate US GAAP Taxonomy elements
- Confirming that XBRL rendered financial statements are proper and agree with printed financial statements
- Verifying that the SEC’s XBRL filing requirements are met
There are also many opportunities for internal auditors when an organization tags the US GAAP Taxonomy deeply into its business and financial systems. Imaging that an organization tags XBRL into its ERP at the general ledger account and cost center level. Those XBRL tags could be utilized to feed financial data to a variety of systems such as consolidation and financial reporting software, tax software and regulatory reporting software. In addition, internal auditors could utilize the XBRL data tags to:
- Move from statistical sampling of financial information to performing 100% testing by utilizing Excel, Access or similar desktop software.
- Eliminate or reduce manual intervention and provide strengthened ability to centralize controls, processes and performance standards thereby reducing risk
- Providing reliable, consistent and electronically available information that allows internal audit to develop standardized, shareable and electronically executable internal audit programs.
- Increase the ability to enforce controls and provide analytics that can be persistently shared for communication and collaboration with internal and external stakeholders, including external auditors
Have you limited the potential of XBRL in your organization? Is accounting and finance the only function involved in your XBRL process? Consider the longer term impact and benefit of XBRL. Now could be the time for you to involve your internal audit, information technology and tax functions to maximize the benefits of XBRL within your organization.
The FASB Codification and XBRL are now conjoined within the Codification website. The FASB says that some XBRL elements are now electronically linked into the Codification. The Codification now provides a list of the XBRL links to the paragraphs in the Codification. For an example see ASC-840-10-75. The FASB’s Notice to Constituents provides further details about the references to XBRL imbedded within the Codification.
“The new XBRL functionality provided by the Codification website will help entities as they prepare or plan to prepare XBRL financial statements using the U.S. Financial Reporting Taxonomy,” states FASB Chairman Robert Herz. “Users will be able to very easily identify the XBRL elements associated with specific Codification paragraphs.”
XBRL US announced previously that it had released two XBRL taxonomies that link to the Codification to assist users as they verify that they have reported their transactions according to current US GAAP pursuant to the FASB Codification
XBRL will improve transparent reporting and processing as companies begin to tag corporate actions such as mergers, reorganizations, and similar transactions. The additional tagging is being sought by XBRL US, the Depository Trust and Clearing Corporation and the Society for Worldwide Interbank Financial Telecommunication. The groups suggest that standardizing corporate action reporting using XBRL would reduce the risk of errors, and improve transparency and speed the reporting these transactions.
XBRL US, DTCC and SWIFT are collaborating to develop a taxonomy of terms based on the ISO 20022 elements that companies can use to “tag” those transactions so important pieces of information can be identified to enable communication interoperability between financial institutions, their market infrastructures and their end-user communities. XBRL US is expected to release the new taxonomy in 2010 for public review prior to use.
Currently, issuers distribute information on corporate actions to numerous intermediaries, such as investment managers, broker-dealers, financial custodians and others. The intermdiaries then re-enter the information to interpret it, a process prone to errors that can drive up costs for investors and intermediaries and can result in erroneous reporting. Those involved in cooperating to develop the new corporate action taxonomy will work in three groups – Issuers, Intermediaries, and Investors. They will provide input and make recommendations to help develop a standardized format for announcing corporate actions.
XBRL US is also seeking to advance open XML standards through the launched of XBRL US Labs. According to XBRL US President and Chief Executive Mark Bolgiano, the aim of XBRL US Labs is to “move industry and government toward a future that has significantly higher levels of information quality, consistency, and transparency in the United States.”
XBRL is an emerging finance technology for sharing business and financial information between software applications both at the server level and end user level. But what makes XBRL so unique as a way of sharing information?
XBRL could be described as the computer language for electronic communication of internal and external business and financial information. XBRL is unique because it works across technology platforms and is application neutral. XBRL can be imported and exported by a variety of centralized and end user software applications including the ubiquitous Microsoft Office applications. XBRL is also easily sharable across the internet.
XBRL replaces manual operations with automation and is applicable to business information, business rules, formulas, controls, processes and resources. XBRL is designed to automate all of the automatable information and processes and then give it to end users in near real-time so that humans can add greater value by thinking about the important issues, strategies and decisions to be made without wasting time on manual analytics. In addition, XBRL will increase transparency for business and financial reporting information thereby fostering trust among businesses, investors, regulators and the public.
Former SEC Chairman Christopher Cox expressed the vision for XBRL this way: “What we need is something that will give individuals faster access to better information that they can easily use and understand. We need to make searches for information easier. It should be easy to call up information about any company you choose. You should be able to download it and use it in the personal software of your choice. And you then should be able to easily analyze and compare the data with the same information from other companies. We want to make the numbers derived from financial statements vastly more accurate. And we want to allow companies to communicate with investors on a constant basis.”
There are ten potential effects of XBRL that could change the future of financial and other reporting. But which offer hope for the future and which is hype? I believe that these claims mostly offer hope, but let’s expose the hype as well. Here is my analysis of what we may look forward to with XBRL.
Companies adopt e-Reporting: It is realistic to think that those who tag their financial data deeply within their financial systems will have relatively easy access to the financial and non-financial data they tag. In the same way, tagging financial reporting source data will enable automated reporting opportunities both internally and externally. When companies understand how to utilize XBRL they will begin giving internal financial reporting users XBRL “readers” to enable use of electronic financial and non-financial data by internal stakeholders. In addition, technologies like Really Simple Syndication (RSS) will begin to become prevalent thereby enabling investors, analysts and the public to “subscribe” (through web-based technologies) to company financial reports the same way they currently subscribe to news feeds and blog posts. In addition, electronic reporting is likely to at first enhance and then replace paper reporting (both internally and externally).
The US GAAP versus IFRS debate becomes moot: There are standardized XBRL taxonomies for both US GAAP and IFRS. XBRL.org would be wise to relate the taxonomies to each other to facilitate conversions between US GAAP and XBRL (I would bet somebody is already doing so). A connection between the taxonomies would become more important when the SEC publishes its revised Roadmap to IFRS (expected later this year). By connecting the two taxonomies, electronic financial comparisons are facilitated. There is some truth the claim that US GAAP versus IFRS debate becomes moot. Under both financial reporting schemes XBRL improves transparency thereby reducing some portions of the US GAAP or IFRS debate. In addition, with connected taxonomies users will be able to more easily compare amounts no matter which GAAP is used. But there is mostly hype in this claim because IFRS and US GAAP are so different in content and disclosure requirements. The conversion from US GAAP to IFRS is a massive effort, even with some facilitation by XBRL.
Assurance about non-financial Information becomes as important and prevalent as about financial Information: XBRL reporting enables disaggregated use of information. XBRL tags are or will be required for financial statements as well as footnotes and schedules in SEC filings. As XBRL becomes a normalized part of corporate reporting, more information will be coded in XBRL and released to business partners, vendors, customers and the public. Companies will want to utilize appropriate internal controls to validate XBRL tagged data since XBRL will be their way of “telling their story” to the world. Appropriate corporate governance should include some level of internal and external assurance on XBRL tags and rendered reports for financial and non-financial data. The assurance provided is likely to become very important for both financial and non-financial data since both communicate the companies message to the world, especially as disaggregation of XBRL data becomes more prevalent.
Companies treat business reporting like digital media: The SEC is requiring public companies to post every quarterly and annual XBRL filing to their websites for one year each. The SEC is making electronic versions of certain filings (most notably 10-Qs and 10-Ks) available on its website first through the use of Edgar supplemented by the SEC’s new system “IDEA” and then ultimately exclusively with the “IDEA” electronic reporting system. The future of SEC reporting will continue to move closer to fully electronic and farther from paper filings (pursuant to the SEC’s 21st Century Reporting Initiative). Companies will also begin to use XBRL (“Interactive Data” as the SEC calls it) in more ways internally. All of these activities point to increasing use of XBRL for public data. Companies should treat the XBRL data like digital media, because they are (or will be) communicating an electronic image in the global marketplace through the release of XBRL data. Appropriate electronic security and controls should be utilized for XBRL data in the same way companies protect other digital media.
Intermediaries redefine their roles–or lose them: In the past companies have given their SEC filings to third parties (such as printers) to be “Edgarized”. Since Edgar will be replaced by the XBRL enabled and web based “IDEA” system, third parties that “Edgarize” will have to redefine their roles to avoid losing market share. Other third party intermediaries that use and disseminate large amounts of data will also need to move toward XBRL as companies begin to use XBRL more aggressively for all sorts of information sharing.
Governments become more accountable for their performance: Governments will increasingly use XBRL to streamline reporting and data sharing. We already see this with certain SEC filing and FDIC bank Call Reports, both of which are (or will be) required in XBRL format. Other governments have moved to XBRL more swiftly that the US Federal Government. China was able to implement XBRL very quickly because companies didn’t actually switch to XBRL reporting. They continued to fill out the same forms they always used, while behind-the-scenes software translated line items into XBRL data. This method allowed China’s capital market to quickly adapt to the new information standard—with no cost of compliance for reporting companies. Japan currently uses XBRL for reporting by 8000 publically traded companies. The Japanese noticed a side benefit of XBRL use. They had difficulty in translating their business and financial information into English, but since the US GAAP Taxonomy is in English, the related tagged data could be easily rendered in English. The Netherlands has embarked in a massive effort to completely overhaul all government reporting. Their various agencies and departments shared the information elements they separately gathered and realized that they could significantly reduce the burden on corporations by harmonizing the elements used across all agencies. This would allow them to move toward utilizing one submission of data by companies in every department across the Dutch government.
Will governments activities become more transparent and accountable in the future? I think it is just a matter of time. Let’s hope that day arrives sooner rather than later—especially for the US government (I hope you are reading this President Obama). XBRL could significantly reduce the administrative burden on companies, citizens and federal employees thereby reducing the time and money required to carry out government activities. Government reporting published in XBRL will enable speedy and automated analysis of government activities. XBRL could finally usher in an age on increasing governmental transparency.
Authorities write policy in digital code: Certainly policy and legal documents will become increasingly electronic. Much is already published on the internet through the use of HTML (HTML is a cousin of XBRL that is designed to format and display text – most web pages are primarily HTML data. If you are a blogger, you probably know some HTML code. The electronic format policies take remains to be seen. I suppose someone could theoretically develop an XBRL Taxonomy for every word (or at least the most used words) in the English language, but I don’t see a need for that. Financial and business information contained within text is different. Data imbedded in text will be increasingly tagged with XBRL for use by consumers, capital markets, government and companies. The SEC will require tagging of data embedded in text (particularly financial statement footnotes, but elsewhere in SEC filings too) in the second year of adoption of XBRL for SEC reporting. To the extent that policies contain financial and other business data embedded within text, authorities may indeed begin to write in code, especially those authorities that utilize younger workers who are technology savvy. Today many bloggers and web publishers write their web posting in HTML code. We may indeed see a day when authorities will write policy in digital code. Perhaps we will even see a day when software developers will develop software that seamlessly converts information into XBRL while originators enter text and data in a MS Word type interface.
Global capital markets become democratized: Capital markets around the world are beginning to utilize XBRL and the United States is no exception. By the time that the SEC’s three year phase in of XBRL is completed (in 2011), the US capital markets will begin to utilize XBRL to electronically download XBRL data, either in whole or in disaggregated pieces (so much for audit opinions on “the financial statements taken as a whole” – a topic for another day). Investors, analysts and the public will utilize XBRL enabled tools to analyze company information to whatever extent they desire. Their analysis will become increasingly digital and automated. Even individual investors will be able to analyze XBRL financial statement using tools that are as ubiquitous as Excel and Word (Office 2007 is XML [XML is another cousin of XBRL] based and can easily “render” XBRL files – try opening company XBRL files in Excel and Word). Now that companies are filing XBRL documents with the SEC you can download and save their filing in Excel using Edgar (press the Interactive Data button on the SEC website). Explore these SEC website pages to check out what can be done with XBRL:
- http://sec.gov/spotlight/xbrl/what-is-idata.shtml
- https://datapreview.sec.gov/previewer/
- http://sec.gov/spotlight/xbrl/filings-and-feeds.shtml
- http://sec.gov/Archives/edgar/xbrlrss.xml
- http://viewerprototype1.com/viewer
As investors, analysts and the public begin to analyze XBRL files from global capital markets, the best global investment opportunities will win investment dollars. Economic “voting” will be done with dollars thereby leading to a democratized global capital markets. Capital markets will increasingly cater to their XBRL enabled ”customers”
E-Reporting becomes as important as e-Commerce: We will be able to subscribe to company SEC filings in the future through technologies like RSS. If you are not familiar with RSS (Really Simple Syndication) you should check it out on www.youtube.com. As investors, analysts and the public begin to use RSS or similar technologies to access corporate SEC filings, they will begin to demand access to other information in similarly automated ways. In the future companies will need to pay close attention to what they report with XBRL and how they report it. I believe that e-Reporting will increase significantly as XBRL becomes more prevalent thereby making e-Reporting and e-Commerce equally important electronic business tools. See my previous post “Really Simple Reporting”.
We know how economies are performing–in time to act: As XBRL gains wider use in governments, security commissions, capital markets and companies, the public will have increasingly real-time electronic data that can be analyzed in automated ways. The speed of communicating economic information will significantly increase thereby enabling the free market to react very quickly to all sorts of company financial information, economic indicators and governmental reporting. We will increasingly understand the performance of companies, markets and governments in time to take action.
What are your thoughts about the impact of XBRL on the future?
In my last post I noted that “…XBRL US is saying don’t file your 2009 XBRL exhibit with the SEC using the Codification taxonomy extension. If you do, the SEC’s Edgar system won’t be able to accept your filing.” This statement is correct but let’s clarify it further.
The SEC will not reject all filings, they will only reject those that are filed with either the Relative Codification Extension or the Absolute Codification Extension. These Codification Extensions are for reference purposes only. The intent is that they may assist you in making sure your data is tagged to the correct 2009 US GAAP Taxonomy element now that US GAAP is set forth only in the Codification. The reason the SEC will reject electronic filings that inlude either the Relative or Absolute Codification Extension is because EDGAR has not been modified to accept the new Taxonomy Extensions.
To file your XBRL exhibit with the SEC use the 2009 US GAAP Taxonomy. You may extend the 2009 US GAAP Taxonomy as needed to accomodate your specific business and financial data. After you finish tagging your data and producing your XBRL files you may seperately verify that your tagged data is connected to the appropriate area of the Codification by utilizing one of the Codification Extensions.
As previously reported, the 2009 US GAAP Taxonomies are referenced back to the now out of date US GAAP hierarchy. XBRL US, the non-profit consortium that supports the implementation of XBRL in the United States through the development of taxonomies relevant for use by US public and private sectors, published a Taxonomy Extension that points to the US GAAP Codification. But be careful how you choose to use the codification extension.
The official Taxonomies to be used for SEC filings are located on the SEC website. If you use a taxonomy that is not listed on the SEC website you risk the EDGAR system being unable to recognize your electronic filing. XBRL US says this in its Codification Taxonomy Extension FAQs:
[The Codification taxonomy extension is] ”for information purposes and are not recognized as part of the official 2009 taxonomy by the Securities and Exchange Commission (SEC). The Codification linkbase file SHOULD NOT be referenced as part of a company’s filing as it will not be recognized by the SEC EDGAR system. The Codification files can be used by both consumers of XBRL data and by filers as reference information to understand the origin of individual elements.”
In plain English XBRL US is saying don’t file your 2009 XBRL exhibit with the SEC using the Codification taxonomy extension. If you do, the SEC’s Edgar system won’t be able to accept your filing. You should verify that the 2009 US GAAP taxonomy element that most closely matches your financial data is properly tagged to your data. The best practice would also include a separate validation that each tag also agrees with the appropriate level of the Accounting Standard Codification (Topic, Subtopic, Section or Paragraph)
The FASB and XBRL US have been working together since 2006. It would have been nice if a smoother XBRL and Codification connection could have been worked out in advance. It seems that part of the challenge to a smooth transition may have been the SEC’s inability to enable quick integration of new taxonomies into the outdated EDGAR system. Fortunately both issues will be addressed by the 2010 US GAAP Taxonomies, which will be connected only to the Codification. I hope the SEC is planning for more timely integration of new taxonomies into the new IDEA system (under development but partly implemented) that will at first supplement and then replace EDGAR.
The Codification taxonomy extension is still useful to investors and the public as they digest XBRL filings after the Accounting Standards Codification effective date. However, XBRL software tool users will have to deal with one additional inconvenience. When you follow the link to the underlying US GAAP you may be taken to the Codification public login page. Anyone can obtain a free login to the basic Accounting Standards Codification tool, but it is a bit annoying to have this additional roadblock to seamless operation of XBRL files. Fortunately the 2010 US GAAP taxonomies will also fix this problem.
I reported on July 2 that XBRL US had mapped its taxonomies to the concepts in US GAAP but neglected to realize that US GAAP would be completely replaced by the FASB Codification effective July 1, 2009. The result is that companies seeking to comply with the XBRL mandate would not be in compliance due to the US GAAP Taxonomy referring to US GAAP that is no longer authoritative. The Accounting Standards Codification became the only authoritative source of US GAAP on July 1, 2009. The former standards and ways of referring to them are now considered non-authoritative. As you may imagine, financial reporting executives are a little upset about the codification problem and the additional effort involved in fixing it.
When the Codification was created, the intent was to simplify the research and application of US GAAP without changing U.S. GAAP. The accounting standards are still the same, but the structure of the standards and the method for referring to them has changed. For example, the accounting standards related to operating leases could formerly be found in Financial Accounting Standards 13 and 144 coupled with several Emerging Issues Task Force standards, a FASB Staff Position, and several FASB Technical Bulletins. Now the same operating lease accounting standards can be found in ASC 840-20. The new way of referencing Accounting standards is by the ASC number (ASC stands for Accounting Standards Codification). SEC Filers seeking to comply with the XBRL requirement for the second quarter 10-Q (for calendar year end companies) should not have to address the FASB Codification issue because the Codification is effective for fiscal periods ending after September 15, 2009.
XBRL US, the group that promotes the use of XBRL and establishes approved taxonomies for use by the public, has developed a ”solution” the codification problem. XBRL US will publish a taxonomy extension that incorporates the FASB codification references. Calendar year end companies will need to utilize the Codification Taxonomy Extension for their third quarter XBRL filings. Apparently XBRL US intends to issue one major US GAAP Taxonomy each year with Taxonomy Extensions being issued only when there is a major change in US GAAP (like the Codification). If XBRL US maintains this approach to updating Taxonomies in the future, you can expect additional extensions for future periods due to the many major accounting topics being addressed by the FASB and the IASB in the convergence of US GAAP and IFRS.
The 2010 release of the US GAAP Taxonomy will incorporate the FASB Codification references.
Before we consider what is involved in adopting XBRL early, let’s review the SEC’s rules for mandatory adoption. XBRL Exhibits to SEC filings will be phased in over three years. In 2009 domestic and foreign large accelerated U.S. GAAP filers with a public float greater than $5 billion as of 2nd quarter of most recently completed year must begin XBRL filing in 2009. Accelerated filers using U.S. GAAP will follow in 2010. All other U.S. GAAP filers, and Form 20-F filers using IFRS as issued by the IASB, must file the XBRL exhibit in 2011. In the year that filers are first required to use XBRL, they must do so for all filings after June 15th of that year. Early adoption is permitted for all SEC filers. The SEC offers a Voluntary Filing Program (VFP) to all early adopters.
In the first year of required XBRL use, companies must detail tag the face of financial statements and block tag footnotes. In the second year, companies must detail tag all accounting concepts in financial statements, footnotes and schedules (narratives disclosure tagging is optional).
There are several areas to think through when you are deciding whether your company should adopt XBRL before being required to do so by the SEC or by market pressures. Here is a brief discussion of a few areas to consider and the implications of each.
Competitive Advantage: By adopting early, companies will have a slight competitive advantage through simplified access to securities markets. Investors would be able to access XBRL tagged corporate filings more quickly and easily which should lead to both a greater audience for your corporate story and a greater number of potential investors.
Learning Curve: Companies that adopt XBRL early will pass through the learning curve before their competitors. The primary advantage of learning XBRL early is that its potential as an electronic data communication tool is realized sooner thereby encouraging earlier use of XBRL to streamline internal and external reporting (more to come on this in a future post).
Software Tools: Companies that are considering early adoption need to determine whether they prefer to outsource their XBRL implementation effort or “insource” the effort by completing the work internally. (A future post will address advantages and disadvantages.)
Internal Data Use: Early adopters that tag data deeper within their financial reporting data flow can access that data electronically increasing the persistence, validation, context, and usability of their data in other applications. For example, a company that tags its data within Hyperion can feed that data to Excel spreadsheets, tax software, internal reporting software, executive dashboards and the like. By adopting these tactics as an early XBRL user, companies can gain accuracy and efficiency while reducing costs.
Investor Communication: Early adopters will be able to tell their story to the investing public more quickly and thoroughly than their non-XBRL counterparts will. Early adopters financial reporting will be far more transparent to investors and others.
Regulatory Requirements: Early adopters of XBRL do not receive special treatment with respect to security law compliance. The same two year limitation of liability applies to the XBRL exhibits of early adopters and on-time adopters. The two year limitation begins to lapse on the date of the first XBRL filing.
XBRL will increase transparency, speed, utilization and understandability of publicly reported information. Getting XBRL reporting right is important to your company’s public image and financial value. Here are 10 best practices to consider as you begin to deploy XBRL inside and outside your organization.
Get started now: Starting early will allow time for the inevitable learning curve and unforseen implementation issues. Your mandatory implementation date will arive sooner than you think.
Thoroughly plan your XBRL implementation: A healthy planning process will provide some assurance that implementation steps are adequately covered. Surprises may still arise but you will be better equipped to deal with them.
Involve the appropriate implementation team: Some have sequestered the XBRL effort to accounting and finance. Involving the appropriate resources from across your organization will improve your XBRL implementation experience.
Outsource if you choose but don’t abdicate your role: You still have responsibility for XBRL reporting and the related internal controls even if you decide to outsource all or part your implementation effort. The right business partner can be very helpful, but they do not know your company like you do.
Implement internal controls that are Sarbanes-Oxley compliant: XBRL utilization involves certain standards and processes. Your implementation should be protected with appropriate internal controls just like your other business and financial processes.
Establish an XBRL internal audit program: Having an extra set of eyes reviewing and testing inputs, processes, controls and outputs will provide an extra layer of comfort that XBRL is correctly implemented.
Be careful with taxonomy extension: Too many custom elements can reduce the comparability of your XBRL reports with others in your industry. Taxonomy extension is fine, but only when there is not a standard taxonomy element that accurately provides the context for your data.
Use the same diligence with your XBRL Exhibit that you do with other SEC filings: The SEC has limited your liability with respect to certain SEC regulations for the first two years of XBRL reporting. Use that time to make sure that your processes generate XBRL exhibits that comply with securities laws.
Prepare for the SEC’s 21st Century Disclosure Initiative: Expect regulatory reporting to become more frequent and less paper based. XBRL technology is likely to speed the flow of information and reduce manual reporting.
Explore ways to utilize XBRL internally and externally: XBRL is a powerful information-sharing tool that can reduce human intervention, improve information accuracy, perform data validation, streamline movement through the reporting cycle and organize business information.
These are my Top 10 Best Practices for XBRL Implementation. If you have additional ideas or a different “Top 10″, please share them.
