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XBRL Increases Transparency

May 9, 2010

The Financial Crisis Inquiry Commission has been meeting to look into the recent financial crisis. The Financial Crisis Inquiry Commission (the “Commission”) website says: “In the wake of the most significant financial crisis since the Great Depression, the President signed into law on May 20, 2009, the Fraud Enforcement and Recovery Act of 2009, creating the Financial Crisis Inquiry Commission. The Commission was established to examine the causes, domestic and global, of the current financial and economic crisis in the United States.”

From the little I have observed coming from the Commission, it is abundantly clear that our markets and the risks associated with them are enormously complex. Individual investments of various types can be understood, but when investment banks pool assets, especially sub-prime assets, then package them into investment grade vehicles through strategies like over-collateralization, senior and subordinated holders or insurance vehicles, the investments and underlying risks become more complex. To make matters worse, these pooled assets are then exploded apart, packaged with various derivative products, and sold to investors.

In addition, different government agencies regulate different parts of our markets. The Securities and Exchange Commission (the “SEC”) for instance does not have oversight over mortgage underwriting requirements. But it does have jurisdiction over the securities that are supported by a pool of underlying mortgages. That adds a layer of complexity to the policing of the investment markets.

Perhaps the most important way to protect investors is to give them visibility into the risks of the investments they choose. When an investor understands the risks, he can take action to mitigate it. The transparency of investment vehicles and the underlying risk factors is an extremely important component of a robust investor protection approach and a healthy securities market.

Bringing increased transparency to securities markets is one of the reasons the SEC acted to implement a rule requiring the use of XBRL (eXtensible Business Reporting Language). XBRL tagged business and financial data can be easily shared and stored on virtually any computer platform and in virtually any application. This makes XBRL tagged information very portable and easily accessible by all sorts of users, including investors.

Transparency is important to investors and security markets. Transparency is equally important within company operations. Companies seem to be focused exclusively on complying with the SEC’s XBRL requirements, but they should begin to think about ways to increase the transparency of their operations. A quick and relatively inexpensive way of gaining that operational visibility is to utilize XBRL. Use of XBRL within company operations provides many advantages including.

  • Ability to access business and financial information from disparate computer platforms or applications
  • Ease of access to business and financial information including through use of existing desktop tools (like MS Excel)
  • Improved accuracy in the business and financial information obtained because amounts are selected using the related XBRL tag
  • Increased consistency of business and financial information because the information persists from its original source to its ultimate use
  • Speed of access to business and financial information
  • Increased automation and less manual data review, especially in handoffs of data from application to application
  • Increased ability to automate reporting

What is your strategy for employing XBRL to improve internal and external transparency?

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