ComplianceWeek, Tigger or Eeyore!

A rather poorly researched op-ed on XBRL by the editor of ComplianceWeek, Scott Cohen. But, still, its of note to read the current journalistic view of XBRL as reported to its readers in the investor relations and governance groups inside public companies.

It was somewhat disturbing and sad to read the editors comments on XBRL. Disturbing for two reasons. Firstly, it points to the lack of serious industry journalistic coverage of the business or market drivers for a global accounting standard that has been incubated, piloted, deployed over the past 8 years with obvious implementation successes, and secondly, it seems to suggest a rather “head in the sand” point of view that “we should let the capital markets work their magic to solve this problem.” It is sad to see the editor of a “compliance” magazine stoop to such dramatic headlines (XBRL Hell!) without doing the minimum required research to better serve its readership. “Eye candy?!” And puzzling nonetheless to see why a magazine focused on compliance issues should be so flippant about “letting the markets work their magic.” But then, it has always been far easier to be an Eeyore than a Tigger!

While the Editor focuses on the SEC program as the driving force and chides the regulators efforts to build a critical mass of early adopters, he completely misses the point in terms of why public companies need to, and will adopt a financial reporting standard that safeguards the accuracy and timeliness of public company disclosures. It is a point often missed when a technology is first hitting the market and is receiving understandable and predictable, anemic market uptake. While the majority of reporting and compliance people in any company are hired to perform a role that deals in very critical and visible information sharing in a very methodical and structured manner, and are managed by CFOs, IROs or Compliance Officers who are charged with policing the release of public information, the manner in which company information gets transported and ultimately consumed suffers systemic problems that are outside the control of these diligent and well meaning reporting groups. It would serve the Editor well to survey a handful of public companies and track the root cause of reporting problems, such as a correction in the media, such as improperly interpreted line items from their footnotes or base financial tables, such as the impact of some company restatements that stem from known poor internal information gathering.

So, while the editor should take comfort in knowing that XBRL is complex because information companies disclosures can be very complex, and XBRL is merely a reflection of a reality that isn’t going to change – highly complex, company specific, industry specific, geographical guided, regulator shaped, accounting rule based public disclosures, he should also be cognizant of the fact that solutions have emerged to make the process of adopting XBRL as easy as updating an Excel worksheet. While it may be useful to “talk XBRL” and rebut the technical issues cited in the editorial, it would serve your readers better to know that the benefits of XBRL are far larger, near term, and early adopters are now shouting louder than the noise that has filled the Eeyore’s camp.

So, let’s address the article specifically.

First, the editor claims that US adoption of XBRL filing has been desultory. Well, one could argue that the SEC reeling under the pressures first to enforce SOX by Congress, then to review and moderate SOX by the market, adopted a more pragmatic position with XBRL by launching a voluntary program. The SEC now has some 30 companies creating XBRL files and is hoping to reach the 100+ company mark in the next 6 months. While the numbers may seem small as a percentage of total company’s filing, they have grown by an order of magnitude in 12 months and continue to rise especially with the new messaging to publish accurately and instantly without burdening the reporting groups with any additional work.

While a tipping point hasn’t been reached, changing market behavior with little immediate benefit until infomediaries and analysts institutionalize XBRL usage will continue to be a challenge. However, beyond compliance to the SEC’s directive, public companies are slowly beginning to understand that they have a reporting problem that directly impacts their company. And, while the SEC has its own analysis problem – the ability to process up to 40% of a million filings a year, public companies are suffering a (possible permanent) downturn in analyst coverage, media journalists improperly retyping facts about their company and investors reading information that has been filtered and massaged by junior data entry operators with little or no quality control.

The Editor cites costs and ROI as a barrier. Misperception. It takes a company accountant 1 or 2 hours (yes, hours!) to review an Excel template as they are starting up to file in XBRL for the very first time. Subsequent filings in XBRL are completely transparent and require no additional work (yes, no additional work!). This new publishing platform – coined EarningsDirect via the Intelligent Financial Statement, developed by an innovative teaming effort by Business Wire and CoreFiling, costs a few hundred to a few thousand dollars depending on the complexity of reporting and pays for itself instantly with the first filing alleviating the inherent problems in transporting the same information to the analysts in the traditional manner.

The Editor would better serve its readers by highlighting a common and widespread external reporting problem for all public companies and understanding how this accounting standard can be used to eliminate these problem – and, to highlight that XBRL continues to be debated inside the financial reporting community to address the broader issues of taking financial information and moving it across the many silos of information consumers both inside companies and its external stakeholders.

Time will tell whether interactive data or some other bold initiative by infomediaries will incent the market to adopt electronic tagging for financial disclosure. Certainly, while the process appears easy, describing business in accounting terms including all the nuances of a specific company and making sure it is consumed consistently is unlikely to be an autopilot operation any time soon - as alluded to by Sun CEO J. Schwartz in his recent blog, although there are some interesting textual analysis and statistical mining "smarts" that may alleviate the problem as demand for electronic tagging catches hold - more later.

As a result of misguided information like this one in ComplianceWeek, IROs/CFOs are still holding on to the view "tell me when I have to do it, and I'll do it, . .otherwise (door slam!)."

John Udells interview podcast Aug 2006

XML for business reporting gains momentum

Two years ago I wrote an unflattering report on XBRL (eXtensible Business Reporting Language), an emerging standard that aims to improve the speed, accuracy, and transparency of business and financial reporting. I applauded the goals, as we all should in the wake of Enron and other scandals, but worried about the complexity of the 151-page XBRL specification, its aggressive use of esoteric features of XML, and its reliance on accounting "taxonomies" defined by committees. I've too often seen these kinds of ambitious efforts stumble and give way to simpler approaches. SGML gave way to XML, for example, and while XML itself offers many advanced features, its most successful application -- RSS -- uses none of them. Would XBRL wind up being used mainly by what one wag called a "master race" of consultants and accountants? [Full story at InfoWorld.com]

In last week's podcast, XBRL's inventor, Charlie Hoffman, assured me I'm not the only one to express these concerns. Just this week, for example, when the SEC announced its Request for Proposal for the development of XBRL-based software, Dave Winer echoed them:

Sounds like the SEC is wanting to re-invent RSS?

Although I felt and to some extent still feel that way about XBRL, I have a much more complete understanding of the issues after researching, recording, and editing the podcast. It runs way longer than the others in my series, almost 70 minutes (edited down from 90), but I think the material warrants that lengthy treatment. Charlie Hoffman doesn't want to reinvent RSS, he wants to reinvent accounting, and he speaks as an accountant not an XML geek.

<< Friday, August 11, 2006 >>

A conversation with Charlie Hoffman and Brian DeLacey about XBRL

Charlie Hoffman, the director of industry solutions for UBmatrix, is acknowledged as "the father of XBRL" -- the eXtensible Business Reporting Language to which I had a bit of an allergic reaction when I first encountered it a couple of years ago. But when Brian DeLacey, a researcher turned XBRL entrepeneur, suggested that I interview Charlie I jumped at the chance. In this week's podcast the three of us discuss the history of XBRL, its relationship to XML, its goals, its successes, and its challenges.

In next week's InfoWorld column I'll write more about what I learned from this long and fascinating conversation. But in a nutshell, though my criticisms of XBRL's complexity were and are valid -- as Charlie Hoffman admits -- the real story is (as always) much more nuanced. The inherent complexity of accounting standards, the competitive forces at work in the realm of global finance, the regulatory pressure being brought to bear -- these and other factors form the context in which the development of XBRL must be understood.

It's worth noting that while XBRL is a complex beast that makes aggressive use of certain advanced features of XML, Charlie Hoffman isn't (or anyway wasn't originally) an XML geek. He's an accountant who, as you'll hear in this interview, is deeply grounded in the practice of his trade. That makes this story an interesting contrast to the development of many of the web services standards I've studied.

Customizable industrial taxonomies

The subtleties of XBRL are lost in discussions where some vendors are swaying the "uneducated" to lean on the SEC to prescribe fixed taxonomies. This is unrealistic and impossible to conceive given the market driven economies embraced globally with very few exceptions (Cuba?, Gulf countries?) and the power of XBRL to process and compare within these natural variances (extension taxonomies) from one company to the next.

However, it is worth referring to the cry for standardization:

In response to the Friday March 31st posting entitled "XBRL Update" on the AAO Weblog (http://www.accountingobserver.com/blog/), Eric Linder, CFA, replied:

--------------------------------------------------------------------------------
Jack,

I was forwarded your blog entry about software to read XBRL files (http://www.accountingobserver.com/blog/) from several people as our company, SavaNet, you may know is the only company providing an XBRL analysis application, called the SavaNet XBRL Reader, which is free and available now from www.savanet.net. It is actually even more than a "Reader" application because it also performs professional-level security analysis on information in XBRL format. Although there is a large library of over 100 available Form 10-Ks in XBRL which can be accessed through the Reader's file manager, it doesn't support the filings made to the SEC under its voluntary reporting program. As a former Wall Street equity analyst, XBRL International member and leading XBRL software developer, I can tell you exactly what is going on here:

The problem here is that the XBRL documents filed with the SEC use company-specific XBRL taxonomies which do not allow for the automated processing and comparable analysis that has been promised to the marketplace by XBRL. In essence, companies are creating their own report form and then filling it out, which, as any financial analyst (but not accountant) will tell you, eliminates the ability to automatically process and compare the information because much of the information could be tagged differently by different companies. Even though companies all start with the same base industrial taxonomies in their filings under the voluntary trial program, they have the unlimited ability to add new items and re-do the calculation relationships of existing items, which essentially changes their definition and makes them unusable for analysis.

I often find myself explaining to the non-analysts involved in the XBRL effort that the moment even one item is added to a base taxonomy statement it invalidates most of the rest of the statement for automatic processing and analysis because, in most cases, without manually reviewing the new item, one cannot automatically tell where this new amount was taken out of the existing taxonomy. Many do not understand this conservation rule of "financial physics": since all financial statements add up to a total, something added in one place is necessarily taken out of the location where it was expected. And since this location is unknown, proper financial analysis requires that you do not trust any of the information in statements which is equal to or below the calculation level of the extension or alteration made by a company while performing automated analysis. (Note: since most compaies reported statements are very "flat" these corporate extensions or alterations are usually done at the highest levels of calculation relationships which thus invalidates most of the statement.) So, with company-specific taxonomies that alter or extend base industrial taxonomies, analysts need to go back to manual processing and the majority of the benefits of XBRL are lost.

So the SavaNet XBRL Reader doesn't support the unrestricted company-specific taxonomies used by companies in the voluntary reporting program because these files cannot and should not be used for automated financial analysis, comparison and valuation purposes. (and if all you want to do is view the statements, you can get them off EDGAR in prettier html format). The REAL risk to the financial community is actually that some users (or companies) that don't understand financial analysis DO attempt to perform financial analysis on these files because such an application could only practicably use the items from a base taxonomy for its ratio and valuation analysis, without taking extensions into account, which will lead to erroneous results in many cases.

Most non-analyst and non-accountants don't understand that even though, for example, the Operating Income and Revenue line item elements may still be reported using a company-created taxonomy, that the analysis ratio of Operating Margin (defined as Operating Income / Revenue) should not be calculated if there have been extensions or calculation alterations. This is because companies may have moved items in the calculation relationship which change the definition of Operating Income element and/or, if the application tries to adjust for this by referring to the specific elements that they believe should go into their definition of operating income instead, they will still likely receive an erroneous result because the company could have added extension elements that are not in this formula. You can immediately see the problem for erroneous analysis by the unaware and the opportunity for "gaming the system" by companies who can "create their own" uncategorized extensions to hold their undesirables - making them somewhat invisible to the automated analysis that will inevitability result from the use of XBRL.

Luckily, there is a XBRL implementation method that gets everyone (investors, analysts, companies and the SEC) what they need-- and that is called "customizable industrial taxonomies". Under a customizable industrial taxonomy XBRL implementation, all companies in an industry use the same hyper-detailed taxonomy (up to 3,000 elements in all statements and notes) without extension BUT companies can completely alter the presentation of these items and over-write labels to exactly re-create the current presentation of their As Reported set of financial statements. (Actually, company extensions ARE allowable IF they fall outside of the taxonomy calculation relationships, such as for company-specific notes.) So, the financial statements that investors and analysts see using a customizable taxonomy solution appear exactly as the company desires, but the underlying elements are structured for accurate, hyper-detailed analysis and comparison.

So, anyone who is reading this, here is what you need to know about XBRL: XBRL has absolutely enormous potential to solve a great deal of the reporting issues that investors and financial analysts face today and really can be a once-in-a-career advancement in analyst tools, BUT only if it properly implemented using taxonomies with restricted extensions, such as in a "customizable industrial taxonomy" solution. If extensions and calculation relationship over-rides are not restricted, XBRL will provide little to no value to investors and analysts. But even worse than no benefit is, if companies are allowed to extend taxonomies without restriction, XBRL could, in some respects, even make matters worse for investors who may BELIEVE they are getting an accuracy and reliability they are not, and then rely on erroneous automated analysis, and/or companies make use of uncategorized (or generally categorized) extensions to even further game the system.

Congress and better financial reporting

Baker Subcommittee to Advocate Transparency in Financial Reporting

The Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, chaired by Rep. Richard H. Baker (LA), will convene for a hearing entitled Fostering Accuracy and Transparency in Financial Reporting. The hearing will take place on Wednesday, March 29 at 10 a.m. in room 2128 of the Rayburn building.

Members of the Subcommittee are expected to discuss ways to promote more transparent financial reporting, including current initiatives by regulators and industry.

For the capital markets to operate most efficiently, information about public companies must be understandable, accessible, and accurate. Corporate statements are mathematical summaries meant to convey a company's condition. The four basic documents which must be filed with the U.S. Securities and Exchange Commission (SEC) are at the heart of investor disclosure: the income statement, the cash flow statement, the balance sheet, and the statement of changes in equity.

Among the current initiatives to improve the clarity and usefulness of public company information is a trend away from quarterly earnings forecasting, the use of technology to decrease complexity, and a review of the various accounting standards and how they interact.

Subcommittee Chairman Baker said, "If U.S. markets are to remain on top in an increasingly competitive global marketplace, we need to move away from the complex and cumbersome and explore technological and other methods of enhancing the clarity, accuracy, and efficiency of our accounting system. At the same time, we need to look at whether earnings forecasting and the beat-the-street mentality, which appears to have contributed to some of the executive malfeasance of the past several years, truly serves the best interest of investors or the goal of long-term economic growth."

The corporate scandals several years ago revealed weaknesses in the financial reporting system. While many companies were violating financial reporting requirements, regulatory complexity also may have contributed to some lapses in compliance.

Fraud, general manipulation of statements, and regulatory complexity all contribute to a reduction in the usefulness of financial statements and all may obfuscate the picture of companies' financial health. A number of recent studies have argued against the practice of predicting future quarterly earnings, concluding that the drive to "make the numbers"
can lead to poor business decisions and the manipulation of earnings.

Congress, regulators, and the industry subsequently have assessed financial reporting failures and have reacted with efforts aimed at strengthening the system, including many provisions of The Sarbanes-Oxley Act of 2002.

More recent initiatives by regulators to streamline financial reporting standards and accounting include:

* A Financial Accounting Standards Board (FASB) review of complex and
outdated accounting standards;

* The use of principles-based, rather than rules-based, accounting;

* FASB's continued cooperation with the International Accounting Standards Board on the convergence of accounting standards; and

* The use of eXtensible Business Reporting Language, or XBRL, a computer code which tags data in financial statements. The use of XBRL allows investors to quickly download financial data onto spreadsheets for analysis.

Public Companies have been filing financial statements with the SEC since the passage of the Securities Exchange Act of 1934.


Scheduled to testify:

Panel I

Willis Gradison, Acting Chairman, Public Company Accounting Oversight Board

Robert H. Herz, Chairman, Financial Accounting Standards Board

Scott Taub, Acting Chief Accountant, Securities and Exchange Commission


Panel II

David Hirschmann, Senior Vice President, U.S. Chamber of Commerce

Marc E. Lackritz, President, Securities Industry Association

Colleen Cunningham, President, Financial Executives International

Barry Melancon, President, The American Institute of Certified Public Accountants

Rebecca McEnally, Director of Capital Markets Policy, Center for Financial Markets Integrity, CFA Institute

Company DashBoard

Spring is here . .and, here I am in (snowy!) Minneapolis to present XBRL to an investor relations audience with Dan Roberts, Chair XBRL US. Dan's day job is Director, Assurance Innovation (hmm oxymoran if ever I saw one!) at Grant Thornton. Dan led me to appreciate that we must strive to create new ways of challenging ourselves and our children and to that point imparted his love and mastery of the unicycle. Dan is a very engaging speaker and always warms the audience with his personal experiences in life. Also joining us in our lively discussion was Garry Lowenthal for Viper Powersports Inc. (Pinksheets: VPWS). Garry is a very affable guy and has over twenty years of senior operations & finance experience, having served as a CEO, COO, and CFO, with a record of facilitating acquisitions, business launches, IPO’s, reorganizations and turnarounds while driving rapid revenue production. BTW, if you ever want to check out of the rat race and join the life of extreme sports -- you must take a peep at Garry's company and his custom bikes.

As I left my hotel for the meeting, I glanced at the FT headline and lobed a copy into my bag as I headed into the Mpls snowstorm. The headline was timely as Pfizer and others were clearly making noises about earnings forecasts pandering to sell side analysts. Opposition grows to earnings forecasts as Pfizer is the latest group to scrap quarterly guidance. -Financial Times March 13, 2006.

The backdrop to this headline is the recent spate of news about the continued convergence of the buy and sell-sides and the potential economic annihillation of sell side business. Some major bulge bracket firms derive as much as 75% of their revenues from principal transactions today. Firms that have traditionally relied on agency transactions as their bread and butter are now also starting to indicate they will start to leverage their balance sheets to act as principal. The unbundling of research and trading in the domestic equities business along with a greater reliance among publicly traded Investment Banking & Brokerage firms to derive earnings growth through principal transactions will likely lead to a further convergence of the buy and sell-sides of the business. Block trading, the specialist system, and the experienced institutional salesman many become a thing of the past as a result. Sell-side research is likely to continue to become more short-term oriented and even rare. More reason for publicly traded companies to take the initiative and market their companies more aggressively and consistently than before -- hence the real time dashboard or some corollary may become more relevant.

Pressing the right buttons

The Accountant: February 28, 2006

A multitude of software products and technological tools are on
offer for companies and firms to use as they seek to improve the flow of
information when it comes to crunching and analysing the numbers.
Catherine Woods reports on where a rapidly evolving market is heading

There is a sense among regulators and the audit profession that more
needs to be done to simplify financial reporting for the users and
preparers of accounts, and that technology will have a key role to play
in this process.

David Turner, group marketing director for software provider CODA,
says that when it comes to using technology, accountants have always
been reasonable. He adds: "[They] are also... slightly conservative and
you can't blame them for that. Auditors, I think, are probably lagging
further behind."

Phil Donarthy is business development manager within the
accountants' division for software company Sage. He says that he does
not find accountants reluctant to take up new technology, but he finds
that many are not as progressive as they could be. He notes that there
has not been a sudden shift whereby accountants have become more
receptive to new technologies than in the past. "I think we're at the
stage now where across all walks of life, people are more receptive to
technology and also, let's be honest, technology is getting better," he
says.

Slow uptake

A sluggishness to use new systems is illustrated by the results of
research commissioned by Sage. Nearly 500 accountants, 200 business
start-ups and 2,100 established businesses were polled for the Sage
Accountants Business Collaboration (ABC) survey.

Eighty-one percent of accountants who responded felt they could make
better use of technology to increase the effectiveness of services they
offered. Sixty-nine percent believed it could also cut the cost of
providing those services.

Turner says the development of the internet has had one of the
greatest impacts on the use of technology in the financial services
sector. "You've had a whole new generation of web-based reporting tools
that have since come out," he says.

This greater use of technology across the finance spectrum, he adds,
is being driven less by clients and investors and more by the general
push for efficiency. Turner notes: "Number crunchers want to spend less
time creating the numbers and more time analysing them."

However, Donarthy says that there is another side and this is when
accountants want better systems for their clients: "Many accountants are
still working with clients who bring them bags full of receipts, rather
than actually providing them with any form of formatted data so a lot of
accountants are saying: 'If only my clients could be more efficient, I
could be more efficient and provide them with real insight into their
business.'"

Providing better business insight for the clients, notes Donarthy,
is also better for a firm's bottom line as it means accountants can
"concentrate their efforts on the higher value stuff [and] they can bill
for more". The benefits of technology can be in terms of greater
transparency, which suits today's environment in which resources are
constrained and yet the demands from regulators and stakeholders are
high.

Firms are progressive

Helen Nixseaman, partner in risk assurance services at
PricewaterhouseCoopers UK (PwC), and Steve Maslin, head of assurance
services for Grant Thornton UK, stress that the firms are progressive
when it comes to the use of technology.

Maslin says it is something that the accounting network, Grant
Thornton International, recognised in the early 1990s after member firms
predicted growing commercial and regulatory pressure for there to be
greater consistency. That led to the development of a common audit
methodology. He says: "Certainly, over the past few years... that's
given us huge commercial advantages and enabled us to deal as
efficiently as we can with regulatory demands."

In addition to this audit methodology, a lot of work at Grant
Thornton International has gone into developing software around internal
controls. The network now uses a software product which Maslin says
builds up a database of the sorts of internal controls one would expect
in different organisations. He notes: "That means whenever we're doing
an audit throughout the world, we've got a single methodology for going
around and testing the effectiveness of our clients' internal controls
system."

The software is linked to another product which enables Grant
Thornton International clients to capture their internal controls
electronically. Maslin says this is a format which allows a member firm
to carry out an audit procedure on controls without a client also
documenting it and causing unnecessary duplication.

Regulations and standards

Maslin observes that the latter system has been introduced to help
meet the requirements of the US Sarbanes-Oxley Act and the new
International Standards on Auditing which now require auditors to look
at the design effectiveness of a company's internal controls.

Internal control software, according to Turner, is a part of the
business that has grown rapidly in the US and is also picking up in
Europe. "Either because of Sarbanes-Oxley or because people in Europe
are seeing other legislation coming down the line, they're realising
that they're going to have to get their internal controls nailed down,"
he says.

Another way Grant Thornton International ensures that work being
done conforms to international regulations is through the use of
electronic audit files. Maslin says by working electronically "we can be
confident if we're doing multi-national audits that we're doing the work
to a single set of standards, but adding on to it the individual
standards of any one country". Audit files in the UK, US and Canadian
member firms became electronic around 1999.

PwC has also used electronic working papers for the firm's audit
files for a number of years. Nixseaman says: "It just makes sense in
terms of sharing information, particularly with teams spread around
different locations or even different countries."

The majority of this software at PwC and Grant Thornton has been
developed specifically for the firms. Maslin says Grant Thornton
International has employed a software team of 15 specialists in North
America for the last 15 years to develop and maintain its suite of
products.

It is, he adds, better at present to use an in-house system: "We've
found the software we've developed and maintained ourselves is certainly
a lot more robust and efficient than a lot of the software we've bought
from the commercial market."

An area where PwC is looking to further enhance its use of
technology is audit methodology. Nixseaman suspects that the firm will
move to make more use of the data analytic-type tools referred to by
Turner. These tools fall into two main areas: "One is in analysing
clients' data, so re-performing calculations or carrying out our own
analysis to look for trends or exceptions, and then producing some of
our own reports or graphs.

"The second area where we use it is to look at systems such as
financial systems or ERP [enterprise risk management] systems and to
look at how those have been configured and how segregation of duties has
been set up."

Quicker to use

Turner says these tools are being used by more people now that the
technology is quicker to implement and cheaper. He describes these tools
as occupying a third level of reporting analysis. The other forms are,
he says, rudimentary, online browsing-type and query-type reports which
people would perform within their accounting systems, and reporting
tools which entail taking something like Microsoft Excel spreadsheets
and turning them into more sophisticated reporting tools, or a purely
web-based product which allows accountants to quickly assess something
like profit and loss.

The tools on the third level of reporting analysis, Turner claims,
are what the market is going to want more of in the next three to five
years: "We've just gone through a number of years of focus on big ERP
applications. I think there's a reaction against that towards 'light
technology' - solutions you can implement fast, that will help you
automate your business and that are almost disposable so you can bring
them in, use them and then, if necessary, move on to the next
technology."

Maslin believes there is more the firm can do with regards to
internal control. He says the challenge for Grant Thornton will be to
move the current audit approach "from instead of just enabling it to
meet our regulatory and professional needs to working with clients to
make sure they're using the results of that audit work to actually
improve the efficiency and robustness of their own systems".

He identifies a new technology that electronically picks out the
parts of company reports that are most often examined as another tool
the firm is looking to harness. "It takes electronic financial
statements and every time an investor or analyst looks at the company
accounts, it builds up a profile of what sections of the accounts seem
to be of most interest. That is going to help both issuers and the audit
firms to better understand the needs of investors," Maslin notes.

A simple language

Simplifying financial reporting for all users of the information has
been driver behind eXtensible Business Reporting Language (XBRL),
especially in the US. Greater uptake in the UK is another area of
interest to Grant Thornton  International. XBRL  is an online system
that works by tagging data within financial information. The tags then
enable automated processing of business information by computer
software. XBRL can process data in different languages and accounting
standards.

In the US, one of the champions of XBRL is Securities and Exchange
Commission (SEC) chairman Christopher Cox who, since taking over from
William Donaldson last year, has consistently promoted the use of the
technology. The SEC is currently running an XBRL voluntary filing
programme which offers companies incentives to take part.

The XBRL project in the UK is not as advanced although Philip Allen,
director of XBRL UK - a consortium which advances the use of XBRL in the
UK - says there has been a huge increase in interest. Allen says the
"massive gain" to be made from the online application in the US is
different to the gains to be made in the UK.

"In the US, the issue is you have a huge number of listed companies
and no-one can really compare or analyse their accounts. Being able to
put it all [into] XBRL will allow people to simplify the analysis of
listed company accounts dramatically," says Allen.

In the UK, he suggests that the main benefit will be to improve a
company's access to credit. XBRL could allow banks to better process and
analyse the accounts they receive periodically from businesses to which
they have loaned money.

Allen comments: "If you have a large bank that actually could look
at a million corporate accounts and compare them all properly in real
time, it would revolutionise the way the bank provides credit. I think
that's probably going to have more of an impact on the UK economy than,
let's say, what listed companies do. They all list in the US anyway so
will be more affected by what the SEC is doing."

Companies House, the official government register of UK companies,
and HM Revenue & Customs (HMRC), are spearheading the British
government's involvement with XBRL. Allen says both have technically got
to the point where they have "solved all the problems relating to the
receipt of XBRL". Companies House now has a live service for receipt of
XBRL, trialling the system for companies which are exempt from audit.

Allen says Companies House and HMRC are "taking it very carefully
and very slowly because they don't want to put a foot wrong on this". He
adds that it is widely acknowledged that listed companies in the UK will
become more familiar with the software.

Accounting firms and software companies, claims Allen, are listening
carefully to the UK government before committing a large amount of
capital in this area: "What they understand is that in practical terms,
this is all going to be driven by government saying: 'This is how you do
your filings.' It's not that they're not interested, it's just that they
could lose a lot of money trying to go too fast on this."

As for when the government is likely to insist that companies must
use XBRL when filing accounts, Allen says: "Lord Carter [head of the
review of HMRC online services] has been undertaking a review of
corporate filing processes and it is expected that he will report at
some point on this. That report will drive how HMRC reacts." In the
meantime, XBRL UK is planning a conference in London during May for
accounting practices and software vendors about the Companies House and
HMRC projects.

Benefits

Just as the UK is keeping track of the US when it comes to interest
in internal controls software, the same trend is expected to happen with
XBRL. Allen believes that the Wall Street community is now starting to
understand what the investment analyst can do with XBRL and the same
equation will occur in the City of London soon, although he acknowledges
that "it is fair to say not many people there have quite got that far
yet". The possible credit benefits of the technology, he adds, are
unlikely to be realised until there is a larger take-up of the
production of XBRL accounts.

When it comes to technology which accountants use daily, the US has
less influence in the UK. Donarthy's theory is that simplifying the
technology he presents to accountants works best: "Accountants want to
do a good job. They're not at all interested in the technical details of
the solution. They're interested in how it can help them provide a
better service to their clients or make their practice as efficient as
possible. That's one thing we've learnt - we have to talk about the
benefits rather than getting hung up by how clever we are with our
latest whiz-bang feature."

Folksonomies v. taxonomy

folksonomies + controlled vocabularies

Posted by Clay Shirky

There’s a post by Louis Rosenfeld on the downsides of folksonomies, and speculation about what might happen if they are paired with controlled vocabularies.

…it’s easy to say that the social networkers have figured out what the librarians haven’t: a way to make metadata work in widely distributed and heretofore disconnected content collections.

Easy, but wrong: folksonomies are clearly compelling, supporting a serendipitous form of browsing that can be quite useful. But they don’t support searching and other types of browsing nearly as well as tags from controlled vocabularies applied by professionals. Folksonomies aren’t likely to organically arrive at preferred terms for concepts, or even evolve synonymous clusters. They’re highly unlikely to develop beyond flat lists and accrue the broader and narrower term relationships that we see in thesauri.

I also wonder how well Flickr, del.icio.us, and other folksonomy-dependent sites will scale as content volume gets out of hand.

This is another one of those Wikipedia cases — the only thing Rosenfeld is saying that’s actually wrong is that ‘lack of development’ bit — del.icio.us is less than a year old and spawning novel work like crazy, so predicting that the thing has run out of steam when people are still freaking out about Flickr seems like a fatally premature prediction.

The bigger problem with Rosenfeld’s analysis is its TOTAL LACK OF ECONOMIC SENSE. We need a word for the class of comparisons that assumes that the status quo is cost-free, so that all new work, when it can be shown to have disadvantages to the status quo, is also assumed to be inferior to the status quo.

The advantage of folksonomies isn’t that they’re better than controlled vocabularies, it’s that they’re better than nothing, because controlled vocabularies are not extensible to the majority of cases where tagging is needed. Building, maintaining, and enforcing a controlled vocabulary is, relative to folksonomies, enormously expensive, both in the development time, and in the cost to the user, especailly the amateur user, in using the system.

Furthermore, users pollute controlled vocabularies, either because they misapply the words, or stretch them to uses the designers never imagined, or because the designers say “Oh, let’s throw in an ‘Other’ category, as a fail-safe” which then balloons so far out of control that most of what gets filed gets filed in the junk drawer. Usenet blew up in exactly this fashion, where the 7 top-level controlled categories were extended to include an 8th, the ‘alt.’ hierarchy, which exploded and came to dwarf the entire, sanctioned corpus of groups.

The cost of finding your way through 60K photos tagged ‘summer’, when you can use other latent characteristics like ‘who posted it?’ and ‘when did they post it?’, is nothing compared to the cost of trying to design a controlled vocabulary and then force users to apply it evenly and universally.

This is something the ‘well-designed metadata’ crowd has never understood — just because it’s better to have well-designed metadata along one axis does not mean that it is better along all axes, and the axis of cost, in particular, will trump any other advantage as it grows larger. And the cost of tagging large systems rigorously is crippling, so fantasies of using controlled metadata in environments like Flickr are really fantasies of users suddenly deciding to become disciples of information architecture.

This is exactly, eerily, as stupid as graphic designers thinking in the late 90s that all users would want professional but personalized designs for their websites, a fallacy I was calling “Self-actualization by font.” Then the weblog came along and showed us that most design questions agonized over by the pros are moot for most users.

Any comparison of the advantages of folksonomies vs. other, more rigorous forms of categorization that doesn’t consider the cost to create, maintain, use and enforce the added rigor will miss the actual factors affecting the spread of folksonomies. Where the internet is concerned, betting against ease of use, conceptual simplicity, and maximal user participation, has always been a bad idea.

Comments (12) + TrackBacks (0) | Category: social software

COMMENTS

1. Simon Willison on January 7, 2005 06:26 PM writes...

Further to your points about, I think a key element of folksonomies that is yet to be fully explored is ways of improving their support for "emergent" vocabularies.

Here's an example: I'm posting a picture of a squirrel on flickr; do I tag it with "squirrel" or "squirrels" for best effect? I can find out which term will be most effective by seeing how many pictures are already tagged with those two terms respectively, and going with the most popular.

At the moment that's a slightly tedious manual process, and one that many people are unlikely to bother with - but if the software offered a seamless interface for doing that (a Google Suggest style popup showing how many images are tagged with that tag as you type for example) people would be far more likely to form and follow a consensus.

I'm confident that there are a lot of things that can be done to improve the quality of folksonomy-produced metadata, without increasing the price (and rendering them useless).

Permalink to Comment

2. Lou Rosenfeld on January 7, 2005 07:29 PM writes...

Clay, interesting comments, but you seem to have missed my point. True, I shared my concerns about folksonomies; I expect you'd agree that they're no panacaea. Nothing is. It'd be silly not to be skeptical about them at this early point in their development.

But I'm also quite skeptical about controlled vocabularies. I've probably read all the same studies you have--perhaps more--detailing their high cost. I spent four years in an LIS program and worked in libraries, so I have a little first-hand knowledge. Oddly, people who attend my IA seminar walk away with the sense that I'm against controlled vocabularies. So shoot, Clay, we actually agree on this point.

But how these two forms of metadata might work together is what's really exciting. (And that's why I used the holistic term "Metadata Ecologies" in my posting's title.) They may be quite complementary, which is wonderful, as salvation lies in neither. I hope we might begin brainstorming how they can work together.

We're not even bringing up how the nature of content, users, and context plays out in all this. Folksonomies might work fine for archives of photos. But I'd prefer that my doctor rely on professional indexing to do his research the next time I'm in urgent care with some strange condition. And I'm hopeful that down the road a medical folksonomy might somehow improve on the performance of MESH headings, thereby increasing my chances of survival.

In the meantime, is there anything else you'd like me to convey to the "‘well-designed metadata’ crowd" at our next meeting (every second Tuesday at the south entrance to Dewey's mausoleum; be there or be uncontrolled)?

Permalink to Comment

3. Jay Fienberg on January 7, 2005 08:23 PM writes...

I'm glad you connected the folksonomy issue to the Wikipedia one, because I think they're similar stories in terms of the battles of loose vs controlled ways of doing things, and how folks who like one or the other tend to react to the other's approach.

But, I think this story of the loose vs controlled battles, however one would tag the two sides, is one that folks like Lou don't fit into so neatly, and that you over reacted to his points.

I think the implication is wrong that folks who practice information architecture automatically fall into some kind of controlled vocabulary metadata control freak category who opposed all wiki folksonomy tag flipsters.

Likewise, I think the implication is wrong that all ordinary folk are, by nature, free tag lovers who'd only desire controlled vocabularies if it got them out of a deal with the devil.

As Lou suggests, there is a whole interesting realm of possibilities wherein both of these approaches are combined and/or co-exist. Even Wikipedia has forms of control--loose vs control is co-existing there.

And, Flickr / del.icio.us have controls in terms of how one can change tags, once they are created--which are controlled vocabulary techniques that (maybe) could actually be removed, IMO, were those folks really committed to folksonomies!

Personally, the most interesting thing to me is creating ways to allow the one approach to evolve into the other, and vice versa, as IMHO, the "right" way is one that can evolve either way, dynamically (e.g., things can be under organized or over organized, and good organization is a dynamic balance between the two).

Permalink to Comment

4. Dave Evans on January 7, 2005 09:38 PM writes...

I think some meta-data will be more controlled that others. Business environment stuff, like "bought by", "owned by", "works for", "funded by", which are the types of tags I'm using in my vizualisation system, are pretty easy to standardize. Tagging "squirrel" is probably good enough for most people without having to worry about plural forms, or black or red squirrels. I wonder if there is a way to self-organize tags against the most popular ones that emerge over time? Changing tags in one fell swoop like in Flickr might be a (scary) good thing, like upgrading software for new features.

Permalink to Comment

5. Rick Thomas on January 7, 2005 09:53 PM writes...

This is a microcosm of the process of language formation. For matters of consensual reality language is fairly fixed. When there's something new to talk about language is fluid and then converges as the subject is understood. The resulting language will always vary by community - English vs. Russian, engineers vs. marketers - because they have different experiences. Bridging communities depends on multi-lingual people using clever tools.

This is also why it's easy for a million bloggers to write quick opinions, but relatively harder to synthesize collaborative works - there is an unavoidable cost of semantic reconciliation.

Evolution uses this algorithm to create life. Start with any found stability. Produce diversity. Choose better stability. Create highly conserved systems along the way.

Permalink to Comment

6. Shannon Clark on January 8, 2005 12:16 AM writes...

It seems to me that there is another, very significent and high "cost" to controlled vocabularies - except in a very few cases, users have to learn (and/or navigate/use other tools) the vocabulary to use it, let alone use it effectively.

i.e. take an extreme example of a library shelving system - it is not at all trivial or obvious to most users (let alone professionals) where a given book "should" be shelved and I assume the process of integrating new/emergent categories is a decidedly non-trivial one. A library shelving system also shows one of the major flaws of many formal metadata systems for many users - they assume an either/or system - i.e. a book can only be in one place at a time, so it is either in one category or another, but not both (at least not physically).

Online there are countless cases when a user, very logically, wants something to be multiplely tagged - i.e. it is both a book business and a book on technology, it is a photo myself as well as a photo containing a monkey etc.

It is also useful to keep in mind why, where, how and for whom users apply metadata (in non-formal situations). Most of the time in most systems users apply none or very little metadata. It is only when doing so ads value very directly for the user that users generally speaking take the time to add metadata.

- blog posts might get metadata if someone wants to make it easier for they themselves to find their own posts. And/or if they have enough readers to assist those readers in finding related posts

- photos may get tagged if someone wants to make it easier for their friends to find specific photos, as well at times to open up photos (ala Flickr) to a wider audience, such as other attendees of the same event.

These fairly adhoc, mostly relatively limited in scope uses of metadata differ very widely from the more formal uses imagined by many people - such as the "Semantic Web" crowd etc. In those cases the assumption is that metadata (and extensive formal metadata at that) is to some degree inherently valuable and useful - but also that it will enable a new class of applications and uses.

I would argue that most of the time the cost of doing all of this tagging, especially the cost of learning the system for tagging (which is more than just learning the names of the tags - it is also learning how to pick and choose between tags, how to search for the "right" tag(s) etc) is vastly higher than most people (or their companies that pay for their time if done in a professional environment) are willing to incur.

Potentially some tools can be built to automate the process - to suggest tags, to apply many of them in a mostly painless and automated way - though all such systems have to guard against inaccurcy as well as the "other" category problem Clay highlights.

In short - an important topic for discussion and one where I pretty much agree with Clay.

Shannon

Permalink to Comment

7. Bill Seitz on January 8, 2005 11:06 AM writes...

I wonder whether folksonomies will just turn into free-text search engines? That's the other extreme of the uncontrolled-vocabulary spectrum...

Permalink to Comment

8. Bill Seitz on January 8, 2005 11:12 AM writes...

Specifying which *contexts* are being discussed seems awfully relevant for discussions like this.

The more coherent (non-diverse?) the "user" "community", the more easily a SharedLanguage can emergence and be maintained...

http://webseitz.fluxent.com/wiki/SharedLanguage

9. pb on January 8, 2005 06:53 PM writes...

Check out this outlandishly clueless call for a "well-designed" web:
http://www.opendemocracy.net/debates/article-8-10-2277.jsp

Not only are all of Thompson's complaints completely wrong, they are the key drivers of the web's crazy success!

Permalink to Comment

10. Edward Vielmetti on January 9, 2005 02:27 AM writes...

This discussion reminds me of the James Fallows NY Times piece on knowledge management where he distinguishes between the "big heap of laundry" approach (= folksonomy) and the "neatly folded PJs" (= taxonomy) approach to handling volumes of information.

Given how much attention people pay to presentation when it comes to materials that they expect to have a big impact or a long lifetime, I can only expect that we'll continue to see both systems in place, sometimes in parallel, as long as there are exclusive categories (Michelin 4-star restaurants) where common-folks opinions aren't the point.

12. bborn on January 21, 2005 10:12 AM writes...

What if the descriptive taxonomy (what this thing is) was open-ended (a folksonomy), but the functional taxonomy (what would you do with this thing) was controlled?

So, say I was bookmarking this post: I could tag it with any words I wanted - tech, library, cataloging, and so on. Those words describe what this item is about in ways that are primarily relevant to me. If they also happen to make sense for someone else, fine.

Then I would also have to choose one or more verbs, words that describe what I want to do with this item. Do I want to read it, save it, comment on it, disagree with it, build something with it, etc.

Software as a Service Model

Experiential model. . . follow the money . . myths . . .1st wave software service ASP move (capital was free, money poured into the initial setup, long time for the recurring revenue), 2nd wave - permission based financing strategy, very little capital goes in initially to get to the first customers because you can launch the service quite quickly compared to the enterprise model. What used to take 18 months to get "Golden master" with the ASP model takes much less time (6-9 months). CSF Unit economics - prove to land customer is less than than that of what they get back from the customer in the life of the customer. Another myth is that it takes longer to get to profitability. Exit - last 2 -3 quarters, highly visible companies are showing much higher P/E ratios such as Salesforce.com. Here to stay over the next decade.

Economic model based around subscriptions based on a smooth revenue streaming. Strong lifetime revenue. Scale benefits as the company grows. Enables you to compete with the big players very quickly. On demand allows you to play at a very different set of rules.

"Democratization of software"

Love-in not lock-in - really allow people to feel that they are not locked in. . . keeps the vendor honest. Only promise what you have.

Sales model -- free trial, as you use the service, you enter the first tier of pricing. Leak in from the bottom up. Expense-able not approvable business model.

Low upfront costs web 1.0.
Web 2.0 value prop. quite different . . The ability to road test the solution first before they actually have to commit - alignment with the vendors - real asset of this model. Actually get access to a community of users input and it shows up as value. Upgrades are seamless. Allows for much more rapid innovation 2 week release cycle. Most SAS companies have labeled their releases as Fall 06 or Winter 06 - speed of innovation follows a release cycle of 3-4 times a year.

"Power in the cloud" - new value by being part of a community. Creating brand new business opportunities that could only be created in the new cloud. Ability to see when the customer is having problems in aggregate and solve it before it has a larger impact. With traditional software they had no idea how they were using it and neither did the vendor - in SAS gives a dashboard to both sides - usage based feedback -- big metric of success.

Focus NOT on the core - sweet areas of a company -- G2000 customer require more integration compared to SMB customer. Start in the mid tier market space. Emergence of open standards integration can be easily done.

SMB market traditionally very fragmented.

White space. . enterprise mash up space - central easy to use resource, new buyers are looking at new ecosystems IBM, ADP.

'democratization of software'

XBRL v other open specs

XBRL is uniquely positioned compared to other open specifications. It is optimized for the exchange of historical, archival business reporting data. It models data that is hierarchically arranged for drill-down and reported along dimensions of time, entiry and scenario (or context). And, it is independent of specifc industry, regulatory regime or level of detail.

Key themes distinguish XBRL from other standards in the financial arena:

• Reports, as distinct from transactions. A purchase order, or, more precisely, the sending and acceptance of a purchase order, is a transaction, transactions are the purpose of a whole host of standards from IFX, OFX, ebXML, ACORD and others.
• Performance data, as distinct from market data. market data tends to be ephemeral and real-time, with pricing being always crucial; performance data is archival and records the history of busness operations and their results. XBRL is about performance data.
• Entities as distinct from investment instruments. Equities are financial instruments whose underlying value is based on public company entities; an entity is the business itself. XBRL represent detail about entities - not only publicly traded companies, but any business or non-profit entity. Equities and other financial instruments are the subject matter of MDDL, FpML and others.
• Reporting metadata, as distinct from reporting metadata. Metadata - data about data - is, for the most part, data abouta document. XBRL defines how the individual numbers and facts inside the financial statements and similar documents relate to one another.

In general, XBRL business content can be embedded into any other standard that is related to transactions, market data, instruments, or document metadata. For example, if there were a standard ebXML business process for tax reportng, XBRL could be used as part part of the "payload" of the tax return itself, since it is used to present financial statement level data as well as the ledger of business transactions that are classified into different tax treatments.

XBRL and business performance reporting - makes a distinction between financial information reporting of a set of data and supporting text, versus the data in individual financial transactions. XBRL is focused on providing a rich, detailed, comprehensive standard for representing data used in business reporting.

Yet Again, SEC Pushes

Yet Again, SEC Pushes For The Adoption Of XBRL
By Melissa Klein Aguilar — February 7, 2006

n hopes of stepping up its effort to get companies to file their financial reports using interactive data, the Securities and Exchange Commission is sweetening the pot for companies that volunteer to be part of a test group with a plan to offer expedited reviews of registration statements and annual reports.

RELATED RESOURCES

View SEC Details Regarding XBRL Incentives (Jan. 11) Related Speech By SEC CIO R. Corey Booth (Jan. 18) Related Speech By Chairman Christopher Cox (Jan. 18) Contacts Companies interested in participating in the test group should contact the following individuals at the SEC: Jeffrey Naumann, SEC Office Of The Chief Accountant Brigitte Lippmann, SEC Division Of Corporation Finance Related Coverage So Far, XBRL Participants Are Those Who Stand To Benefit (May 2005) Tagged Data May Help SEC, But Will It Help You? (Aug. 2004) SEC Proposes Rule On Voluntary XBRL Reporting (Sept. 2004) Rules, Guidance Read The Proposed SEC Rule On XBRL Related Concept Release On The Use Of Tagged Data SEC FAQ About The XBRL Voluntary Filing Program Related Resources SEC Spotlight On Tagged Data, XBRL Initiatives

The move comes roughly nine months after the April 2005 SEC launch of a voluntary filing program under which corporate or mutual fund registrants can file their financial information with the Commission in XBRL—short for extensible business reporting language—a computer language that makes financial data interactive. Since the launch of the initiative, the SEC has only received 22 XBRL filings from nine companies. SEC officials admit that the response isn’t quite what they had hoped.

Booth

The program is “an important initiative, and I think we have pursued it appropriately,” SEC Chief Information Officer Corey Booth said in remarks at the XBRL-US National Conference in San Jose on Jan. 18. “I must admit, though, I had hoped that we would have more filers in the first nine months of the program.” In a further sign that XBRL isn’t yet setting the world on fire, the conference itself drew only slightly more than 200 attendees (see box at right for complete speech and related resources).

In announcing the new incentive, the Commission said it wants test group participants that will use the commercial and industrial, banking, insurance, or investment management industry classifications in XBRL. The staff expects to establish the group by some time in February.

Companies that participate in the test will have to file their reports in XBRL format for at least one year and provide feedback on their experiences, including the costs and benefits associated with reporting in the interactive data format. In return, volunteers will get expedited reviews of securities registration statements. Well-known seasoned issuer volunteers will find out whether the SEC will review their Form 10-K within 30 days after filing and the SEC staff will provide any comments on that filing within 45 to 60 days of filing.

Where's The Carrot?

Right now, more than 15,000 companies submit more than 700,000 filings annually through the SEC’s EDGAR system, nearly all of them filed in ASCII text or HTML. But the SEC has been pushing for the adoption of XBRL, citing potential benefits of tagged data such as greater transparency of financial information, reduced costs for investors and analysts, and possibly, broader analyst coverage of companies.

Getting filings in a machine-readable format would enable the SEC to review annual filings and develop ways of flagging troublesome companies more quickly, making it easier for the agency to meet one of its mandates under Sarbanes-Oxley: Section 408 of the Act requires the SEC to review the filings of all registrants at least once every three years. The information in SEC reports submitted in XBRL could also be made instantly searchable by both analysts and investors.

Ciesielski

Despite the various incentives, few companies have expressed enthusiasm for XBRL other than printers, software firms and investor-relations outfits that stand to reap some business benefit from the technology. For the rest of Corporate America, “it’s a little hard to see the carrot for them,” says Jack Ciesielski, owner of investment research firm R.G. Associates and publisher of the Analyst’s Accouning Observer. “This is something that is supposed to aid financial analysis and it probably will make it a lot easier for the SEC to do financial analysis. It’s probably got a low priority in companies” (see related article, "So Far, XBRL Participants Are Those Who Stand To Benefit," in box at right).

The latest incentives “will probably help” the SEC attract more issuers, says Dave Copenhafer, director of EDGAR Services at financial printing giant Bowne. Bowne was the first company to file its earnings releases in XBRL under the SEC pilot program. “We’ve had several expressions of interest that came about solely as result of SEC’s comments. Whether they translate into action, we’ll have to see.”

“The incentives change the dynamic of why companies will participate,” Copenhafer continues. “Before, the firms that filed were primarily technology companies of one sort or another that, for internal reasons wanted to understand [XBRL].” However, he said, “that doesn’t change the fact that it’s still difficult to get a set of corporate financials properly structured into an XBRL instance document. And the investment in resources to prepare an XBRL filing is still substantial… It’s not like turning a Word document into an html document.”

Savage

“There is definitely a learning curve and some time investment required,” in reporting in XBRL for the first time, notes Michelle Savage, vice president of investor relations services for PR Newswire and chair of the XBRL-U.S. Adoption Working Group. Still, Savage says, “once companies have the first quarter under their belts, it gets a lot easier.”

Booth at the SEC also acknowledged that major hurdles to broad adoption exist. For one, he said, preparers still need to “get comfortable with the technological aspects and the accounting aspects of the standard.”

“The preparation of XBRL statements is still perceived to be difficult and I believe there is also reality behind that perception,” noted Booth, who said the SEC’s examination of the filings received so far “suggests that there is still a lot of room for technical judgment and interpretation in how to apply the taxonomies to a particular situation.”

INCENTIVE

The excerpt below is from the SEC's Jan. 11 announcement that it was offering incentives for companies to file financial reports with interactive data: The Chairman of the U.S. Securities and Exchange Commission today announced that the Commission staff will offer expedited reviews of registration statements and annual reports to companies that volunteer for a test group as part of the Commission’s interactive data initiative. Interactive data holds the promise of transforming the static, text-only documents companies file with the SEC into dynamic financial reports that can be quickly and easily accessed and analyzed... Companies that participate in the voluntary program’s new test group will furnish financial data contained in their periodic and investment company reports in XBRL format for at least one year and provide feedback on their experiences, including the costs and benefits associated with reporting in the interactive data format. Because of the efficiencies staff anticipates in reviewing their filings prepared in XBRL and to encourage participation in the test group, the Commission staff will offer volunteers expedited reviews of registration statements under the Securities Act of 1933 that the staff has selected for review. For well-known seasoned issuers, the Division of Corporation Finance staff will offer to inform volunteers whether or not the staff will select their annual reports on Form 10-K for review. The staff will notify each well-known seasoned issuer volunteer whether it will select the volunteer's Form 10-K for review within 30 days after filing and will undertake to provide any comments on that filing within 45-60 days of filing. Source SEC Offers Incentives for Companies to File Financial Reports with Interactive Data (Jan. 2006)

Booth also cited the issue of a lack of demand from the investor community. While “not every retail investor or Wall Street analyst needs to understand the intricacies of XBRL in order to make use of it,” he acknowledged, “We are still are not seeing the kind of demand pull that would truly catalyze the market, and in turn make more companies interested in solving the supply-side issues.”

Toes In The Water

Another challenge to widespread adoption “has to do with the core XBRL technology itself,” and a question about how to get more effort behind evolving and refining the taxonomies. For example, Booth said rendering XBRL documents in human-readable format remains a challenge. In addition, validation standards can differ from product to product, which can raise questions about “whether your XBRL document is truly ‘kosher’.”

Savage and others offer other reasons for companies’ slowness in embracing XBRL. “Complying with Sarbanes-Oxley and making process changes has been consuming people for the last couple of years. It’s been a huge undertaking and a real tax on public companies,” Savage says. “That’s been a big factor in people saying, ‘It’s not critical, it’s a voluntary program’.”

Another hurdle, Savage says, is a common misperception about XBRL. “The name itself sounds like a technology change that finance departments, preparers and IR departments have to undertake, when it really isn’t. It’s a business process change,” she says. “One thing we’re (the XBRL adoption group) doing is looking at the positioning of XBRL to make sure the message we’re conveying is that this is a process change that will change the way companies report information.”

In his remarks, Booth offered one suggestion that might make the task less daunting. He suggested that participants in the voluntary filing program file just their main financial reports in XBRL at first, and begin providing XBRL footnotes “a quarter or two later.” SEC rules require participants to file the main financial statements in XBRL format, but they aren’t required to file the notes in XBRL.

“Maybe this kind of simpler, walk-before-you-run approach would induce more companies to stick their toes in the water,” Booth said. And eventually, companies may not have a choice—some expect the SEC to make XBRL filing mandatory sometime in the future.

Copenhafer

Copenhafer says a “viable alternative” to mandating XBRL might be for the SEC to give companies a template, “rather than having companies go through the difficult process” of constructing a complete XBRL document. He notes that a similar method was adopted by the FDIC, which requires member banks to report numbers in their call reports in XBRL using a template.

However, Booth’s remarks indicated that such an approach was unlikely. Noting that the SEC tried a similar “fill-in-the-blank approach” when it introduced the Financial Data Schedule, which captured key financial figures in tagged format as an addendum to company filings, he said, “It didn’t really catch on, and we discontinued it. The fact is that the universe of SEC registrants is extremely diverse, and we need to account for that.”

Greed versus Fear

U.S. Equity Research “Dog Days”

In the U.S. capital markets, common wisdom suggests that public companies are struggling more than ever to attract capital they deserve - that more than 1,200 of the 6,000 companies listed on U.S. exchanges get no coverage from security analysts, and coverage is anemic for another 1,000, with only one or two “Street” analysts providing research. Research indicates that over 50% of the companies that trade on NASDAQ and some 20% of those listed on the New York Stock Exchange get little or no equity research coverage.

“’Consensus estimate’ may be from one analyst .. More than half the 8,416 public companies have no analyst coverage” Ashwani Kaul, chief spokesman for Reuters Estimates

One might assert that these numbers alone are sufficient to merit some rethinking in how corporate investor relations interface with their investor constituency.

Perhaps not. So let’s follow the money. As a “Wall Street orphan,” a company may now seriously consider taking a draconian step and revert to a private company structure in the hope of resurrecting one day in the public markets. Oftentimes, its stock price may stagnate for a protracted length of time or, worse still; enter a death spiral leaving in its place a “shell company”. The burden of Sarbanes-Oxley , now well publicized, is sometimes cited as one reason for companies now considering the delisting route as well as a reasonable explanation for staying private longer. It’s also clear that while Sarbanes-Oxley related costs may be less for a smaller company, they are unlikely to decline proportionately with a company’s revenues. The net effect of this is that small companies are disproportionately affected by compliance costs.

To compound this particularly U.S. epidemic of stymied capital, these Wall Street orphans pay relatively more for capital from new investors or from their institutional lenders. Wharton School research finds these orphans pay roughly 140 basis points, or 1.4 percentage points, more for their new money per year than those that have a recognized Street following. Put another way, on a $100 million capital issuance, the markets extract $1.4 million each year from companies with little or no cover compared to those that do – a not so incidental cost of doing business for a “Wall Street orphan.” While it is true that analyst coverage is only one of the factors tied to cost of capital, data does show that of those 10% of companies with good, credible coverage from 5-6 analysts, the cost of capital is significantly less.

With uncertainty about the use of trading soft dollars (a means of paying brokerage firms for their services through trade commission revenue) for traditional marketing services, it is unlikely any attractive economic model for equity research will emerge anytime soon. And, at least over the last 5 years, the trend has shown no sign of a reversal. Given the new restrictions on sell side research, and the way that it is now perceived within the markets overall, the demand for investment banking led equity research from the buy side has dissipated. This leaves open the challenge of creating an alternative commercially viable model for equity research. The situation is further exacerbated by the fact that there are now more companies globally seeking a public issue on a U.S. exchange, all competing for coverage.

Know that the lion's share of sell-side research is stale. EPS estimates are a commodity, price targets are for retail and many if not all of the big houses outsource model creation to companies like EvalueServe in India. So if you can outsource it, it must be a commodity. No? With the only thing of value in today's capital market today is the connections an analyst has to the company. However, as one IR Director told me recently Reg FD limits much of the stuff they learn and can disseminate. What remains special and untouchable is industry overview reports; they are really the last piece of value left for identifying firm and market forces; so that a professional can determine what he should be looking for and generally what catalysts will make an equity move. Analysts used to have insight . . today, they have hindsight.

A report by Booz Allen titled Saving Sell Side Research highlights key threats to those who lack the vision and adaptability to change with the market - massively declining research spend due to competitive forces, more robust performance measurement metrics, and a squeezing of the middle (being neither a high-quality, focused boutique nor a global behemoth with the resources to deliver a superior global product). This report outlines three specific prescriptives to the sell side, assuming a rational business case can be made for keeping research at all:

1. Delivery Model Streamlining (more efficient resource allocation, "rationalize" compensation, increase outsourcing)
2. Offering Redesign (expand coverage of small/mid caps, add expert networks, quality models, performance metrics, add a degree of client exclusivity)
3. Differentiated Service Levels and Pricing (calibrating levels for small, mid-size and large firms, hedge funds, etc.)

Several alternate models are emerging ranging from offshoring services through firms like EvalueServe, based in India, boutique specialty equity research firms (that have some unique or proprietary investment model, such as Innovest), alternative, and intermediated research from Investor Relations Group and National Research Exchange. While the offshoring model has gained steam, the intermediated model is just being launched so the outcome remains dubious. The demand for coverage is there. Still, says John Nesbett, president of Investor Relations Group in New York City, “there is an argument to be made that having good information out there is helpful, wherever it comes from.” More specifically, the research might translate into a lower cost of capital for small companies and even generate enough trading volume so that the companies would eventually get their research for free. As companies wait patiently for the dust to settle, there is a growing need to find new ways to market themselves to the investment world and better target their message to a pre-qualified investment group. A compelling argument can be made, therefore, that it is far better to be transparent than to be invisible.

An emerging global financial data standard, called eXtensible Business Reporting Language (XBRL), is pushing ahead to help alleviate the issue of accurately communicating company financials with the potential to do much more than help analysts and the regulators.

The concept is simple. Think about the adoption of barcodes or Universal Product Codes (UPC) for products, and the deployment of RFID (radio frequency identification devices) tags embedded with barcodes in the supply chain and retail environments. Now think about how the same industry gained massive value through more accurate tracking of goods leading to fewer errors, lower inventories and even better-stocked shelves, which lead to lower costs, satisfied customers and higher revenues. Making error rates and inefficiencies - and their financial impact visible and therefore correctable was the fundamental commercial potential of barcoding. Now, think of XBRL in financial reporting as the ability to “barcode” the individual financial concepts (such as Operating Profit, Interest Expense, etc.) so that they can be picked up in a consistent and accurate manner downstream from the preparers of financial data.

According to comments made recently (Jan 2006) by the SEC Chairman, the inefficiencies in the flow of financial data from source to consumer accounts for an error rate approaching at least 28% - a not so inconsequential number when you realize how much capital moves in real time based on these numbers. So, how does XBRL make a difference? By adding context information to financial data, XBRL brings about a raft of efficiencies that put more control back in the hands of the company – the IRO, the CFO, the Treasury and the CEO and gives the end consumer (analysts, media journalists, professional and retail investors, etc) access to a robust, reliable, and noise-free pipeline of information from which they can develop their earnings forecast models in a fraction of the time.

“Zero Defect” Financial Data

With the rapidity of information flow in today’s capital markets, it is becoming more important than ever for the investor relations function to pay special attention to the Street – dealing directly with the needs of brokers, broker networks, equity research companies, analysts and other groups of stakeholders. In this highly fluid and dynamic environment, a top priority of the IRO function is to continuously build differential information in ways that persuade the “investor” that adding this company to their investment portfolio is better than adding some other company. Put simply, building a compelling value proposition for a “buy and hold” decision. It is more important now than ever before for the IRO to be in the driving seat. IROs need to be able to push information out as directly, as accurately and as rapidly as possible to a targeted audience of existing investors, potential investors as well as key stakeholders and analysts.

Added to this mix are two other trends, the impact of Regulation Fair Disclosure (Reg FD) and the rise of alternative investment funds. On the first point, there is some justification for the outcry that Reg FD has resulted in less exact details of disclosed company numbers. Some go as far as to explain the volatility of stock performance with the reduction in information flow through the analyst community with less one-to-one contacts taking place. Reg FD has been used as a disincentive for companies to do anything more than the bare minimum with corporate earnings deteriorating with the rise in pro forma reporting. On the latter point, the rise of alternate investment funds (such as hedge funds) and greatly increased application of more sophisticated algorithmic trading models that look deeper into the financials points to a direction of automated trading that is fraught with inherent risks without the provision of a “zero defect” data stream. XBRL ensures a “zero defect” data stream – there is no conversion of data, manual or systematic, to help the data to be processed by different types of consumers and their corresponding systems.

In summary, we have companies disclosing less information as a result of Reg D, fewer analysts funded to cover companies and help them get Street exposure and large funds with major overhangs in search of the right investment. XBRL makes the argument for easier and faster access to company financials alleviating the information asymmetry caused by some of the inefficiencies in the market and regulatory rulings.

Moving away from “one size fits all”

There is clearly a well established and growing multi-billion dollar market for the consumption of high quality financial data as demonstrated by firms such as CompuStat, FactSet, Bloomberg, Thompson Financial, Reuters and others. Each of these data aggregators differentiates itself against its peers by trying to get access to corporate information as fast as it is disseminated to the SEC and from the wire distribution companies, adding value to the data by bundling it with their key search words, filters, analytics, productivity tools and research news so that they gain a higher market share of the data consumers in the industry. Each of these product vendors provides some unique value to its customer base and serves a very valuable function in the efficient operation of today’s capital markets.

Over the years, each of these data aggregators has developed, their own “prism” of public company based on some analysis of key information that may be more characteristic of a specific industry sector. So, for instance, one vendor may have a list of 500 financial data points they generally look at and report based on “as reported” company information. In addition, by industry sector, they may drill down further to track specific industry information – peer comparisons. So, in practical terms, data aggregators parse the data from the companies to fit their data structures. Analysts, Street journalists and other data consumers then use this data to drive their revenue model – justifying a price to earnings and a stock price either above or below the current price – leading to a bullish (buy, hold) call or a more cautionary recommendation.

The downside of this approach is that there is always room for approximation and data interpretation since information is lost in the passage from the IRO to analyst via data intermediary. So, companies send a “round hole” in, and without their control or knowledge -- a “square peg” gets out to the investors. A data integrity issue is perpetuated -- one that can only be remedied by placing more control of the original data into the hands of the publishers of the data – the companies themselves. Enter, a flexible tagging system that takes account of the uniqueness of financial reporting – XBRL.

One standard: Many uses

IROs from all public companies should be encouraged by the validation of XBRL in the market (see www.xbrl.org/showcase/ ) and efforts by the SEC to persuade companies to adopt XBRL for external reporting. Although the SEC has not mandated XBRL filing at present, it is a strong advocate of adoption not only to help its own analysis but to greatly improve the efficiency of US capital markets overall.. Advocates of XBRL believe that 2006 will be the turning point in terms of headway in both the public and private sector.

Issuers from large companies can help overcome accuracy and efficiency hurdles that slow or impact hedge fund assessment of their performance. Issuers from smaller companies that struggle to get sell side coverage can use the SEC’s voluntary filing program to get noticed. Corporates that find that their unique attractions are getting buried in a sea of standardized infomediary data can make themselves stand out.

With the maturation of XBRL, both from a standards point of view and from tool and consulting vendors that support its widespread usage, the risks associated with successful deployment using XBRL have been mitigated and it behooves all companies to adopt XBRL by committing to the SECs Voluntary Filing Program assisted by experts in the methodology, tools and techniques.

An edited version of this blog was published on the NIRI Virtual Chapter Newsletter.