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Companies could be filing XBRL-ready financial statements as soon as 2008. But some observers worry that the definitions corporations will have to follow will be written almost entirely by accountants.
David M. Katz, CFO.com | US
October 30, 2006
Thanks to unrelenting cheerleading by Securities and Exchange Commission Chairman Christopher Cox and, now, millions of dollars in SEC funding, XBRL is almost ready for prime time.
After years of glacial development, XBRL (which stands for eXtensible Business Reporting Language) may soon be sufficiently developed for public companies to publish the financial data in their 10-Ks and 10-Qs in a format that is easily read, compared, and analyzed by computers. Indeed, if all goes well, the remaining standardized definitions should be written about a year from now — just in time for the 2008 filing season — say the leaders of that effort.
But with XBRL's new momentum come concerns over who will steer the process through the last mile, and whether the end result will help or handcuff the finance departments of public companies.
To be sure, the SEC hasn't said that it would require all U.S. public issuers to file their financials in XBRL. But Cox has pounded the drum for its adoption steadily, arguing that XBRL will make it easier for companies to share the data filed under generally accepted accounting principles among themselves and with investors via the Web. And those investors, the thinking goes, will create strong demand-side motivations that could push companies to adopt XBRL even if it's not mandatory.
Moreover, the notion of a universal changeover to XBRL has gathered steam since late September, when U.S. Securities and Exchange Commissioner Christopher Cox announced that the SEC had awarded three contracts worth $54 million to change the current disclosure system "from a form-based electronic filing cabinet to a dynamic real-time search tool with interactive capabilities."
The bulk of that investment — $48 million — will go to modernizing the SEC's own EDGAR database, and another $500,000 has been earmarked for an effort to produce interactive data tools for investors. But the remaining $5.5 million, to be spent on finishing off the writing of code for XBRL "taxonomies," is targeted directly at corporate finance.
"Since taxonomies have already been written for more than 80 percent of the companies that file reports with the SEC, I am encouraging every one of these companies to file their next quarterly reports in interactive data format, as part of our current voluntary program. And by adding $5 million to the taxonomy writing effort over the next few months, the SEC is making it possible for every company to file XBRL financial reports in 2008," Cox told CFO.com in an E-mail on Monday. (To date, 24 companies have agreed to voluntarily take part in the commission's pilot program and submit their yearly, quarterly, and other reports using interactive data for a period of one year, according to the SEC.)
The money and responsibility for completing the taxonomies — collections of "tags" labeling the data supplied by all filers of financial reports under GAAP — is now in the hands of XBRL-US, Inc. Formerly a committee of the American Institute for Certified Public Accountants (AICPA) and then a consortium of XBRL enthusiasts, the group, which has about 75 member companies and 25 individual members, is now faced with the task of a becoming a fully independent professional organization even as it tries to fulfill its end of the SEC contract.
The steering committee of the group has signed an initial agreement with the SEC to provide "commercial strength taxonomies" — ones fit for use in filings with the commission — for its XBRL project. The group is currently negotiating the details with the SEC, and both sides expect to sign a final agreement within a month.
Despite the challenge before them, the leaders of XBRL-US sound giddy about the prospect of being handed an SEC contract to do work they have long championed. For as many as eight years, they've argued for the need to free financial data from financial forms so that it can be readily sliced and diced and yield a more transparent picture for users. "The only difference between XBRL-US and a cult is that we don’t have a religion," says an advocate for the cause.
Now, however, the cult must transform itself into a business, members say. XBRL-US, an outpost of the 450-member XBRL International consortium, had been the only unit of the global group that lacked independent standing. As a special committee of the AICPA, it couldn’t enter into contracts with third parties "and was out of synch with the governance structure of XBRL jurisdictions around the world," says Dan Roberts, chairman of the XBRL-US steering committee. The organization has since reorganized into a Delaware-domiciled non-profit searching for a chief executive officer and contractors to do the actual work of producing the taxonomies, building atop ones that have already been created for many industries.
Roberts, national director of assurance innovation for the Grant Thornton accounting firm, said last week that the AICPA recognized the need for XBRL-US to become a fully independent organization "and has been working with the committee for about the last year to be in a position to make that transition . . .The contract with the SEC provided us with an opportunity to make that transition very quickly." AICPA has been a "very generous" member of the organization, providing it with back-office systems support, he said.
Some give the SEC's Cox credit for injecting a sense of reality into a field where airy notions long prevailed. "Cox raised the bar" for XBRL-US, specifically, says Dennis Santiago, chief executive officer of Institutional Risk Analytics. The chairman's initiative brought XBRL-US "out of R&D mode and into a production mode," providing a necessity for checks and balances within the organization as it produces "a real tool that people can rely on, instead of an idea," Santiago adds.
Along with the elevated standards, however, have come questions about how the organization will be run — and, especially, who will run it. Some non-accounting members of the consortium are worried that AICPA — and accountants generally — will dominate the process of hatching the overarching XBRL taxonomies.
In a recent E-mail to Roberts that questioned the openness and balance of the organization's governance structure, for example, Christopher Whalen, a managing director of Institutional Risk Analytics, asked: "How is the transition to an 'arms length' relationship with AICPA happening? How is the broadening of the governance base to take in the non-accounting mission elements of the new organization being managed?"
Some XBRL-US members contend that the group's leadership should include more corporate CFOs and investor-relations specialists, as well as more bankers, brokers, software makers, and data aggregators and analyzers. Since he joined his company about a year ago, Sunir Kapoor, president and chief executive officer of UBmatrix, an XBRL taxonomy designer and member of XBRL-US, observed that while he's seen strong representation from Microsoft and Adobe in recent months, "the focus, priorities, and discourse that take place [within the group] come primarily from the accounting profession."
Kapoor, who hopes his company is in the running to be one of the vendors in the taxonomy project, thinks that the leadership of the group should take the opportunity of the changed governance structure to provide more non-accounting representatives on the steering committee and board. (Kapoor, however, can't complain that his own company doesn't have a say in the organization: Phil Walenga, UBmatrix's director of financial services, is a member of the XBRL-US steering committee.)
Some critics also say that a narrow focus on accounting issues could hinder the interaction of the taxonomies with non-accounting data, non-XBRL technology, and the SEC's database. "The accountants are only focused on the accounting side of this," says a top executive for a technology company enrolled in XBRL-US, who noted that data tags must be made "extensible" to the changes companies may ring on the basic standards. "I know the AICPA is going to be focused on the taxonomy, but there's a potential for a gap between the taxonomy and the reusability of the data," said the executive, who spoke on condition of anonymity.
For their part, the members of the steering committee want to have the AICPA continue to play a strong role in XBRL-US. Asked to confirm rumors that Barry Melancon, the accounting institute's president and CEO and Arlene Thomas, a vice president there, would be named to board or executive positions of the non-profit, Liv Watson, vice chair of the steering committee and the vice president for global strategies at EDGAR Online, said that those were "good rumors." She added that she "wouldn't be surprised" if the XBRL-US steering committee considered an arrangement similar to the one that AICPA has with XBRL-International in which the CPA institute has a five-year position on the international group's steering committee.
Overworked in recent weeks from hashing out the terms of the organization's deal with the SEC, steering committee members told CFO.com in a group interview that they are turning their attention to forming a democratic governance structure for XBRL-US. They hope to have an interim board in place over next few weeks, a step required under Delaware law in order to sign the contract, according to Watson. At some point, the steering committee will name a nominating committee to name the candidates for a permanent board that the group hopes to have in place by early next year. Picking the board will be an "open," "member-driven" process, committee members say.
Indeed, the steering committee "has always been broader based than just the accounting profession, and the purview of the new organization will be no different," contends Amy Pawlicki, director of business reporting, assurance and advisory services at the AICPA. "It will incorporate as many different participants in the reporting supply chain as possible." She noted that in addition to representatives of the accounting industry, the board also included members from data aggregators (EDGAR Online) and wire services (PR Newswire director of investor relations Michelle Savage).
Referring to AICPA, however, Pawlicki added, "no one said we were going to be less active in terms of our contribution to and support of XBRL-US."