Risk & Compliance

XBRL Will Keep Investors Wanting More

The programming language will pique, not satiate, investors' appetite for more information.
Sarah JohnsonSeptember 29, 2006

Be prepared for hard questions.

If Securities and Exchange Commission chairman Christopher Cox gets his wish and companies universally adopt XBRL to file their financial statements, investors and analysts will be asking CFOs tougher questions.

By using the XBRL programming language, which eliminates the need to rekey data into computer models and analysis tools, investors and analysts will be armed with real-time, easily digestible information about companies big and small. What’s more, the transition to XBRL will likely lead to more knowledgeable and inquisitive shareholders and analysts who will pepper earnings calls with hard-hitting questions, said Greg Adams, chief operating officer and CFO of EDGAR Online, who participated in the SEC’s Friday morning roundtable on interactive data and small companies.

During the roundtable, the panel — made up of corporate executives, investors, and analysts — promoted the benefits of XBRL, an Internet-language method of tagging financial data. They said it’s not as tough to use as it sounds, doesn’t cost as much as you’d think, and could lead to smaller companies gaining traction on Wall Street. At the same time, it could also encourage investors to want more.

“Use this opportunity to give investors something new,” said Deborah Allen Hewitt, a College of William & Mary professor and a member of the investment committee of the Virginia Retirement System (VRS). “Don’t just wrap the same type of data in a new technology. Use this as a chance to provide broader data about your company, and deeper data.” She asked that companies consider using XBRL to tag highly coveted, and closely held, data such as business-segment information, so investors get a better sense of how revenues and earnings are produced.

Hewitt thinks XBRL will help companies provide investors with more detailed, qualitative data — that’s the only way her medium-size pension fund, which manages a $50 billion portfolio, would start to pay more attention to small-cap companies. Currently, small caps make up only 8 percent of the VRS fund’s assets, and the pension managers are unlikely to look at companies that generate less than $50 million in revenue and trade less than 50,000 shares daily. To take on such liquidity risk, fund managers will want more detailed information about small-company fundamentals, noted Hewitt.

In addition, companies using XBRL will find that it is more difficult to hide, for example, restatements or other items typically buried “in the footnotes of a 500-page document,” said Richard Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics. Indeed, he agrees that XBRL will increase investor and analyst scrutiny.

Whalen reckons that once XBRL is adopted more broadly, financial-statement users will preset computer models to create financial highlight pages, peer and industry comparisons, or proprietary single-company metrics as soon as regulatory filings are released and the data is fed into their systems. Currently, for short-term analysis, users manually load highlight data from earnings releases into models, often ignoring EDGAR filings because it takes too long to sift through the static documents, explained Whalen.

CFOs will feel anxious when they first start to file using XBRL, but the feeling wears off, according to Adams and Malcolm Persen, CFO of Radyne Corp., whose companies have used XBRL to tag financial data. The finance chiefs also said the cost, at a few hundred dollars, was minor. In contrast, a large company like $43 billion (in sales) United Technologies spent $40,000 to convert its financial-reporting system, according to Cox.

Adams admitted that using XBRL was awkward because the language formatting is not “mature,” explaining that the taxonomy was not complete. (The taxonomy is the data-labeling information needed to run XBRL.) Earlier this week, the SEC announced a $54 million investment to update its 20-year-old EDGAR database of corporate regulatory filings and turn it into an interactive database that uses XBRL. Of that amount, $5.5 million has been earmarked to complete the XBRL taxonomy, and Cox said he expects the project to be finished within a year.

After the initial anxiety of using a new way to file financial statements wears off, the pros outweigh the cons, according to Radyne’s Persen, whose company is one of 24 participating in an SEC XBRL pilot program (the others include General Electric, Microsoft, Ford, and Pfizer). In fact, XBRL will likely ease some of the compliance cost burden associated with the Sarbanes-Oxley Act, as the new tags should help companies spot, and then trace, internal-control problems faster, added Adams. “Internally you can find problems sooner rather than later,” he noted.

Adams said that XBRL was part of the reason his company is trading an average 135,000 shares per day, compared with 20,000 last year, and why its stock price has increased. “We’re able to tell our story faster,” he said. However, Persen, the only CFO on the panel who is not associated with EDGAR, said his own company’s higher trading volume and climbing stock price is not related to his use of XBRL to file financial statements.

The panelists agreed that there’s still work to be done before widespread adoption of XBRL; for example, more software tools are needed to easily pull together and analyze information. They also believe that progress has been slow regarding getting companies to use XBRL. Panelists complained that the SEC is being too soft on getting companies interested in the programming language. “XBRL is not a very big hurdle to get over,” said Persen. “I encourage the commission to find ways to encourage companies to take it on.”