Finance Geek: Technology for XBRL Reporting

The U.S. Securities and Exchange Commission (SEC) has mandated that companies provide investors with “interactive” data to make it easier for them to analyze information contained in annual reports, quarterly statements and news updates. The key to making interactive data possible is a technology known as eXtensible Business Reporting Language (XBRL). XBRL makes it possible to use Web-based tools on the SEC Web site or download the data into a spreadsheet model. Either approach makes it possible for an individual to analyze the information any way he or she wishes without having to key in the data manually. The SEC is phasing in these reporting requirements, starting with a limited set of data from the largest corporations but planning to ramp up rapidly to require comprehensive financial statement and footnote data from all but the smallest public companies. (For details see http://xbrl.sec.gov/.)

In my discussions about XBRL and interactive data after the requirement was announced with people working in the office of finance department, they asked, “What’s in it for me and my company?” My initial answer was “Not much; just like financial reporting, it’s a requirement.” Now, however, I think there’s lemonade to be had from those lemons – but first (to extend the metaphor) you’ll need to buy a lemon press.

Since the SEC announcement of its interactive data rules, software vendors have been rolling out software packages to automate the process that starts with the financial close and ends with the required financial documents with the XBRL-tagged data ready for filing. This close-to-file process has traditionally involved a great deal of hands-on effort. Many of the numbers in the filings come from the company’s consolidation software, but sizable chunks originate from other enterprise systems and – let’s face it – from spreadsheets. (This is especially true of the more detailed annual 10-K filing.) The process of authoring, editing, proofreading and reviewing the bits and pieces of text, data and tables that make up the document involves multiple iterations and reviews. It is spread out across a group of people who usually pass the draft reports along to one another as e-mail attachments. Often, there will be last minute revisions to the data and, although the change may be small, the item may be referenced in the text, which also will need to be updated. Material filing errors are rare, but that’s mainly because companies throw enough eyeballs at the task to spot and correct mistakes. It is a labor-intensive process with high stakes involving highly paid people who I think have much better ways to spend their time. And speaking of time, the filings have to be completed in the SEC’s already shortened filing periods.

These systems eliminate the laborious process of applying XBRL tags manually to financial statements, and also automate the process of assembling the completed document. So, if you’re the CFO, controller or in charge of external reporting, the answer to “What’s in it for me?” is a faster, easier, less time-consuming and risky process for creating public financial statements. As of this writing, three software vendors – Clarity Systems, Oracle Hyperion and Trintech – offer software that helps manage the process. I expect to see similar offerings from IBM Cognos and SAP shortly.

Companies also have the option of having their financial printer, which they already use to handle their submissions to the SEC’s electronic filing system (EDGAR), handle the tagging process, saving them the time and effort performing this step. This may work for some, especially in the short-term. However, it would be shortsighted for companies not to do their own tagging, because I believe many companies will be able achieve significant time and cost savings by automating the entire close-to-file process, including the tagging. Saving time means that highly paid professionals are doing less busywork. Moreover, handling the process in-house very likely will give executives more time to consider what ought to be in the document, or perhaps enable them to move up the filing date.

Those that choose to tag manually have several vendors to choose from, which are listed in the attached table. These tools are an option, particularly in the first year, because of the limited number of data points that must be tagged. However, I don’t believe they are a sustainable choice, especially for companies with revenues of US$500 million or more, because of the large number of items (hundreds, or in some cases more than 1,000) that will need to be tagged.

The SEC’s interactive data mandate can be just another burdensome regulation, or it can be a reason to make your close-to-report cycle faster, easier, more accurate, less risky and less expensive. It’s your choice.