A year ago, the SEC was firing warning shots across the bows of the business community about the use of tagged data in corporate filings. Now the steady cannonade from Washington is starting to get real attention in finance director suites.
SEC chief Christopher Cox is leading the charge. A year ago he was on the road giving speeches to any group that would listen about the value of extensible business reporting language (XBRL). In the background, he and his chief technologist, ex-McKinsey executive Corey Booth, were putting together a strategy to make things happen. That strategy came to life in 2006 with a flurry of industry roundtable discussions, more speeches and real money on the table.
Show me the money
By the fall, Cox was in super salesman mode, personally giving live onstage demonstrations projected on large screens before industry groups. But it was his announcement of multi-milliondollar XBRL contracts in September that capped the campaign.
Guiding the commission through a commitment of over $50 mn to upgrade Edgar so the filing system could handle tagged data, Cox made sure another $5 mn was directed to the US consortium that has struggled for years as a purely volunteer group to get XBRL ready for prime time.
That money, says Michelle Savage, vice chairman of the XBRL-US steering committee, will ensure that XBRL rules (taxonomies for tagging data) get into shape much faster than could have been achieved without assistance.
Since last year, the number of companies making XBRL filings has jumped dramatically. The figure went from eleven in the summer of 2005 to 20 last June, then doubled to 40 less than five months later, in mid-November.
‘The number is up significantly over 2005, and we continue to get inquiries,’ reports Jeff Naumann, the SEC’s XBRL point man. ‘We have 86 filings from 37 companies today and those numbers continue to grow,’ he said to IR magazine in early November.
Bringing small investors in
There was a third aspect to the SEC’s September announcement: Cox wants to offer features on the commission’s web site that will allow anyone to work with the XBRL data for free, according to Naumann.
Power users buy complex XBRL products, but the SEC has commissioned two vendors to ensure the general public has free access to the new form of data. ‘We want to provide a capacity on the web site – a means to view and use the data,’ Naumann says. ‘On top of that, the prototypes will showcase ways in which data can be used for analysis.’
Investors should have access to the free services by mid-2007, if not sooner. Naumann adds that the commission wants much of the software behind the services to be ‘open source’, which means that software vendors can build additional capabilities using the code from the SEC project as a base – a move that is sure to raise use and interest rapidly.
There are challenges at the retail level. Chuck Callan, senior VP for regulatory affairs at ADP Investor Communication Services, says ADP’s experience in distributing proxy materials, for example, reveals that 75 mn retail investor recipients still demand hard copy. Many of them use the internet but aren’t making the jump to using it interactively – in this case to vote proxies.
‘We believe that XBRL will not draw these investors without the appropriate wrappers,’ Callan says. ‘In fact, we think you’ll lose them.’ The industry needs to make the investor experience better, he adds: ‘We need to figure out how to get investors to look at the screen.’
Pros want it too
On the professional side of the fence, there are plenty of good reasons to see XBRL advance. One sell-sider, Mark Augustine of Augustine Consulting (who spent nine years as a biotech analyst for Credit Suisse), says a high workload limits the scope of research coverage, so using XBRL would mean more time to cover more companies.
‘The biggest roadblock for me covering more companies was never the science – it was all the legwork to simply bring it up to a state of readiness,’ Augustine told an SEC roundtable last summer. ‘All the forecasting etc would be readily enhanced’ with XBRL, he added.
Several vendors are already working for issuers filing in XBRL. In addition to providers of audit and finance support software like Hyperion Solutions and Hitachi, they range from Edgar Online, which has long worked as a portal to the SEC’s Edgar database, to news release firms like PR Newswire and Business Wire. Of course, these firms all charge for their services, but cost may not be as big a concern as some companies think.
One of the early XBRL filers, United Technologies (UTC), put in-house resources to work and spent only a small sum to report in the new format alongside its regular text filings. John Stantial, director of financial reporting at UTC, told roundtable participants at the SEC last summer that the first document filing by the company cost just $300 and 80 hours of manpower.
Low cost and dropping
UTC’s first dealings with XBRL, while cheap, still required special effort. Stantial said many of his peers complain that the costs will be high and resources are too thin, especially for companies that have just gone through the costs of dealing with new Sarbanes-Oxley accounting requirements. ‘The reality is that it costs next to nothing,’ Stantial maintained. ‘It’s not even in the same world as Sarbanes-Oxley.’
The cost is likely to drop a lot more when UTC upgrades to a new internal financial database from Hyperion. ‘I have just roughed it out, but it looks like we can cut 15 to 20 percent of our man-hours per quarter,’ Stantial explained. ‘That is an impressive number.’
At ADP, itself a corporate XBRL filer, Callan says the task took about 25 man-hours as finance people started up the learning curve with the first quarterly filing document, but just three or four hours for the next one. ‘After the initial inquiries and usual diligence, it was easy,’ he says. ‘In terms of extra resources, it was uneventful.’
Asked to describe the benefits for his company, Brian Vendig, manager of external reporting at Xerox, says: ‘Our corporate culture is to get involved with technology that is likely to improve the activities of our customers. We were involved in the original development of Edgar 20 years ago, and we want to have an understanding of the new systems so we will be prepared if the SEC makes them mandatory.’
XBRL plays into Xerox’s ethos in other ways: ‘It ties up with our company’s involvement with smart documents and smart technology,’ Vendig says. ‘It seemed like something we could get behind.’
Improving communications
Malcolm Persen, VP and CFO of Arizonabased Radyne, says he joined the SEC’s pilot XBRL reporting program to get some XBRL experience in an effort to attract Wall Street research followers. ‘This is not expensive and it’s not hard to do,’ he states. ‘Compared to the other hoops we have had to jump through in the past two or three years, this one is pretty easy.’
‘Why do it now?’ asks Michael Becker, director of global disclosure and financial reporting services at Business Wire. ‘XBRL is not an ‘if’ proposition, it’s ‘when’. Companies should prepare their systems today at a leisurely pace, creating a repository of XBRL information so they don’t have to backfill later.’
In a recent posting on Hitachi XBRL’s new blog (blog.hitachixbrl.com), Gary Purnhagen, VP of strategic planning at Merrill Corporation, boldly predicted the SEC will make XBRL mandatory in 2008. Over the next year, as investors catch on, there will be a ‘stampede’ of XBRL filers, he claimed – then, when the SEC mandates XBRL, it will be nothing more than a ‘sweep-up’ of the late adopters.
For now the bandwagon is far from crowded, and there remains plenty of room for everyone to hop on board. What’s more, there are incentives for doing so. As Naumann says: ‘There are improvements to be made, and this is a better way to communicate with stakeholders.’
