XBRL: Accounting Geeks Get Radical

It is not often that something as deeply geeky as XBRL gets onto the front page of Wired magazine. Daniel Roth’s superb article about radical transparency raised the profile of those four letters. What could be more boring than an XML standard for accountants that has been around for a decade? On the other hand, what could be more exciting than something that might disrupt and recreate the deeply broken global financial system? I spent two days at the XBRL US National Conference in New York to find out the reality, which is somewhere in between.

The Ultra-Fast XBRL 101

For XBRL newbies, here are a few key facts and some links for further research:

• XBRL stands for eXtensible Business Reporting Language.
• It is an open standard based on XML, created by an accountant named Charlie Hoffman. Read some quick facts here.
• If you tag something consistently, software applications can more easily analyze the data and present more useful information. Yes, that sounds like the semantic Web, and we all know that has faced the chicken-and-egg problem (i.e. not enough content is semantically tagged yet). But imagine a semantic Web standard for which governments around the world tell companies that they have to tag data that way.
• XBRL gained attention in the US when the SEC mandated that public companies report their financial results in XBRL (starting with companies that have a market cap over $5 billion). That has been going on for two quarters now, so all parties are getting real-world experience with XBRL.
• But XBRL traction is greater in other countries, especially Japan, Australia and Holland, where it is being used to standardize and simplify reporting to government regulators. In the UK, companies report to the taxman using XBRL.

The Twitter hash tag is – you guessed it – #xbrl.

Why XBRL May Be Revolutionary

The best analogy for XBRL is the barcode in the retail world. The analogy works because it may take a while to happen… but when it does happen, everything will change. Imagine every number with a standardized tag telling a computer what it is.

Here are the revolutionary implications of XBRL:

• A year ago, the global financial system suffered a cardiac arrest.
  
  That scared a lot of people. The patient now walks around the hospital grounds and occasionally forces a healthy smile. But most close observers recognize that the patient is far from healthy and is still indulging in cigarettes and double cheeseburgers. This heart attack affects us all. Radical transparency, to shine a light on those toxic assets and murky financial pools, is the best long-term cure. And XBRL, along with political will, is key to that radical transparency.
• Ordinary investors don’t trust the stock market.
  
  It feels like a casino where the roulette wheel is fixed. That is bad for all players in the economy. We need people to trust numbers again and to invest patiently in great companies that grow and pay for their kids’ tuition and their own retirement. That patient investment will help great companies grow and help those companies create good jobs. That is the way the stock market is supposed to work, and a few idealists think it could work that way in the future. Jane Q. Public needs access to analytical tools that are currently reserved for Wall Street insiders, and she has to have confidence in the numbers. Private investors need to be served by truly independent analysts who charge transparently. XBRL can play an important role in that.
• The cost for a company to report to government regulators is ridiculously high.
  
  This is a hidden tax on jobs (except for accountants!). The time and money spent on this could be used more productively. What if government agencies agreed on a single way to file reports using XBRL? This is happening today in Australia and the Netherlands.
• There is a major disconnect between the three types of reporting (i.e. to investors, to regulators and to internal management).
  
  The third type is what really drives business. These are the “business intelligence” and MIS tools and dashboards that managers rely on to help them run the business. What if one set of numbers could drive all three types of reports auto-magically? We are a long way from this, but the vendors leading the XBRL charge are creating the platforms that will enable this in the future.

Today’s Reality Check

The New York conference was about XBRL in the US, so we will keep the current analysis to what is happening here.

The basic reality is that large public companies are obeying the SEC’s mandate by reporting in XBRL. No surprise there: they have to do it.

So, they are spending some money to prepare these XBRL-compliant reports, by purchasing vendor tools and outsourcing the work. Some are doing it enthusiastically, anticipating the many downstream benefits. Others are doing it just to check off the box. This is hardly the best year for a new cost with an uncertain ROI. The same bean counters who are asking everyone to cut costs are asking for bigger budgets… “To do what, exactly?”

That’s the problem. The returns are very unclear, and they are certainly more than a couple of quarters away, and most managers are thinking pretty short-term these days.

The returns are unclear because investors are not using XBRL data in any meaningful way yet. It’s a chicken-and-egg problem. Not enough XBRL data exists yet for serious analysis.

Many markets have chicken-and-egg problems. This particular one is easier to forecast because – without stretching the analogy too far – the government (via the SEC) is ordering the chickens to lay eggs.

What the Future Will Likely Bring

The future is always uncertain, but in this case we can predict a few things with some degree of certainty:

1. More companies will report their financial data using XBRL, because they have to. So, vendors will find ways to make this increasingly easy and low-cost.
2. XBRL will be used in the Mortgage-Backed Securities (MBS) market, because this is the market where we, via the government, own a lot of toxic assets. The technology to do this is available, and the politics indicate that it will happen.
3. XBRL will be used in the bonds market to enable new forms of credit rating, because the current credit rating agencies clearly failed at their job, and the government will want to do something about this.

What Is Still Very Unclear

1. What new mechanisms, vendors, tools and services will emerge to make this data useful for investors, both individual and institutional?
2. How will this impact the fast-growing $8.8 billion market for business intelligence systems.
3. What will happen when the US government makes a bigger push for transparency using XBRL as leverage? The SEC’s mandate is a great start. But other countries are ahead of the US in XBRL adoption, and the Obama administration is making a big push for data transparency via data.gov and other initiatives. So, we are likely to see more in this area, but precisely what will happen is unclear.