XBRL and the Information Management Challenge
As the US Securities Exchange Commission (SEC) continues to embrace reporting in eXtensible Business Reporting Language (XBRL) format – its Interactive Data Voluntary Filing Program is now in its third year and expanding into Mutual Fund Information – the demand for interactive data has never been greater.
Interactive data improves the flow of business information between the publishers of data (e.g. management of public and private companies, government agencies) and those who rely on and consume this data (e.g. analysts, investors, lenders, other government agencies and/or regulators).
US investors will now be able to receive information on stocks, bonds and mutual funds with the data itself being interactive, making it possible for investors to go online and compare information filed. SEC chairman, Christopher Cox, said that formalising of the rule was part of the SEC’s ‘war on complexity’ and that the new format would enable investors to find what they need quickly and reliably, without having to pore through pages and pages of documents. XBRL is also at the heart of the American Federal Deposit Insurance Corporation’s (FDIC) trailblazing Call Report Modernization Project, which ensures that banking data for the industry, investors and consumers is reported in a timely and precise way, providing a true and accurate reflection of the US banking industry at any given time.
Interestingly, the FSA in the UK, however, has chosen not to rollout XBRL because it does not feel the format is “the most appropriate technology for the FSA or UK financial services at the current time.” This is in part due to the fact that unlike other regulators, the FSA is not required to provide or facilitate access to such corporate disclosures. But XBRL is making in-roads in the UK elsewhere.
XBRL is a powerful and flexible XML-based language that standardises financial reporting in a format that is clear and easy for business users to interpret and analyse. It enables automated processing of business information by computer software, cutting out laborious and costly processes of manual re-entry and comparison and allowing companies to efficiently define, produce, exchange, and communicate information that satisfies the reporting requirements of numerous regulatory bodies.
This is accomplished by the software attaching bar codes to individual pieces of data within documents and spreadsheets so this information can be automatically pulled into reports and analysed.
Currently, millions of dollars are being lost off businesses’ bottom lines because of inefficient systems that do not allow the organisation to view and act on consolidated real-time information from across its operations. This also means that fraud prevention systems are not operating as effectively as they could, leaving organisations open to criminal activity and their customers at risk. Despite significant investment in transaction monitoring systems to provide the regulatory ‘tick in the box’ for anti-money laundering (AML) operations, many organisations’ entire transaction history still sits largely in isolation and unused. Point solutions for different types of fraud prevention and detection have been put in place but the information they hold is not shared in any meaningful way.
In the search for anomalies and fraud in large data sources, forensic auditors are often compiling data from disparate accounting systems, manually mapping data sources and often manually re-entering data into multiple spreadsheets. As more and more accounting systems offer export capabilities to the XBRL format – the search for fraud is much improved. With the introduction of XBRL at deeper ledger levels in an organisation, the entire accounting and operational processes become more efficient as well.
With legislation such as the 3rd European Money Laundering Directive forcing financial organisations to implement processes around areas such as know your customer (KYC), it is essential that these businesses understand the operational efficiencies that stem from using XBRL.
For the business, XBRL provides real-time access to a single version of the truth, streamlining the AML and fraud reporting processes and allowing colleagues to collaborate effectively. Management can have a realistic overview of the current state of their organisation and be confident that their information is both auditable and compliant. In the US, the umbrella agency for banking regulation, the Federal Financial Institutions Examination Council, found that a 90-day review cycle was reduced to two days when the data was filed under XBRL. For the IT department, XBRL provides a simple mechanism to really leverage the value in current investments and provide a joined-up service to end-users. Sophisticated interactive data tools exist today and more are being built by technology vendors to help management, investors, analysts and regulators analyse their business information.
Despite the clear benefits of XBRL and the support of bodies such as SEC in the US, adoption of XBRL has on the whole been faster in Europe than elsewhere, largely because it is far simpler to effect change on this scale across smaller countries where there are fewer interested entities involved, parties and data sources to manage. The Dutch government has committed to cutting the administrative burden for business by 25% in four years and several Dutch ministries, including finance, justice and economics are collaborating on an XBRL taxonomy to carry financial data from businesses through the regulatory chain. Already the introduction of XBRL in the Netherlands has allowed multiple government parties to reduce 60,000 data elements down to just 5,000 through using a common data dictionary, and stock exchanges in China, Japan, Spain and other countries are already accepting XBRL submissions or developing XBRL systems.
In addition, the Committee of European Banking Supervisors (CEBS) has developed two XBRL-based taxonomies to enable interactive reporting by credit institutions and investment firms in the European Union. COREP (the Computerised Representation of the CEBS Common Solvency Reporting Framework) is primarily focused on regulatory own funds and the Basel II Pillar I capital requirements pertaining to credit risk, operational risk and market risk, with the aim of reducing the reporting burden on reporting entities and encouraging a level playing field across Europe. FINREP (the Standardised Financial Reporting Framework) will enable credit institutions to use the same standardised data formats and data definitions for prudential reporting in all countries where the framework will be adopted. CEBS believes that both of these taxonomies will reduce the reporting burden for credit institutions that operate cross-border, and lower barriers to the development of an efficient internal market in financial services.
In the UK, momentum is gradually building behind the adoption of XBRL through advocates such as Lord Carter of Coles who recommended in his review of Revenue & Customs online services that all UK companies be required to submit their Corporation Tax returns online using XBRL from 2010. Both Companies House and HMRC can now accept certain submissions in XBRL format, and accounting standards bodies are also adopting XBRL for the International Financial Reporting Standard. While many financial organisations now understand the potential benefits of using XBRL for regulatory reporting, until they understand its implications better most financial services firms are treating XBRL with some degree of caution.
The level of preparation needed to make the most of XBRL will vary between companies, industries and countries, with publicly listed companies needing to know significantly more about XBRL than private organisations; but even the smallest company will need some level of awareness if XBRL becomes the digital financial reporting standard it promises to be. It is not surprising that there is some trepidation around XBRL: until now, the role of XBRL has been limited to taxonomy design and the creation of highly technical information products. Business users have been left out of the mix, unable to understand how XBRL can help them to deliver visual, cross-enterprise understanding from raw data with less time and resources. However, there are now interactive, integrated and easy-to-use XBRL solutions available that can help non-technical users leverage this rich source of insight and make financial reporting the insightful and timely process it was always meant to be. Some would say about time too.
For too long, financial services organisations have been making operational decisions based on partial and old information. XBRL can help ensure that every process, from financial reporting to fraud prevention, works effectively and efficiently for the benefit of the business.