All public companies in the U.S. are mandated to tag their financial statements with XBRL, but many finance executives are saying the tags are not useful. In this Q&A, Robert Kugel,
senior vice president and research director of Ventana Research, based in San Ramon, Calif., provides insight on where XBRL is in its development, why it could be beneficial for private companies to adopt, and why tagging internally is wiser than enlisting a third-party service.
Can you give a brief history of XBRL and XBRL tagging requirements?
Robert Kugel: The developers of XBRL thought if they created a consistent set of tags for each data point, people could consume financial information in ways that were far easier and more flexible than what they had at the time -- and that continues to be the wish. Over the past 15 years, the technology has evolved, [and] it's been adopted around the world for a variety of reporting functions.
So now the SEC thought it would be terrific if people could access information in their EDGAR [Electronic Data Gathering, Analysis, and Retrieval] system in a way that made it easier to consume. They [ushered] in this requirement for public corporations to tag their financial statements using XBRL so that investors and others could have easier access to financial information.
Why do you think CFOs aren't finding XBRL useful?
Kugel: To begin with, the requirement wasn't aimed at benefitting public companies any more than [it was intended] to get them to publish their financial statements. But with that said, we're still fairly early on in the development of XBRL and its application to investor and public relations purposes. While the basic technology is there, it hasn't really been applied in ways that make it useful to corporations, combined with the fact that there just aren't any freely available tools that people can use that make good use of XBRL technology. The ones that the SEC has made available on its website aren't especially useful.
I think that companies need to figure out more inventive ways of working with this. I don't know of any company that has taken XBRL technology and built it into its website so that investors, suppliers and customers could work interactively with their financial statements. We're not there yet.
How can private companies benefit from adopting XBRL?
Kugel: [Using] QuickBooks or another basic accounting package, you can create a financial statement automatically. [But] if it was then tagged using XBRL, [and] you have a loan or a lease, you could just email the lender this XBRL-enabled report and they could consume [it]. So it would be very simple for private companies to communicate their financial condition to interested parties. Today the handful of banks that have systems for automating […] financial disclosure analysis are spending gobs of money for proprietary systems, and they work up to a point, but it doesn't make that information as readily available for analysis across the entire institution as if the basic information was coming in tagged.
It seems the two prevalent approaches to doing XBRL tagging today is to either hire a third party or do it internally. Which is the better option?
Kugel: Hiring somebody would appear to be the easiest approach because you're preparing your filings the way you always have. You then hand them off to somebody who does the tagging, and then likely does the filing. But I don't know too many CFOs or controllers who would leave it to somebody else to, for example, create the captions for their balance sheet and income statement. Most like to have control over exactly which tags are being used, and that control is the number one reason I advise companies to do this in-house.
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The second reason is those providing the [tagging] service wind up getting deluged by [lots] of companies all at once [and] you probably wind up having less time to do the preparation of the statements than you would if you were doing it internally because [the service providers] have deadlines. Third, it's an additional expense that I don't think is terribly worthwhile. The fourth reason is I don't think tagging financial statements is all that difficult. About six years ago, I tagged statements for seven public companies in a variety of industries. The experience gave me a [handle] on how tough it is -- and it's not that tough. [And] now the tools are a lot better than they were then.
[Also] the software for managing the close to disclose [process] includes a tagging engine. To me, the value of those tools is that they've enabled more process automation in the assembly of financial filings. They make what had been a fairly chaotic and time-consuming process a lot easier, and cut down the work people need to put into producing these documents accurately and efficiently. So turning on this tagging capability -- to me, [is] a small incremental step and it doesn't require huge amounts of training. It requires some training, but nothing that I think companies ought to find daunting. Having control and more time to [produce] the final report I think more than compensates for the effort that goes into the tagging process.
What's your advice for a company that would like to get started doing the tagging internally?
Kugel: There's plenty of training available at a number of sources, including the vendors of the software. Honestly, this isn't rocket science -- it's almost entirely a mechanical exercise.
Get some training, and then the nice part is that these things pretty much update themselves. What the systems […] do is they simply push everything forward another quarter or year. Some effort is required initially to do the implementation, but then you're pretty much doing quarter-to-quarter maintenance.
Where do you think the future of XBRL is going?
Kugel: [XBRL consortiums are] sponsoring competitions to encourage the development of freely available tools, and I think over time we'll probably see some for investors or others to use so they can consume the information in EDGAR and in data repositories.
I think companies will figure out that [XBRL] is useful on their websites. I apologize to any company where I've missed its use of XBRL to create interactive graphics and analytics, but I haven't seen one. For now, most companies have fairly extensive investor websites, and some prepare additional schedules of data that they don't necessarily file with the SEC. At some point most of the information they provide to a financial regulator, as well as some of this other information, could be tagged and they could create investor websites that are more interactive than [they are] today.
The data's available, but if there's no way of consuming it easily, it's not going to be terribly worthwhile. I'll give an analogy -- think back to the early days of business intelligence (BI). BI was invented because ERP systems did a great job collecting information, but companies had a hard time making use of it because there was no straightforward way of reporting and analyzing it. Now you want to be able to make use of the data you've spent so much money collecting, and that's where these reporting systems are really worthwhile. You've done a good job now on the financial reporting side of tagging the information, but as of yet we don't have an easy way for individuals to make use of it.
Emma Snider is the associate site editor for SearchFinancialApplications.com. Follow her on Twitter: @emmajs24.