Just days before a federal regulatory body will vote on whether to require publicly traded companies to use a specific business data language to report their financial data, IBM is launching a major initiative to create new standards for the language, thereby making it even more useful.
The Securities and Exchange Commission is expected to vote on Wednesday on whether companies will have to submit their financial filings in Extensible Business Reporting Language (XBRL). Filings submitted in XBRL use XML data tags to describe business and financial information, making the documents much more searchable than the current official SEC filings, which are submitted in HTML or plain text format. Elements of a report, such as executive pay, are much more accessible, and the new format allows for more extensive cross analysis.
The IBM Data Governance Council is announcing Monday an initiative to develop a new XBRL taxonomy to describe risk and market losses. The council, a group of 50 global companies including American Express, Bank of America, and Citibank, believes a XBRL risk taxonomy could provide a more thorough picture of risk that is incurred in the overall economy--thereby preventing the sort of market meltdown that occurred this year because of the lack of understanding of the risk in subprime mortgage derivatives.
(Credit:
XBRL International )
The council is soliciting proposals from financial institutions, corporations, vendors, and regulators for ways to create consistency and semantic clarity in the ways companies disclose operational, market, and credit risk.
"What's convenient about this language is that it's become widely adopted, so there's a wide body of knowledge about how to prepare reports using the language, and it creates the opportunity to normalize information," said Steve Adler, chairman of the IBM Data Governance Council. "It allows regulators to compare financial results to each other, and that comparable nature gives regulators enormous power to understand trends."
Other industries, he said, can follow the model of insurance companies, which pool their risk data to create a picture of the overall market that allows them to map and forecast market trends.
"One of the things we've learned from the subprime credit crisis is that we have so much information flying around today, nobody is able to discern the impact of their decisions on the larger market and the economy," Adler said. "Semantic clarity makes the information comparable, not just for human beings, but also comparable for computers that can assimilate the information and create business intelligence frameworks."
In late February, the council will discuss the risk standard specifications in a meeting with the SEC, the Enterprise Data Management Council, the Financial Services Technology Consortium, XBRL International and XBRL.US. Adler said that the council cannot speak for all of its member companies but that some corporations such as Key Bank have expressed interest in developing the standards.
XBRL reporting has been widely adopted internationally. The SEC started a voluntary XBRL filing program in 2005, and in May 2008 published its proposal to require companies to submit their financial statements in XBRL format starting in the first quarter of 2009.
However, not all companies have adopted XBRL reporting because they are waiting for the SEC to vote on whether it will be required. There is hesitation to incur the cost of transfering to a new reporting system, XBRL software vendors said at the 18th International XBRL Conference in October.
"I think, especially in this recession, cost is always a concern for every organization, but it's far too early to assess what kinds of costs or resistance would evolve" to developing a risk standard, Adler said. "We think this has benefits for many parties--for financial institutions, for regulators, and for markets--and we want to hear the concerns of organizations. That's part of the standards process, listening to everybody's perspective and building consensus."
Adler said he could not speak to how likely it is the SEC will vote in favor of XBRL filing requirements on Wednesday, or to whether the vote will have an impact on the interest in developing a risk taxonomy.
"The standard is a valid standard because of international adoption," he said. "What the SEC does on Wednesday won't have an impact on our decision to move forward with this process."
WASHINGTON--Financial information about companies is sometimes difficult to uncover, and even more difficult to compare.
It's buried in footnotes to earnings reports and sometimes almost seems intentionally obfuscated. The Securities and Exchange Commission thinks it has the answer: a type of language for business data that could be to finance what HTML was to the Internet.
That was the plan, at least. There have been no fewer than 17 conferences so far to advance the Extensible Business Reporting Language, or XBRL, standard, and it still is not mandatory for U.S. companies. (The SEC started a voluntary XBRL filing program, and in May 2008 published a proposal that would require companies to submit their financial statements in XBRL format starting in the first quarter of 2009.)
At the 18th International XBRL Conference held here on Thursday, the SEC was expected to officially establish new XBRL filing rules. However, the rules were not set, and embattled SEC Chairman Chris Cox--Sen. John McCain has called for his resignation as a result of the recent financial crisis--did not appear at the conference as scheduled.
In general, regulators claim that adopting XBRL is essential to improving the efficiency and transparency of the public reporting process and has far-reaching implications for keeping track of the corporate world both domestically and internationally. But publicly traded companies don't like the uncertainty created by the SEC's delays.
"We have hundreds of companies sitting on the fence," said John Yapundich, executive vice president of EDGARfilings.
The SEC maintains an online database called EDGAR--the Electronic Data Gathering, Analysis, and Retrieval system--so investors can review public companies' financial reports.
EDGARfilings is a vendor that provides software for filing documents with the SEC, and the company has invested heavily in XBRL software, Yapundich said.
Even so, "people are only slowly adopting the XBRL format because they're waiting to see the rule sets from the SEC," he said.
The conference appeared to be peopled not with representatives from public companies who will file in XBRL format--but instead government regulators and vendors like EDGARfilings, Fujitsu, and Rivet Software that are pitching their XBRL software.
XBRL filings use XML data tags to describe business and financial information, making the documents much more searchable than the current official EDGAR filings, which are submitted in HTML or plain text format. Elements of a report, such as executive pay, are much more accessible, and the new format allows for more extensive cross analysis.
"The benefit is better analysis, better understanding--it's the transparency virtue we're shooting for," David Blaszkowsky, director of the SEC office of interactive disclosure, said Thursday at the conference.
Politicians, shareholders, and the public alike are clamoring for more transparency and accountability from Wall Street, the panelists at the conference said. Eisuke Nagatomo, president and CEO of Japanese company EN Associates, said that in the past year, the term "corporate governance" appeared 575 times in the Wall Street Journal--the same as the previous six years combined.
With so many large companies collapsing under poor management, high executive pay has been a particularly hot issue. The House of Representatives in April 2007 passed a bill providing shareholders with an advisory vote on executive compensation, and Democratic presidential candidate Barack Obama sponsored matching "say on pay" legislation in the Senate. With McCain also expressing his support for shareholder advisory votes, the legislation will likely make it into law during the next administration.
"That tightens the need for better and faster information," said Patrick McGurn, special counsel for RiskMetrics Group. "Investors will be looking at hundreds of thousands of these 'say on pay' profiles."
By providing standardization from company to company and across markets and making elements like executive pay easy to find in a report, XBRL has the potential to eliminate the time crunch involved in that process, he said.
"There's a need for XBRL to serve as the horse in front of the cart on the disclosure issue," McGurn said. "Once investors have information for one market, they'll want it for every market."
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