14 May 2011

Putting a price on XBRL for American Business

In 2008 the SEC mandated the provision of registrants' financial statements in the XBRL format, with phase-in being over a three year period. While many of us were frustrated by the delayed phase-in, in retrospect this was probably a very wise decision by the SEC. The phase-in has provided the window for software and processes to improve, and for there to be a body of experience to give us all a good idea of what is about to happen.

Now that we are entering the third year, and the true cost and impact is beginning to be seen and felt. It is difficult to place any truly reliable figure on the total cost to American business, but a range (albeit a very wide range) is certainly possible.

Before I go any further, full disclosure, raas-XBRL (www.raas-XBRL.com) is a service provider delivering inexpensive XBRL production services, so if I sound like a vendor, there's a reason. I am also a huge advocate for XBRL as a reporting standard. I am not an advocate for detailed tagging for the phase-3, or smaller, filers. I think that is a waste of money and time.

So what are some of the key things we learned so far?

  • The SEC was not far off in their estimates of time requirements, at least for the very largest filers.
  • The SEC was not far off in their cost estimates for first time filers, at least for the very largest.
  • Detailed tagging is a nightmare, the value of which has yet to be demonstrated.
  • It is still possible to be "opaque" while using XBRL to demonstrate just how "transparent" you are. Introduce a new system, find a new way around it.
  • This is going to cost US business a lot more than anyone imagined.
  • So far, the only visible beneficiaries of detailed tagging are the consultants.

It is usually around this time that I start getting e-mails from XBRL advocates asking me how, as a prior Chairman of the XBRL US Steering Committee, can I say these nasty things about XBRL. I say them because they are true.

What are my assumptions?

Lets take a minute to estimate how much XBRL is going to cost American business. To do that we need to start with some assumptions:

  1. There are 1500 phase-1 and phase-2 filers, and approximately 8500 phase-3 filers, for a total of approximately 10,000 filers.
  2. The most common estimates in the market are an average of 60 hours for first time filers. The phase-1 filers averaged over 120 hours. Phase-3 filers hopefully will average to the downside of the 60, but for the "highest" cost estimate I use the 80 hours for the first 10Q, and the same for the first 10K, with the other 10Qs requiring half as much time. I use the 60 hours as the "lowest" cost estimate time requirement.
  3. For the 1500 phase-1 and phase-2 filers, I have estimated no change in total effort for out-years. This is because detailed tagging requires the deconstruction of footnotes each time, and is not a one-time large effort followed by a lower roll-forward effort such (as it is with block tagging).
  4. For detailed tagging, although lower than the estimates that have heard (and believe, of a six-times the first year effort) I'm using a four-times cost, hoping somehow that efficiencies will result in lower total costs.
  5. The SEC based it's cost-of-XBRL estimates on a $250/hr rate. I will provide a low - high range of $150 - $250 to cater for a mix of consultant and internal resources. So for the "highest" total cost estimates I use the $250/hr. For the "lowest" total cost estimates, I'm using an average $150/hr, but that does assume use of internal resources only.
  6. I have also estimated an annual software license cost of $15,000 per filer.This may or may not be applicable for many small filers this is not the case, and certainly with raas-XBRL, there is no additional software license.

Before getting to the costs, I accept that these are assumptions, and as such, each is open to interpretation and modification based on the readers own assumptions, experience or knowledge. Proponents of XBRL will want to use the lowest estimates possible, to provide an ROI that is clearly positive, or at minimum a lower cost burden. The only problem is that vague notions of "transparency" when there are, today, so few users of the information, makes it difficult to demonstrate the ROI on XBRL.

I am confident that there is a good ROI for tagged financial statements, but I cannot see any decent ROI for the costs of detailed tagging for smaller filers. I believe the SEC should defer that requirement immediately, and keep that deferment in place until systems have been upgraded to be able to deliver the ROI.

The payback will come as production of XBRL becomes the norm in all consolidation software regardless of the size of package, and we can see the benefits of faster closes, cleaner numbers (internal to companies), greater ease of analysis within companies, and public domain or free software applications that enable the retail investor to actually exploit XBRL. That is when detailed tagging of all filers 10Ks and 10Qs should happen. But until then, detailed tagging of phase-3 filers is simply a massive and unjustified burden.

Lets ballpark the cost

So lets look at what these assumptions will mean for the total cost to American business of implementing the SEC's XBRL mandate.

For 2011 - 2012 (a full year of filings) the lowest total cost is almost $550 million, while the top of the range is almost $1.1 billion. Yes, in the coming year, American business is going to shell out between $550,000,000 and $1,100,000,000 in fees and additional time costs to provide basic XBRL to the SEC (and detailed tagged filing for the 1500 largest filers). That is a wide range, but is based on the fairly wide ranges that the assumptions include.

In 2012 - 2013, the SEC requires an additional 8500 companies to provide detailed tagging. That is going to result in a massive increase in the cost burden of being public. If access to capital is a primary reason for going or staying public, then the increased cost burden of XBRL detailed tagging can only reduce the value of the access to public capital. If the cost burden is too high, I think we will see a number of companies delist.

Based on the assumptions above, the total cost to American business in 2012 - 2013, for the provision of XBRL to the SEC, could reach $2,600,000,000.

These cost estimates do not include any additional cost for assurance over the XBRL. The SEC provides two years of litigation relief for the XBRL component of their filing. That two year window expires this year for the top 500, and for the next 1000 it expires next year. Presumably that means that these companies will need to have assurance over their XBRL. Current ranges for non-detail tagged "Agreed Upon Procedures" engagements are running anywhere from $25,000 to $50,000 per, with anecdotal evidence that the base price in moving upward pretty quickly. I fully expect that number to increase dramatically for detail tagged XBRL. Certainly that may be chump-change to a top 500 companies already paying millions for their audit. Yet this is an additional cost directly attributable to XBRL.

Simply put, in the 2012 - 2013 year, the group-3 filers, roughly 8500 US companies, will shoulder an additional $1.5 billion in costs to be public. That comes to an average of $180,000 per filer. Now lets imagine that my numbers are wrong, Complete wrong. 100% wrong. That still means an additional $90,000 burden per US public company.


The ROI on XBRL needs to be demonstrated, and soon.  I also cannot recommend strongly enough that the SEC, XBRL US Inc, XBRL International and the major proponents of XBRL work to develop and communicate the ROI on XBRL, a return on Investment to the filers, that significantly exceeds the coming upsurge in costs.


  1. I've said it before, and I'll say it again. There's no need to look for an ROI. This is a tax intended to make the SEC more efficient and better able to scrutinize company accounts. That's good for society.

    If the SEC itself is not able to improve it's ability to scrutinize accounts as a result of using XBRL then that would be cause for concern.

    So I think the question is: has the SEC been able to improve it's oversight by, for example, increasing the number of company accounts which are examined? Anyone know?

  2. Here is a 2007 Article from the Journal of Accounting titled: "The ROI on XBRL" that demonstrates a positive ROI for the company that authored the article and used a 'built-in' approach. http://www.journalofaccountancy.com/Issues/2007/Jun/RoiOnXbrl.htm

    As of the December 31, 2010 XBRL submissions, aproxmiately 150 of the Fortune 500 were using 'built-in' (rather than bolt-on) implementations and reporting cost/time savings of 25% to 50% on their overall reporting processes (not just their XBRL exhibits) while enhancing their controls. As an example, here is a free webinar wherein Cigna outlines there process, cost, time and control benefits.

    The flaw in Dan's accounting is that it only considers the costs (and not the benefits). One sided accounting is not how ROI's are typically conducted.

    Also, to answer the 'anonymous' question above, there is a blog posting here that highlights users of XBRL, including the SEC Staff and other analysts enhancing their analytical processes

  3. Dear Anonymous,

    Imagine instead if the SEC had simply bought the feed from EdgarOnline, with over a decade of history, and then contracted EOL or another company to convert the incoming data into XBRL (as EOL had done, and had the systems in place to do). It certainly would not have cost as much as the burden that the regulator is imposing on business.

  4. An analysis that considers the costs without the benefits does not seem like it is very balanced.

    Approximately 140 companies used built-in implementations to submit their XBRL Exhibits to EDGAR for their December 31, 2010 submissions. Many of these companies are reporting cost/time reductions of 25% to 50%+. Several examples are included below:

    The 'ROI on XBRL' article published in the June 2007 Journal of Accounting here: http://www.journalofaccountancy.com/Issues/2007/Jun/RoiOnXbrl.htm was written by United Technologies Corporation; acknowledged as the largest Hyperion implementation in the world. If they were able to remove 25% of the cost/time from their reporting processes from this type of 'built-in' implementation, wouldn't that reflect some for of 'net benefit'?

    "Standardize to Streamline" highlights many of the general process reporting enhancements enabled by XBRL. http://www.chessys.com/news_display.php?id=39

    Also, in the December, 2010 PwC webinar on: 'Automating the last mile: The role of XBRL in streamlining financial reporting", freely available here: https://www302.livemeeting.com/cc/pwclivemeetingroom/view?id=4FQZP6 Cigna highlighted how they benefited from their use within their reporting processes; again generating a cost/time reduction of approximately 35% and enabling them to redeploy 1/3 of the individuals previously involved in their prior manual report assembly and reporting processes.

    There are other case study examples of 'built-in' implementations available here: http://www.webfilings.com/blog/altera-breaks-through-barriers-process-improvement-webfilings and here: http://www.rivetsoftware.com/resources/information-library.aspx and at other 'built-in' vendor sites.

    To address the Anonymous comment above, it may be useful to note that the SEC analysts are beginning to leverage a range of XBRL enabled analytical applications for their persistent analysis of company submissions. The incremental capabilities enabled by XBRL are provided in two areas: 1. incrementally more correct, timely and accurate data available for analysis from the company XBRL submissions that was previously available via traditional reporting / parsing processes; and 2. collaborative modeling and analytical capabilities provided by the formula standardization.

  5. "An analysis that considers the costs without the benefits does not seem like it is very balanced."

    Perhaps -

    "An analysis that considers the benefits without the costs does not seem like it is very balanced."

    ...would be equally true.

    1. Obviously none of you work at a company that has to actually do XBRL... I do and there is no cost savings. In addition, being that no one is using this in the financial world. There can be no benefit. The SEC has acknowledged that they do not have the staff to monitor.

      In the end more government red tape that makes American Business less competitive.