30 January 2011

Re-post - SEC Interactive Data: Approaching Usefulness in 2011

This is a re-posting of an article by Dennis Santiago, CEO of Institutional Risk Analytics (IRA - http://www.institutionalriskanalytics.com)
Monday, January 24, 2011

Dennis Santiago of Institutional Risk Analytics is a user of the call report data that is made available from the FDIC, and that is collected in the XBRL format. Dennis however dos not take an XBRL feed form the FDIC. As he has said to me on numerous ocations "Why would I take data in a format that requires me to do more work, more computer cycles, and more cost. The FDIC provides the data in other formats that are much easier for me to consume, so I do".

Yet Dennis has been a "friend" to XBRL for a number of years, always ready to point out opportunities and suggest improvements that will enable him to actually use XBRL data.

He can be reached at dsantiago@institutionalriskanalytics.com or at 310-676-3300


Monday, January 24, 2011.

SEC Interactive Data: Approaching Usefulness in 2011

By the second quarter of 2011, we will see another wave of machine-to-machine interactive financial data become available directly from the U.S. government. In June 2011, approximately 8,700 companies will begin to file supplementary “xml” files accompanying their quarterly and annual financial statement filings with the Securities and Exchange Commission. XML files can be read directly by computers allowing instant absorption by the analysis programs -- institutional and individual – to evaluate public companies. At its most grandiose, it means that investors, litigants and policy makers will be able to examine and assess the official legal version of these filings as fast as Regulation FD (Fair Disclosure) will allow.

This latest technological jump in financial information transparency is the result of a number of years of work by the SEC. The process included having to develop a specific sub-dialect of xml called XBRL, a many year exercise to turn the free form reporting of the U.S. Securities Act into a workable codified set of data construction rules. Because it blends management statements, the legal requirements of speaking about both “Financial Statements” and “Safe Harbor” discussions, and numerical precision of form-like data enhanced by company unique extensions, it is the most complex attempt of this type to date.

Not that the SEC is a stranger to XML. It originally started the process by requiring the relatively simple Forms 3, 4 and 5 that report on company ownership to be submitted per an XML specification via an online form. Hundreds of thousands of these documents have been filed and machines capable of reading them are able to render who has what at the most complex companies transparent. The SEC is also working on the XFDL specification that will codify many more form types submitted to the SEC.

Prior to this the most complex government financial data collection exercise took place in the parallel universe of the U.S. Banking Act. The FFIEC had brought the reporting of FDIC Call Reports into a Central Data Repository (CDR) and pioneered a three tongued publishing methodology that delivered perfect synchronization among a human viewable HTML file and two computer readable data files, one in xml format and one in CSV format thus covering 99.99% of possible downstream analysis interfacing cases. It set a high standard for all direct government-to public dissemination to follow.

Getting Ready for Prime Time

One of the true tests of a new idea is whether or not it still works when one shuts down all the “experimental versions” of the process. The U.S. government version of this is beginning this phase now. Being analysts who use filings data to assess companies as opposed to XBRL developers seeking to make a living by filing documents with the SEC, we decided the time has come to do a “production acceptance test” of things as we wait for June 2011 to arrive.

Test number one was to ignore all experimental filings data feeds from the SEC and ask the key question, “ Is it possible to find and catalog these documents using only the official EDGAR Accessions file?“ And our favorite follow up government accessibility and transparency question, “Is what it takes to do that sufficiently low hurdle that anyone can do it for free or near free?” This is a critical operational issue because in the end, if it doesn’t work via a truly publicly accessible librarian pathway it isn’t soup yet.

We are happy to report that the answer is yes and yes. One needs nothing more than the SEC Accessions Catalog file to generate a complete table of the URL pointers to every xml filing. It’s implementable as a lights out program and we plan to create a look up utility with the link pointers to all the xml support files that will be incorporated into our IRACorpFilings.com site. Each filing has a set of xml files that together constitute the XBRL submission supplement to the main filing document.

The SEC’s implementation of downstream transmission support does not presently have the CSV check file version of the data alongside the xml as is done by the FFIEC. For one thing that makes it slower to process back into an RDBMS but that’s just an inconvenience and not a show stopper.

What bothers us on this one is that we would like to see the CSV check file accompanying the xml file set – or at least the main xml file with the blocked data elements in it -- because having two machine readable versions of the same output file from the evidentiary source will help immensely for downstream users who need to automate testing for internal consistency in the incoming reports. We recommend that SEC OID look into this as a production feature to come online hopefully by the end of 2011.

We did note that the earliest 1,503 companies from the first and second wave of these filings did something odd … to us anyway. They prefixed the filenames of their xml files with their stock ticker symbols, an identifier that is not an internally verifiable construct – CIK is the real U.S. Securities Act legal identifier and is already in the header of the filing. You have to look up the stock symbol using an external “private” source and we flagged it as something that will become a “human reader” issue later on. There will come a point when the filers reach beyond just the major exchange traded public companies to what we like to refer to at IRA as the remainder of affected SEC Registrants.

It’s not an issue for machine-to-machine reading by the way. Computer programs don’t read and any unique string of text constituting a valid filename is sufficient. The bottom line is that locating usable URL links to XBRL xml file sets in an SEC filing is not a make or break issue requiring any sort of global Legal Entity Identifier. The xml files accompanying each filing could be named “Fred” and can still be successfully targeted by any well programmed computer. The SEC Accession Catalog is dandy and we look forward to our program – and ones written by others -- reading out and data basing the links to xml from these filings as they continue to appear.

Next installment, we’ll talk about what’s in the files themselves and what we think about using them to do surveillance and assessment analytics.

Once you know where the files are the next question is, “Can you do anything with them besides print them out?” The real value after all is in the distillation.


27 January 2011

Why did the SEC mandate XBRL?

Earlier this week I witnessed a very interesting discussion. A room of people were speculating on why the SEC had actually imposed their XBRL mandate. Was the SEC's focus on the "retail investor" just a marketing ploy? If the analysts weren't using it, had the analysts missed the point? What is the benefit for the company creating the XBRL? Who is using the data, anyway? This is all great speculation, but I think misses the point, and the what I believe to be the original driver for the SEC's program.

I am convinced that the real genesis of XBRL can be found in the financial scandals of the early 2000s (and in... hushed silence.... SOX 408).

I believe the SEC has mandated XBRL because they need the data, and that provision of that data to the investor community, while part of their mandate, is and was secondary. It is difficult enough to perform analysis of companies with semi-manual processes, no matter how much data you have. To improve efficiency, you need to import the data, and run it through your analytics before any human sees the data. The FDIC has demonstrated this with their XBRL based Call Report upgrade in 2006 (but that is a different story).

The big difference is that the SEC is not (we all hope and assume) making buy and sell decisions based on the data. they are doing what they are mandated to do: protecting the capital markets. That does not require split-second buy-sell decisions, but careful analysis, identification of outliers, and dare I say it, wondering why companies choose to not be comparable.

So getting back to the main point - the scandals resulted in that wonderful paragon of legislation: Sarbanes-Oxley, also known as the "Full Employment in the Accounting Profession Act". Of course, the world focused on the now (in)famous Section 404. And, after years of documentation, testing and (the dreaded Section 302) certifications, oh, and probably billions of dollars in auditor and consultant fees, internal controls actually are better.

But look a little further. Look at Section 408 (kindly extracted here by The University of Cincinnati College of Law: separate link).

c. Minimum Review Period. In no event shall an issuer required to file reports under section 13(a) or 15(d) of the Securities Exchange Act of 1934 be reviewed under this section less frequently than once every 3 years.

Of course, there's more. Paragraphs "a" and "b" increase the scope to include "Regular and Systematic Review" of a large number of filers. 

Basically, Section 408 requires the SEC to review all filers not less than once every 3 years. It also requires that all companies meeting a set of conditions be reviewed every year (a set of conditions that I think would probably cover close to 10% of filers).

To do that, the SEC's manual (or near manual) systems would have had a difficult time coping. Section 408 in effect is the source mandate for XBRL, a mandate on the SEC that requires a data standard that can provide the SEC with computer to computer data for 'easy' consumption by computer systems. Those systems can then perform the pre-processing and analytics, flag up the outliers, and even identify some of those that should be reviewed every year. That, I believe, is the primary original driver for the adoption of XBRL by the SEC.

Protecting the capital markets by rapid and frequent review of filers, enabled by computer to computer provision and consumption of data. Apply that argument, and the requirement for XBRL becomes self justifying. All other additional uses of XBRL become an added value to the economy and investors.

The next question is: What does this tell us about the SEC's probable next steps?

First, get use to XBRL, its not going away. Second, expect the SEC to accommodate filers enough to make provision of XBRL as 'easy' as possible. After all, if the SEC needs the data for their purposes, then if concurrent provision to the markets as critical a requirement. 

Finally, if the program is critical to SEC success (which I believe it is) and they will work to make sure filers do not attempt to derail the program, I fully expect the SEC to defer detailed tagging for "group 3" filers. The burden will prove to be heavier than the benefits that they will already be achieving simply from the consumption of the primary financial statements. But these are guesses only...

20 January 2011

Detailed Tagging - A descent through Dante's Inferno

Dante's Inferno is such a cliche, but hey, I'm willing to go there. Come along with me for a quick ride down through levels 1 - 4. The levels are Limbo, Lust, Gluttony and Greed. (there are five more, but for our purposes, we'll stick with the four levels of Detail Tagging - sorry, Inferno). And my goodness, don't they, in a dark sort of way, almost match.

I recently received a flyer offering Year-2 XBRL creation at a very very reasonable price. So reasonable that I simple did not, and do not, believe it. I can only guess that this is:

  1. a loss leader specifically designed to bring in clients and recover the actual cost on other services, or
  2. the filing agent betting that the SEC will defer Detail Tagging for "Group-3" filers.
  3. carefully crafted messaging that will push the hard work back onto the client, so there really is no benefit in using this particular "low cost" provider.

So I thought that maybe the thing to do is to remind people of what Detail Tagging really means. Now, instead of writing something new and fresh all by my self, I'm re-printing something written by Neal Hannon a couple of years ago. At the time it stuck me as the best explanation I had seen, and it remains so in my mind.

As you read his four levels (I've shortened them a little here for speed) consider the amount of effort involved. Is it double the first year's tagging, or more. Especially when we are seeing estimates of the total number of tagged elements jumping from around 150 - 200 to over 2,000 in some cases. And remember that getting to the 2,000 meant reading and sentences, extracting numbers (1, 2, 3) and numbers (one, two three) and then also tagging the relevant explanatory text associated with the numbers. dissecting

Notice that as you descend into the four levels, it is almost like descending through various levels of Dante's Inferno.

So here is Neal Hannon's description of the four levels of tagging.

What is Block Tagging (Level 1)?

According to the SEC proposed rule, Level I tagging means tagging each complete footnote tagged as a single block of text.   Block tagging may also include the embedding of HTML tags for formatting purposes.

Using block tagging, XBRL tags are placed around an entire block of text and numbers.  The simple process of block tagging a note to a financial statement would involve the following steps:
  1. Select the block of text you wish to tag.  This could be the note explaining a company’s application of fair value or their disclosure of investment securities. 
  2. Select the text block tag from the XBRL taxonomy and create your text block in your XBRL tagging tool of choice.

Okay, seems simple enough. Almost like being in Limbo - no huge strain, certainly some work to do, but thank goodness there are good tools and service providers out there.

Level 2 Tagging

Level II tagging requires that each significant accounting policy within the significant accounting policies footnote be tagged as a single block of text.  The tagging methodology for level II will be the same as level I. 

Well, this is a little more interesting. Someone is lusting after a more granular breakout of the accounting policies. That should be do-able.

Level 3 Tagging

Level III tagging should be considered as part of Level IV.  As written in the proposed rule, Level III requests that each table within each footnote be tagged as a separate block of text and be combined with all level IV requirements as detailed below.  See the Level IV description below for more details.
Now this is getting to be a meal, a very big meal. There are filings out there with more data in the tables embedded in the notes than in the financial statements. This is beginning to look a lot like external help will be required, or a new hire - great, more headcount.

Level 4 Tagging

At Level IV, which is applicable to all companies after their initial year of block tagging, the proposed rule requires companies to deeply tag every footnote.  Within each note, any monetary value, percentage, or number will need to have an XBRL tag applied, however, it is not necessary for that level of tagging to exactly preserve the original formatting or layout, because it is assumed that if the level 4 tags are available then the level 1 tags are too. 
Here’s what the SEC’s proposed rule says about level IV tagging:

(IV)  Within each footnote, each amount (i.e., monetary value, percentage, and number) separately tagged and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged.”

If the company is following IRFS, as issued by the IASB, the IFRS disclosures will also need to be tagged.  Companies may also want to expose additional information contained in detailed footnotes that go above and beyond US GAAP requirements. 

So level IV tagging means preparing an XBRL tag for:

  1. Each and very number, monetary value, percentage, etc. contained within a footnote;
  2. All GAAP required disclosures; and
  3. Company-specific disclosures that go beyond GAAP requirements

The third item hasn’t been specifically asked for in the proposed rule but preparers may want to include them in their XBRL exhibits.

Now wait just a minute - that's just plain greedy. It takes our lawyers months to craft all those sentences just right, and decide which numbers to spell out (to make them less visible) and which to put as numerics. External help will definitely be required, and more headcount. This is going to be expensive.

With total tagged elements growing from the 150 - 250 range all the way up to 1,500 - 2,500, and having to deconstruct sentences, this is a lot of work. 


Frankly, having re-read Neal Hannon's discussion of the four levels of tagging, I simple do not believe that we have any real idea of the true cost or impact. I desperately hope the SEC will defer this for smaller filers, or face a serious backlash once true costs are known.

And anyone who buys services that include a quote for year-2 detailed tagging - read the fine print. Look carefully at the wording of the offer. Be careful. Be very careful. The four levels of tagging could well be your descent into the inferno.


Note:  I'm grateful to Neal Hannon for his carefully considered and written analysis. You can find the entire document here:  http://hitachidatainteractive.com/2008/10/15/level-1-block-tagging-vs-level-4-deep-tagging-an-xbrl-illustration/

04 January 2011

The XBRL Mandate: Opportunities, And Threats, For Non-Big 4 Auditors

I love Francine McKenna's blog "re:TheAuditors". One of the best parts frequently is the comments. When she offered me the chance to guest post, I jumped at the opportunity. So my thanks to Francine, and for your reading (and commenting) pleasure:

Or you can keep reading exactly the same content  here:
For years now, every time someone complains about “auditor concentration” the stock response from the big firms seems to be “the smaller firms aren’t stepping up”, all the while the largest four firms are auditing approximately 98% of the market capitalization of the largest companies on the major exchanges in the US and the UK. While there is, of course, no single reason for this dominance, the ability to invest in technology and quickly adapt to new standards does contribute to smaller firms’ subordination.

Mandates such as XBRL provide an example of how the largest audit firms exploit new regulation to further market concentration for their advantage.

The SEC mandated that companies provide XBRL versions of public company 10-K and 10-Q filings.  This year, 2011, is the “third year” of a three-year phase in. If we’re in the third year, why isn’t XBRL “old news”? Because this year – 2011 – the vast majority of public companies, those with market caps under $75 million, are required to file in XBRL for the first time. The SEC’s estimate is that 8700 companies are required to provide XBRL versions of their filings for the first time in 2011.

How does this “new” reporting standard further encourage audit firm concentration?
Until now, only the largest companies had XBRL on their radar. As a result, XBRL was also on the radar of the largest, global accounting firms. In fact, the Big 4 (and a couple of the next-tier firms) have been active in the development of XBRL for years. So the Big 4 have had more than two years to train a cadre of individuals who understand this new technology and can talk to current and potential clients about it. The smaller firms have been playing the eternal game of “Standards Overload” and catch-up. None of their clients needed to create XBRL (until this year) and, therefore, those firms did not invest in their own knowledge.

If I were a Big 4 business development executive, I’d be taking a very good look at the list of high quality companies – the ones with growth prospects and great audit fee potential – that are not currently Big 4 firm audit clients. New, complex, expensive and time consuming technologies are perfect for FUD: “Fear, Uncertainty and Doubt”. How can I use FUD to poach plum clients from smaller audit firms? I’d make a list of a couple hundred targets for the partners and  give them a script. This is what they should say:
“Mr CFO, did you know that you are required to provide your 10-K and 10-Qs in XBRL? You have to create versions of your reports in this complex, expensive and time consuming standard. Are your current auditors briefing you on this requirement?”
And then they should reinforce the fright formula:
It is very complex, with things like ‘arcroles’ and ‘linkbases’ – things that I don’t understand, but that we have experts that have been working on this for years. Oh, and did I mention ‘detailed tagging’? And, our experts are some of the only people in the world that have actually provided any assurance over XBRL.”
As a Big 4 business development executive, I don’t want the minnows, only the whales. Then the partners go in for the kill…
“We’ve already helped a number of companies just like yours. Maybe a bit bigger, and more complex, but that ensures that our experts will be able to help you through this difficult transition.”
Now the rest of the FUD:
“Of course, your current auditor is a great firm, we know them well. I don’t remember though if they have been involved with this XBRL thing. Maybe you should ask them.”
At this point, it really doesn’t matter if the client does talk to their auditors, the Big 4 partner has already undercut them.  He or she has sown FUD and given the prospective client a great additional reason why the Big 4 just might be the firm for them now.
In summary, here’s how it works:

1. XBRL supported by the Big-4 for years
2. Limited participation by other firms
3. Assurance not well defined
4. SEC mandate not well communicated
5. Smaller audit firms might not be ready
6. Big 4 cherry pick the clients they want to poach, using XBRL readiness / advice as a way in
7. Big 4 cement concentration

And that is how something ‘new’, and, in reality, not that complex – and that does not need to be expensive – becomes another tool to expand Big 4 control. At a minimum, the largest audit firms ensure there is no erosion of Big 4 concentration.
But lets take a look at that FUD.

1. XBRL is not complex. Okay, it is a little complex. But we’re not building an airplane here. We’re producing reporting in a different format. There are lots of tools and processes to make it relatively easy. In addition, the SEC has a comprehensive site to help filers.
2. No human in the CFOs office (or anywhere other than a development shop somewhere) should be worrying about ‘arcroles’, and linkbases. They will be built automatically by any decent XBRL software.
3. Implementation of XBRL does not need to be expensive. The SEC’s estimate was $40,000 – $80,000 for the first year. It is very possible to outsource the production of good quality, SEC-ready XBRL for between $6000 – $9000. So shop around. With the right software, companies (smaller audit firm clients) can produce their own SEC ready XBRL for around $4000 – $5000 plus internal labor costs.
4. ‘Detailed tagging’ will be difficult, but is not required until a company’s second year of filing. By that time they will have more experience, and the software will be even better.
5. The smaller accounting firms have not been involved in the development of the XBRL taxonomies, but haven’t needed to be involved. However, there are people in those firms who do understand XBRL.
6. Finally, even the Big 4 have no real idea how to provide assurance that is cost effective, and today there is no requirement for assurance or an audit of the XBRL.

So while the SEC’s mandate for XBRL is real, and yes, all remaining SEC registrants really must provide XBRL this year, it is not a nightmare. Accounting firms other than the Big 4 have every opportunity to help their clients select the best options. Clients – SEC registrants – have a wide range of options, some very expensive and some very reasonable. The software has had a few years to mature and now is really very good.

But here is a real warning: The SEC estimated that 8700 companies will provide XBRL for the first time in 2011. If companies do not book the resources early, and if their accountants and auditors are not ready to give them options soon, this mandate will turn into a SOX-type cost. Companies – and their auditors – should be talking about, and planning for this, now.