Why Worry?

In 1985, Dire Straits released their their iconic album Brothers in Arms. While there are so many great tracks on that album, I keep finding myself singing "Why worry? There should be sunshine after rain, these things have always been the same, so why worry now". (You can listen in here)

So, sunshine after rain.

What on earth does this have to do with XBRL? 2nd quarter filings are flowing in to the SEC, including the associated XBRL versions of the filings. And what is notable about these filings? These filing represent at least the ninth XBRL filing for all SEC filing companies other than those spared by the inability of the IFRS to create a taxonomy acceptable to the SEC (although that really is a different, sadly disturbing, topic). That means that all filers have now left their period of "litigation relief".

The SEC was, of course and as always, very clear - there is no mandated requirement for XBRL to be audited. After all, Chairman Cox was famously worried that requiring audit or XBRL would spell "crib death" for the XBRL project. How right he was, yet how wrong at the same time.

After all, who would be supportive of the additional burden of having to pay for production of XBRL, and then have to pay for an audit of the XBRL. 

This left the SEC with a small problem when it came time for the Final Rule. How to require a new reporting format from filers with one of the stated purposes being to improve the quality of information provided to the investing community - while at the same time keeping to the promise to not require an audit of the XBRL?

The answer; give filers two years to learn how to get their XBRL right, then make the XBRL carry the same legal liability as the HTML filing, but without a requirement for an audit.

Here is the problem; the two year window did not give enough time for the development of a deep enough reservoir of resources that actually understand XBRL, and the development of enough skilled individuals within companies to produce XBRL that is "the same" as the HTML. Certainly not to any meaningful level of confidence.

Now CFOs should be asking themselves "Why Worry?" Our providers know XBRL, shouldn't they, even if we don't? Right? And the SEC isn't really serious about this stuff, are they?

Too many filers simply do not have the resources to have dedicated XBRL expertise in-house. And the increase in total XBRL resources required to support production of XBRL filings has grown by over 100 times in five years. So, in 2009, for every 1 "XBRL resource equivalent unit" then we now need almost 100 today. (I'm inventing a new unit of measure here - the XBRL resource equivalent unit (the XREU, but I promise to avoid using that). The XREU is a unit of measure equal to the person resources, trained in XBRL, required to produce the equivalent of a first year "block tagged" XBRL filing. So I'm assuming for simplicity that each filer required 1 unit equivalent for their first year of filing. I am also, from personal experience and wide discussion, that “detailed footnote tagging” (DFT) represents three times the first year effort, and therefore equals 3 XREUs. Finally, I am also assuming that assurance over the XBRL requires 1 XREU per filer. I know, a very blunt instrument of an estimate, but let’s go with it for a moment.)

So in 2009, we needed 500 XBRL resource equivalent units. And for estimation purposes only let's imagine that detailed tagging requires three times the effort, so in the second year, production of XBRL required the original 500 units (for the first filers) plus 1500 units for their detailed tagging requirement, plus another 1000 units for the second wave of filers.

For simplicity the following chart shows the growth in required XBRL resource equivalent units.

Oh, and just in case, I've also added the equivalent of 1 XBRL resource equivalent unit per filer for assurance starting in each filer's third year - the year they leave their litigation relief.

So why worry? Because a close look at the chart above shows a growth from 500 XBRL equivalent units in 2009 (basically, one filer's basic tagging of face financials equals 1 XBRL equivalent unit in this analysis) to over 50,000 XBRL resource equivalents this year; 2013.

Most CFOs, even if they have not see the chart above (or one like it) instinctively know that they are exposed. There simply has not been the time to train and retain the skill sets and individuals required to actually produce over 50,000 XBRL resource equivalent units. The additional small problem is that this pool of resources are needed simply to meet US SEC registrants only. There are many other XBRL implementations around the world, including India, that are competing for the few existing and established resources.

And knowing that the resources simply are not there, then it is only prudent of those CFOs to worry about their XBRL, and the liability that they now carry.

Why worry? There should be sunshine after rain. But for now, it is still raining brand new, freshly minted XBRL resources.

Put bluntly - the CFO that does not worry about their XBRL is a worry.

We are a year or two away from sunshine.

Living in the Past

One of the most common nasty things said about New Zealand is that on arrival, you go back 20 (or 30, or 50) years into the past. I've always found that to be a cruel thing to say (and now quite untrue), but have to admit that in the 1980s it did feel a bit like the 1970s, or earlier. Quiet, terrible coffee, bright walls, plastic chairs, and bland food.

A few days ago I passed through Jersey's port of Saint Helier (Google Map) on my way to St Peter Port in Guernsey. Being much closer to France than the UK mainland, Jersey and Guernsey were the only parts of the UK to be occupied during the second world war, a legacy that lives on in the street names and attitudes. Occupation saw Russian POWs brought in to build the fortifications that dot the coast. Underfed and poorly treated, accepting any food surreptitiously passed over or under the wire by locals, already themselves burdened with inadequate rations.

Sadly the coffee shop at the port is also a reminder of days gone by. While the city is becoming a strange morphing of Canary Wharf's glass faced buildings and old French(ish) village square, there has been no modernisation of the restaurant at the port. Truly it feels like traveling back to the 1980s or earlier. The coffee is better (just), but the food and ambiance is dire. Oh, and in a nod to the occupation, all the accents are Slavic.

It should be impossible to make a bad cheeseburger. Should. But under wartime conditions, who would be surprised by a little sawdust to fill out the meat content? Still, it is nicely in context for the era, whichever era Jersey remains firmly locked in.

Telling your story, your way - Or why extensions are here to stay

There has been quite a bit of discussion about the idea that XBRL filings should be comparable, and if they are not, that somehow is a surrogate indicator of lower quality XBRL. Yet this flies in the face of one of the key promises of XBRL - "Tell your story, your way".

Companies are different, and after years of attempting to create one-size fits all reporting. The SEC tried, and IFRS continues to think they have a one-size fits most (except SMEs). It remains clear that it is what is different about companies that enables them to be successful.

Three Motivations to Create Extensions

For years the example used was that of a major computer manufacturer and service provider, which included a negative expense line for 'IP expense'. The expense was negative because the company was bringing in over a $1 billion in revenue from patent licenses. The problem was that the data aggregators consistently aggregated (well, it is in the name) would combine all of their expenses into one 'other expenses' line, thus distorting the company's position, and message. They were (are) proud of their portfolio of patents, and reflect that in their business reporting.

We also see the example of the giant Zombie banks. Looking at their XBRL we see extension rates well above 50%. They are telling their story, their way - by intentionally making it difficult for simple Zombie to Zombie comparisons to be run. Difficult in fact, for anyone to perform automated analysis, including regulators.

There are also companies that have limited resources to spend on their external reporting, and XBRL has added to their burden. Sometimes creating a new extension is simply faster and easier than digging through 16,000+ elements, reading detailed definitions, and wondering why their exact concept is missing. Equally, as the US GAAP taxonomy evolves year on year, how many companies are reviewing their extensions, confirming that an extension created in a prior year is still required.

Three examples, three motivations, one outcome: more extensions.

1. Transparency if wonderful. We are different, and we want the investing community to know that we are different. We have unique line items and footnoted facts because we want to demonstrate why we are the better investment.

2. We'll happily pay for opacity. We are different, and exploitation of our differences enables us to be successful. Enabling easy comparisons between us and our 'peers' actually will reduce our ability to exploit our unique advantages - whatever they are. Transparency helps regulators and competitors, not us.

3. We are too busy and with no benefit from investing limited resources in XBRL, we'll get this done a quickly and cheaply as possible. If we can produce XBRL that passes the SEC's validation checks, then that is good enough for us.

One example uses XBRL to improve the quality of available information and increase transparency. The other harnesses the power of XBRL to protect their opacity. "Our 'black box' is what keeps us profitable, reduces competitors ability to match us, and keeps the regulators in the dark (without appearing to want to keep regulators in the dark)". The third simply does not have the resources to waste on XBRL, there's real work that needs doing.

They are not going away

There is simply too large a need for extensions, and too many different motivations. There are also over a million extensions already created. These are not going away. Some, possibly most, are either duplicates or are so similar as the make if difficult to differentiate. Yet these are not going away. If anything, expect the total number of extensions to continue to rise.

After all, even if the SEC, the FASB, the IASB, or any group, attempts to analyse extensions to identify a reduced set of new taxonomy elements, the three motivations outlined above will act as a 'headwind' to companies migrating off their extensions. 

So while we should see fewer 'errors', we will not see significant drops in extensions that are there specifically to influence comparability or reduce the 'auto consumption' of financial and business information. Controlling the message is what business reporting is all about, not providing transparent reporting. 

Only once they have driven down the number of errors will the SEC have the energy or resources to drive down the number of extensions - and for each one, the SEC will need to demonstrate that the filer did not, in the filers' view, have an adequate justification for the extensions created and used.