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.


Recommendation


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.

XBRL: The futures so bright, we should put away the Kool-Aid

Timbuk3 sang a song called “The futures so bright I gotta wear shades”. There really is no better way to describe the potential future of XBRL. I say potential because like all future’s, we will be part of making that future. But making that bright future first requires us to be honest about the present and the potential. XBRL will not bring world peace, and is not the best solution for many of the problem statements that XBRL says it will solve. The market has had a decade to explore and compare XBRL against other solutions to these problems, yet for some reason has not used XBRL to achieve those benefits.


It is time to acknowledge that there are problems for which XBRL simply is not the solution. Maybe it is time for us to recognize that there actually are better, cheaper, fast solutions for some problems.


That is not to say that there are not problems for which XBRL is the best solution, but more on that later.


So think of this article as me standing up in front of the world and saying “I am an XBRL-holic. I’ve drunk the Kool-Aid for too long. I know what it tastes like, but I’ve also come to know its limits”.


Forget the Myths


I have had on-again off-again conversations over the past few years with ERP vendors or advocates. My question to them is usually goes along the lines of “There’s this really interesting article on the potential of XBRL, can you take a look please and let me know what you think?” Thankfully I’ve yet to have any of these people come back and say “XB-what?”


All acknowledge the advantage of a vendor independent, open standard for information interchange. They understand and support the opportunities for semantic interoperability that XBRL enables, again from a vendor independence perspective.


But every one of them also has been scathing about the claims for XBRL to transform internal reporting and internal processes. Each of them has labeled the identified problems as being symptoms of poorly implemented ERP systems or ineffective processes. Each told me that business process re-engineering, while no longer the consulting product or phrase de-jour, is still the best way to gain the internal benefits promised by XBRL, and at a far lower price than the custom development exercises that current XBRL implementations require.


When I talk with them about the ability to use XBRL for provision of information that has accuracy built in, there is grudging acceptance, but only when that information is being provided to or coming from an external party. Normalization of reported elements in an external financial reporting environment also gains some support. The most support comes from the idea of an open standard that provides a boundary standard for provision of information between parties where the structure and content is not mandated by a form.


But while they have been almost unanimous their view that while XBRL is a valid and potentially effective standard for such data exchange, not one said that it is or would be effective for data analysis. All said that the data would first need to be converted into another format – vanilla XML, Excel, CSV, SDR or other format to allow for faster processing, storage and usability by humans or computers. Even the FDIC, which uses XBRL to collect Call Report data from banks in the United States, provides the output in three formats. I do not know of any entities that take the XBRL feed from the FDIC, but I am sure there are some.


I have heard of at least one XBRL project in which XBRL information was sold as a data-quality solution that could be used within a company for client and prospect analysis. My understanding is that the users basically said “Thanks, but we really don’t want to train our people in a whole new standard – can you give us that in Excel?”


We also hear a lot about XBRL for Internal Audit. Apparently XBRL will revolutionize consumption and analysis of data from GL or accounting systems or other data sources. This is a great dream, especially to me, a former Internal Auditor. Yet it is also a solution to the day before yesterday’s problem. Yesterday (well, for the last 15 years or so) data analysis products have been built for internal auditors (and external auditors) that will accept data from almost any proprietary GL or accounting system. These systems can then import the data and run a couple of decade’s worth of pre-packaged and developed algorithms, formulas and calculations on that imported data. (Do you want to run a Benford's Law calculation across a 100,000++ records? Well, just push a button and it's done.)


Some of these products even built the capability to import XBRL, but I could not say how many users actually are using that capability. In one case, the application can import XBRL GL, yet as there have been zero users, the company stopped supporting the standard for data consumption “years ago”. XBRL GL might have had a future a decade ago, but I now believe that XBRL GL serves only two purposes. 1) to provide a bookend to the Business Reporting Supply Chain slide that is almost obligatory when XBRL presentations are made - XBRL GL “proves” that XBRL has a place, independent of existing ERP or accounting systems, virtually from the point of transaction entry/creation. 2) to serve as a test bed for development of taxonomies for business operations. After a decade, how many ‘real’ XBRL-GL implementations are there in the world?


So, now that I have that all off my chest, we can move on to the benefits of XBRL, and my predictions, and what is the glorious future of XBRL – “so bright I have to wear shades”?


Chickens and Eggs


The XBRL Chicken and Egg problem has always been the lack of software, driven by the lack of data to use the software, there being too little data because there is not enough software that can cost-effectively create XBRL data, so there is not enough data to demonstrate the analytic power of semantically consistent data, so it has been difficult to build a business case to build the software to exploit non-existent data. And around and around we go.


The Chicken and Egg problem is coming to an end. While there have been a number of very effective XBRL implementations around the world, in most cases the data collected in XBRL is not actually made available to the consuming public. The SEC’s program is creating that giant pool of data. The entire lack of data problem (the Egg, or the Chicken?) is in the process of disappearing. Therefore we can expect two great leaps forward over the next couple of years. Note I said a couple of years. This is not today, and certainly not yesterday. This is in the future…


First, as millions of data-points of accurate information are made freely available, developers are beginning to understand the potential uses of that data, and the potential applications that can add value to that data. This is already happening, and we are seeing the first products coming to the mass market. This will accelerate.


Second, as production of XBRL becomes an assumed requirement for accounting and financial reporting systems, we will see XBRL being built into almost all systems. With XBRL being built in as an output format, it is only a small step (okay, not really) to allowing the linking of any input data to a corresponding element within a company specific, industry, national or international taxonomy. Even better, it should become possible to link any input data to corresponding elements in multiple taxonomies.


What will this allow?


The market, with enough data-sets and individual XBRL-tagged facts, will (note I’m still using the future tense, though that becomes the present within months, not years) confirm to the software industry that there is enough data, and therefore probably enough demand, to support a business case for new software development.


It will allow (again, future tense) listed companies to not only provide their own financial statements on their websites, but to produce low-cost, high quality analysis of themselves and their peers/competitors – basically self produced market analyst coverage. Companies will also have the ability to provide the type of analysis that will enable a visitor to actually “play” with the data and run comparisons directly from the investor relations screens on the company’s website. Talk about being able to “tell your story, your way”.


More regulators will (some already do – present tense) be able to perform rapid and cost effective analysis of companies, identifying the outliers sooner than the market, such that regulators may intervene before investors suffer massive losses from fraud or business failure. This will enable regulators to more cost effectively achieve their mandates of protecting the markets and investors.


High quality, free data, provided directly from the regulator, will force the data aggregators to improve the quality and range of services built-into their data offerings. Why? Because is the data is free, the value is in the added services, not in selling the data. Anyone will be able to download the data for free. At a guess, the Google and Yahoo Finance online services will be adding additional capability, if they are not already – enabling the side by side analysis of multiple companies, at little or no cost to the retail investor.

So in this not-too distant future we have XBRL being produced as a natural output of most accounting systems, and we have inexpensive tools for consumption and analysis of XBRL. This opens the market to the entire commercial banking systems around the world to request XBRL versions of financial statements, radically increasing the number of companies producing XBRL. And they will be producing XBRL because it will be as easy as producing an Excel, Word or PDF version of their financial statements for their bank. When the marginal additional cost to produce XBRL sinks to $0, there will be no reason not to produce reports in the standard.

Finally of course, XBRL being built into systems will support improved governance, risk management and effective internal controls – where that is not already being achieved through effective process implementation or re-engineering. It will definitely improve the external reporting process, by reducing internal data-friction.

So yes, the future of XBRL is so bright that if we focus on what XBRL can actually achieve, we can put away the Kool-Aid, and put on the shades!