May 2006
The SEC's Interactive Data Revolution: Improved Disclosure for Investors, Less Expensive Reporting for Companies
Since becoming chairman of the Securities and Exchange Commission (SEC), Christopher Cox has been advancing the idea of a new, electronically based system of disclosure that will both improve the information available to investors and reduce the disclosure and reporting costs of companies. This new system, which the chairman calls “interactive data,” uses the capabilities of a new computer language (known as XBRL) to make corporate data--including the text disclosures in Management’s Discussion and Analysis in the 10-K report--far more accessible to investors and analysts and less expensive for reporting companies to produce. At this conference, Chairman Cox gave a keynote address describing the benefits of interactive data and discussed the SEC’s efforts to encourage its use. Following his address, panelists discussed how a computer language specially adapted for financial reporting and disclosure can achieve the chairman’s objectives.
Peter J. Wallison
AEI
The promotion of interactive data has been a key initiative of SEC chairman Christopher Cox. Currently, analyzing the information that companies disclose to the SEC is an onerous, time-consuming task. For example, if an investor wants to compare something as simple as the sales of all the pharmaceutical companies, he must go to the SEC’s website, download the 10-K reports, review the financial statements, and input the relevant numbers into an Excel spreadsheet. However, his efforts may not even prove sufficient, as some companies display their sales net of discounts, while others subtract them later. Interactive data solves this problem by allowing a software application to extract the precisely comparable data and information from the SEC’s database of company reports in a matter of seconds. Such a system empowers investors by making comparisons among companies easy to do. Furthermore, interactive data has the potential to vastly reduce the costs that companies incur in preparing their financial statements and SEC reports. If Chairman Cox can gain widespread acceptance of XBRL, it will be a notable achievement for investors and the SEC.
Christopher Cox
Chairman, U.S. Securities and Exchange Commission
The national movement toward interactive data, which began in the private sector, is about the electronic exchange of financial information standardized across many technologies--personal finance software, corporate financial preparation software, and the Internet. Today, the vast majority of working adults and more than 50 percent of U.S. citizens own stocks, compared to just 19 percent twenty years ago. In addition, longer life expectancies have made saving for the future more important. Consequently, the tools of investing must keep pace with the changes in society. In order to make appropriate investment decisions, people need faster access to better, more accurate information that they can easily use and understand. Searching for information on the Internet must be easier than it is today, and investors should be able to download it and use it in the personal software of their choice. Interactive data--or XBRL--accomplishes this. Each piece of data reported to the SEC is tagged with a unique ID. Thus, when an investor summons “revenue” or “prepaid expenses” or “goodwill,” that is exactly what he gets.
In addition to empowering retail investors, interactive data would make American markets more efficient. While many people--company CEOs included--believe that analysts and investment professionals take their data directly off the SEC’s website, this is not the case. There is an entire industry centered on extracting information from SEC filings. Unfortunately, because much of the data is extracted manually, human error comes into play. The error rate from this process is unacceptably high, ranging between 5 and 20 percent. Interactive data would make information more accurate and analysis more widespread.
Mike Willis
PricewaterhouseCoopers LLP
XBRL is a royalty-free, international, Internet-based information format designed specifically for business information. This Internet-based information standard is governed by a group of over 450 business-reporting supply chain organizations from twenty-seven countries around the world. One of the great advantages of XBRL is that it standardizes the manner in which business information is described, thereby enabling dramatically cheaper, faster, more accurate reporting, compliance, analysis, and other processes.
The current information exchange processes in the capital markets are highly manual. Companies report in formats that are not reusable, creating a waterfall series of manual processes as investors struggle to access, validate, and analyze reported information. This often involves tracking down company reports on EDGAR and company websites, cutting and pasting information into spreadsheets, and preparing analysis models based upon this manually acquired information. Current access and validation processes are problematic due to the paper-centric formats currently used for reporting (Word, PDF, HTML), which subject the users to the risks of manual transformation, errors, and omissions. Current analysis is likewise challenged as modeling concepts based upon the physical location of data within spreadsheets hinder development, sharing, reuse, and management of modeling concepts (macros) across spreadsheets, applications, and even analysts. XBRL enables investors and analysts to build macros based upon standardized vocabularies of reported concepts that are more easily shared, reused, and managed than those embedded in spreadsheets today.
XBRL enhances the supply chain by allowing software applications to “understand” information based upon a common structure. Like the Universal Product Code (barcode), a standardized way to describe information enables automation of many of the currently manually executed steps. When firms tag their data from the get-go, analysts and investors can retrieve and analyze the information they need within a matter of seconds, thereby substantially lowering the cost of information delivery, access, reuse, and analysis.
Public registrants in other countries have already begun to realize these benefits. Public registrants in China, Korea, and Japan have already begun reporting in the XBRL format. Three weeks after the top twenty publicly traded registrants on the Korean Stock Exchange published their reports in the XBRL format, the percentage of international investment in these firms doubled, moving from the low teens to the upper twenties. This dramatic economic benefit resulted from the transformational impact realized when a single Internet language is transformed into other human readable languages at the discretion of the user rather than the preparer.
A primary purpose of XBRL is to enable migration of the business-reporting supply chain from a manual set of supply chain processes to the Internet, where automation can more effectively drive costs, efficiencies, and transparency. As a result, you should expect that market adoption of XBRL will be based upon economic incentives rather than regulatory mandates—at least in the United States. As market participants recognize the benefits that accrue to their specific organizational processes/functions, realization of these benefits will quickly follow.
Richard J. Daly, Investor Communications Division
Automatic Data Processing, Inc.
Automatic Data Processing, Inc. (ADP) provides much of the technology underlying the processes of online proxy voting and electronic delivery of company proxy statements and financial reports to shareholders. Currently, over 11 million U.S. investors elect to receive information electronically, and 85 percent of all street votes cast are voted electronically. XBRL could be the magic bullet that gets more investors to choose to access company data online. The current way of searching thorough electronic reports--either PDF or HTML documents--is not exceptionally user-friendly. However, through XBRL, investors could more easily access and compare data in a variety of areas, including stock performance, directors, board or committee reports, executive compensation, or other proxy information. In developing technologies for investors, it is important to understand how investors use them. Investors do not use the Internet for the convenience of issuers and financial intermediaries; they use it because it is convenient and they get more value from it than through alternative means. XBRL could encourage more investors to participate in corporate governance via the Internet.
Mark Schnitzer
Morgan Stanley
Morgan Stanley joined XBRL in 1999 and has been committed to promoting the use of interactive data in order to help our clients make better informed investment decisions. The task of analyzing data across companies over time, industries, and accounting jurisdictions is a highly onerous task. Today, analysts spend much of their time loading data and validating that the data are accurate. With XBRL, Morgan Stanley will be able to download data straight from the companies and load them directly into its valuation models. Consequently, analysts can spend less time checking data and more time actually analyzing them and making recommendations for investors. This will enable Morgan Stanley to provide faster analysis with more insight to its clients for the 2,000 firms it covers, and also to expand its coverage to additional firms.
Louis M. Thompson
National Investor Relations Institute
Currently, XBRL is still in its infancy, with only roughly twenty-two companies having adopted it. However, more companies should start adopting it once they recognize its value. Once institutional investors and brokerage firm analysts recognize how helpful it is in conducting research, they will start pressuring companies to use interactive data. Also, companies will be more open to XBRL when they realize that unlike Sarbanes-Oxley implementation, using XBRL does not entail exorbitant costs. Companies control the scope and amount of information they report using XBRL, and once other firms participate, companies can make comparisons with their peers and set benchmarks. From an investor’s standpoint, one of the major benefits of XBRL is that it better facilitates the disclosure of nonfinancial factors, which are crucial for arriving at a proper valuation for a company. This is a definite improvement over generally accepted accounting principles (GAAP), which are lacking in how they take--or fail to take--such factors into account. In short, XBRL presents a win-win situation; investors, analysts, and companies all benefit.
Robert Eccles
Perception Partners, Inc.
The Enhanced Business Reporting Consortium (EBRC) is a market-driven, not-for-profit collaboration comprised of all the major representatives of the corporate reporting supply chain including companies, analysts, rating agencies, accounting firms, and investors. The representatives come together to agree upon frameworks for how enhanced business reporting can be used to supplement financial statements based on generally accepted accounting principles (GAAP). This has become increasingly important because current financial statements are based on an accounting model that was established over 100 years ago, when value creation was based mostly on a firm’s hard and tangible assets. Today, however, many firms generate value from intangible factors, which John Philip of Infosys describes in his presentation. Through enhanced business reporting (EBR), analysts and investors can have a better sense of a company’s performance and future prospects. EBR is about content and is closely related to the to the XBRL format. EBR standards would provide a more structured framework for the management discussion and analysis (MD&A) portion of a company’s annual report. Based upon these standards, additional XBRL tags could be established by simply extending the taxonomies being developed for the financial statement. This would make the information in the MD&A as easily accessible and useful as XBRL will make information contained in the income statement, balance sheet, and footnotes.
John Philip
Infosys Technologies Limited
Infosys Technologies Limited is an India-based, NASDAQ-listed software securities firm that has chosen to participate in the SEC’s XBRL pilot. A great deal of the firm’s value lies in intangible assets such as human resources, including the collective expertise, innovation, leadership, entrepreneurship, and managerial skills of the employees; intellectual property assets, which include know-how, copyrights, and patents; internal assets such as systems, technologies, methodologies, processes, and tools that are specific to Infosys; and external assets like customer loyalty and brand value. Infosys has ways of scoring these intangibles. The information is currently disclosed in Infosys’s annual report. XBRL will further enable the firm to communicate such information in a more effective manner. The company decided to offer this additional information for many reasons. One reason is that for a company in the technology industry, the value of intangibles such as brand and people are more important than the physical assets. Infosys aims for transparency in order to make current investors more comfortable and to enable potential investors to make informed investment decisions. The transparency afforded by enhanced business reporting and XBRL actually leads to a competitive advantage over other companies because there is less of an information asymmetry between investors and management. Moreover, arriving at a concrete valuation of human resources is a boost for employee morale; the employees are happy to know how much they matter to the company.
AEI staff assistant Dan Geary prepared this summary.
