Interactive data is a phrase you can expect to hear a lot from the Securities and Exchange Commission. Having issued a request for information (RFI) in October 2005 to help it assess the benefits that interactive data formats such as eXtensible Business Reporting Language (XBRL) can provide, on Nov. 21, the SEC released a draft request for proposals (RFP) for a new contract to overhaul its Electronic Data Gathering, Analysis and Retrieval (EDGAR) system and enable it to embrace interactive data. The draft RFP provides the basis for preliminary discussions with the software industry and will be followed by a final RFP, in mid-January.
EDGAR is the mainstay of the SEC's disclosure program. Approximately 700,000 filings received by the SEC each year from corporate securities issuers and investment companies flow through EDGAR - providing a repository of information accessible to the public. As the SEC nears the end of its eight-year agreement with Northrup Grumman for the service and maintenance of EDGAR, it is seeking to enter into a new contract - expected to be awarded by midsummer - for future support, with the expectation that the system will require a redesign to allow it to handle an increase in filings that use interactive formats, such as XBRL.
Indeed, the SEC has been promoting development and use of XBRL. In March, it instituted an XBRL voluntary filing program, allowing firms to submit documents using the format. That was followed in October by the RFI, with a deadline of Dec. 2 for submissions, which the SEC now is examining.
The RFI has two main intents, according to Corey Booth, the SEC's CIO. "One is to provide information that we may then use to make our own investments behind XBRL for our internal purposes or for continuing to drive the program forward," he says. "The other is, we are trying to gather more market intelligence on where the [industry] is in providing these various XBRL-related technologies," Booth continues. "We want to keep very close tabs on the evolution of the technology, because that is the critical factor in trying to make this program a success."
A key part of the SEC's focus is on tools for rendering XBRL documents in human-readable format, which is a big technical challenge, according to Booth. "We are looking for continuing improvements in tools for parsing and analyzing the documents, and bridging between the XBRL document and whatever [Microsoft] Excel-based analyses we have been trying to do," he says.
That is critical to the SEC's plans and its ability to accept XBRL documents. As Michelle Savage, VP of investor relations services for PR Newswire and chair of the XBRL-U.S. Adoption Working Group, notes, "There isn't, within EDGAR today, a system that allows them to pull in XBRL documents efficiently." [Ed. Note: PR Newswire is a subsidiary of United Business Media, the parent company of CMP Media.]
Tag - You're It
According to Savage, the benefit of XBRL is that it works as a tagging system for information. Thus, data within an XBRL document is searchable and can be extracted easily. And that is particularly beneficial to analysts and investors who have to trawl through a plethora of financial reports to collate large volumes of information.
As Octavio Marenzi, CEO with consulting firm Celent Communications, explains, "If I now have an XBRL reader and the firms are publishing the data in XBRL format, I can request the revenues for a firm from this year to that year and it will get them for me automatically." The investment community in general, and particularly institutional investors, would certainly benefit from the use of XBRL, he adds.
As would the SEC, adds the Commission's Booth. "We do similar kinds of analysis internally," he says. "Our hope is that we can take advantage of some of the efficiencies in the way we review companies and assess risks."
And with Section 408 of Sarbanes-Oxley now requiring the SEC to review every company at least once every three years, the urgency for the SEC to find more-efficient ways to review filings is even more important, the XBRL-U.S. Adoption Working Group's Savage points out. "They don't have the funds to hire the staff to do that, so they see XBRL - or interactive data - as one part of that solution, making it easy for them to pull in the data," he says.
Playing by the Same Rules
The real challenge, though, will be getting the filing companies themselves to adopt the standard, as the payback for them is somewhat less tangible. The benefit to the filing firms is the transparency provided by XBRL documents, according to the SEC's Booth. For starters, shareholders would benefit from easier access to information. But, more important, such access to information could help firms get on the radar screens of institutional investors.
Booth notes that one of the big problems that public companies face today is the lack of research coverage, with mid-cap and small-cap companies in particular receiving less coverage as Wall Street firms have cut their research budgets. "I view this as a way of lowering the cost of coverage and hopefully increasing the amount of coverage available, which I think would benefit companies that are seeking it," he says.
Yet, as of October 1, there were just 13 XBRL filings from nine companies under the SEC's voluntary program. And, as Booth acknowledges, the companies that have filed thus far using XBRL typically have business-oriented motives for doing so. "For instance, they are technology providers who hope to benefit from the broader adoption of XBRL," he explains. "There are a couple of companies who are filing agents that serve other companies in preparing and submitting filings to the SEC, so they are using it as a way of establishing their bona fides and making sure they understand how to do it."
Ultimately, the format will succeed only if it is adopted industrywide. As the XBRL-U.S. Adoption Working Group's Savage notes, "You have to have agreement from a large body of organizations that we are all going to adopt the same standard, otherwise there is no standard." Broadening the user base is, therefore, a key theme for the XBRL organization in the United States.
A simple solution that would accelerate the process would be for the SEC to make XBRL adoption mandatory, suggests Celent's Marenzi. Requiring firms to put XBRL tags in the data would be very straightforward and shouldn't be a costly thing with which to comply, he argues.
"I think it is going to have to come as a government mandate of some sort for it to be implemented quickly," Marenzi says. "Otherwise, it will happen, but over the course of a few years. And there will always be those firms that don't comply, don't publish their reports in XBRL - and that will mean it is of that much less value to the market in general."
For now, however, a regulatory mandate is not an option, at least not one being discussed publicly. Rather, the SEC's focus is more on evangelizing the benefits of XBRL. "For a mandatory program, we would need to feel there was critical mass, that it was going to be able to be done at acceptable cost and acceptable levels of effort, and that there is an acceptable body of knowledge and subject matter expertise out there that people could do that relatively easily," relates the SEC's Booth. "My hope is that it will become a de facto standard before we put in place a mandatory program."
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