CORPORATE GOVERNANCE X-factor Fast Speeding up financial reporting

The future of global financial reporting depends on the X-factor – or how quickly New Zealand corporates adopt new computer language called XBRL (eXtensible Business Reporting Language). It is global digital language that will allow the worldwide financial community to exchange and reliably summarise financial information, regardless of how it is prepared.

Directors in New Zealand should now be tracking this emerging technology because of the speed, cost saving and accuracy that it can deliver to management teams working under their direction.

Why do we need the X-factor?
Before examining what XBRL is and what it does, consider recent developments here and overseas and the following statement made about how important the X-factor will become in the global economy:
“Over the last decade or so, this country’s vaunted system of disclosure, financial reporting, corporate governance and accounting practices has shown serious signs of failing to keep up with the needs of today’s investors, our economy, and new technology makes rapid communication not only possible but essential.” Harvey Pitt, former chairman of the Securities and Exchange Commission in the US commenting on the demise of Enron.

Clearly Enron, HIH, WorldCom, and other financial reporting embarrassments have resulted in global need for more timely and accurate financial reporting. XBRL facilitates this need.

Who’s behind the X-factor?
XBRL now has the backing of 200 of some the world’s biggest multinationals like JP Morgan, IBM, Reuters, Morgan Stanley and Standard & Poor’s. The not-for-profit consortium, XBRL International, is focused on making XBRL universal standard by creating awareness among societies of accountants, key businesses and governments worldwide.

Microsoft is backing XML and XBRL to the hilt with its upcoming release of Office 11. Similarly Oracle, SAP, Peoplesoft, Hyperion and many others, are committed to making XBRL-enabled products.

Why are these software giants around the world so interested in this particular technology? Because XBRL has been designed to allow data generated by their proprietary systems to be shared seamlessly between other systems and businesses, and because the web-based medium to do so is free – yes free!

Corporate deployment strategies seem no longer to be focusing on “should we have XBRL capabilities?” but rather “when should we deploying it and who should be involved?”

What makes XBRL so appealing?
XBRL’s non-proprietary exchange features are not limited solely to accounting systems. XBRL allows business data of any kind to be shared between word processing packages, spreadsheets, web pages, databases and analyst interpretation tools.

Clearly companies and countries that are quick to learn and then use the language of XBRL will be key competitors in the global economy. This is one of the reasons why professional accounting institutes and standard setters worldwide (including the International Accounting Standards Board, the American Institute of Certified Public Accountants and New Zealand’s Institute of Chartered Accountants) together with the “Big 4” accounting firms, and others have contributed significantly to XBRL’s development and deployment over the past three years.

International Financial Reporting Standards (IFRS) are viewed by many directors as increasingly important because they are seen by many as providing passport to accessing funds on global capital markets.

When this development is linked with XBRL – effectively universal translator of financial information data, whole new set of possibilities emerges. To illustrate: all listed corporates in the UK will be required to adopt IFRS in 2005 and hard on the heels of that development the UK Inland Revenue Department is looking to have all its corporate tax returns submitted to it in XBRL by 2006!

So what is it that makes XBRL so powerful?
The key to XBRL is the “tagging” or marking-up of the component parts of financial statements according to predetermined dictionary of terms and their relationships. The tag represents very small component of the overall financial statements (eg, the directors’ fees paid for particular year, or the audit fees paid to the parent company auditors) that can be extracted and reused on demand without having to do any more data manipulation. “normal” set of statutory financial statements may have up to 1000 different facts.

Having every fact tagged in consistent manner means very efficient and effective “dice and slice” functionality can be called upon to benchmark both internal and external corporate performance – key component of any effective corporate governance regime. XBRL provides the building blocks for the rendering and gathering of financial data from any electronic source. From there, as with wooden blocks that child would have, what can be done with the tagged information is solely limited by one’s imagination and degree of interest in the subject.

What are the benefits of XBRL?
It is conservatively estimated that streamlined XBRL accounting process including complete processing of transactions online, from ordering to trial balance and financial statements, could save at least 85 percent of the time currently taken in inputting and accessing data. In saying this it’s important to note that XBRL doesn’t require any additional financial information to be created beyond that currently required in company financial reports. It simply provides decision makers, be they management or directors, with more ready access to information contained in published financial statements.

“XBRL will allow us to do more analysis and less time downloading things, printing out paper and rechecking numbers,” says the New Zealand Institute of Chartered Accountants’ recently appointed director of research Alan Teixeira.

He sees XBRL as major labour saving tool, particularly in loan assessing, risk assessment, equity analysis and investment banking.

“Another major benefit of XBRL will be the almost immediate access to current data revealing the overall financial health of company or organisation.”

With all the advances in technology it seems quaintly ironic that the quarterly financial US reporting system that has been in effect since 1934, notwithstanding recent amendments to it, still plods on providing figures that are at least six weeks out of date. In New Zealand our reporting deadlines are no better, which begs the question at time when corporate governance is coming under intense scrutiny – can this be improved?

XBRL not only has the potential, it can change all this. The message for directors and executives in New Zealand business, financial and government institutions is simple: recognise and appreciate the X-factor quickly or face the fact that competitive advantage and cost-saving opportunities will be lost.

Mark Hucklesby is national director of accounting for Ernst & Young. Email: [email protected]

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