XBRL

It's 2007 and the world of business regulation is in the throes of its own tsunami of unforseen events and unpredictable consequences.

In response to massive corporate accounting scandals, a new information management environment has emerged: An environment that expects optimum information transparency, especially in financial reporting. New non-proprietary standards like eXtensible Business Reporting Language (XBRL) and IFRS, for formatting financial data and structuring financial reports, are sweeping the globe.

Businesses are adapting to an operating environment increasingly focused on improved corporate governance and better risk management through compliance with new regulatory controls such as Sarbanes-Oxley and Basel II. And investors continue to press for higher quality information about business performance to support and justify their investments.

In the midst of all this, regulators must still keep up with the constantly shifting sands of a global market in which a housing crisis in one country can spark a run on a bank in another. The UK’s Financial Services Authority (FSA) recently experienced this when mortgage repossessions in the USA caused the first run on a British bank in over 150 years, putting the FSA in the glare of the media spotlight. Now more than ever, effective regulation depends on an electronic information supply chain to deliver timely, accurate data in digital formats to facilitate faster and more comprehensive information delivery and analysis.

But regulators around the world are rising to the challenge of this changing environment.

Former Chairman Christopher Cox of the USA’s Securities and Exchange Commission (SEC) has been advocating what he calls “interactive data” for some years now. His vision is that this data format will help to better serve two key stakeholders of the SEC by making “SEC reporting easier for registrants and easier to understand for every investor.” On September 25, 2007, Chairman Cox unveiled a new standard for filing information to the SEC, based on XBRL, and outlined a timetable for a final recommendation on broad XBRL adoption by Spring 2008. Meanwhile in Singapore, the Accounting and Corporate Regulatory Authority (ACRA) has already mandated that all company annual returns must be filed in XBRL format after November 1, 2007.

In the European Union, Companies House in the UK and Sweden’s Bolagsverket are the regulators responsible for business registration and collecting the annual returns of these businesses in their respective countries. Both have improved their information supply chain by offering new XBRL-based options for companies to file their annual returns. Many other business regulators in the EU are also investigating and evaluating how to improve their information supply chain.

In the banking sector, regulators all over the world including the USA’s FFIEC, the National Bank of Belgium, the Bank of Japan and the Bank of Spain are streamlining the way that they receive and review the information they collect. The same is true of the Shanghai Stock Exchange and the Singapore Financial Regulatory Authority who have both mandated the use of XBRL in regulatory reporting as they are increasingly aware that they must compete in a global market for the stock market listings that are their lifeblood. Globally, over 2,000,000 companies will file financial reports with various regulators in XBRL format this year.

So what is the information supply chain that all these regulators are working to improve and how are they going about introducing real qualitative change?

The Information Supply Chain for Regulators
The information supply chain for Regulators involves a number of stakeholders, all of whom have some interest in the information output, including:

• Government,
• Other higher-level “oversight” regulators or ombudsmen
• The specific business filing community managed by the regulator
• The regulatory domain’s information consumer community

This information consumer community also comprises a range of different constituencies:

· The regulator’s own internal data auditing and compliance staff

· Third Party data aggregators and publishers

· The business filers themselves

· Financial analysts, brokers and independent advisors

The regulator’s internal auditing and compliance staff are interested in data accuracy and completeness and in identifying meaningful exceptions in the data that may warrant further investigation. Third party data aggregators, like Reuters or Standard and Poors (S&P) for example, consume the publicly available data provided by the regulator to add value to it and sell it on to information consumers. These consumers may include both the original business filers and other interested parties such as financial analysts, brokers and advisors.

Figure 1 – The Information Supply Chain

As figure 1 shows, all these stakeholders may participate in a supply chain that begins with a regulatory filing event and ends with information insight reaching a specific information consumer. Business filers provide the raw data that the regulator formats, stores and analyzes for its primary regulatory purpose. If allowed or required in the regulator’s specific jurisdiction, feeds from th is data may be provided to third party information agencies that add their own proprietary value and s ell the enhanced information on to interested consumers.

In the past, this supply chain was entirely dependent on data provided to the regulator on paper or through basic HTML web forms. Paper submissions forced time-consuming scanning to digitize the reports and error-prone re-keying of data into databases by the regulator’s staff, representing significant non-added-value activities. Enabling the filing of returns electronically, say in the form of a PDF file or a web form, reduces the scanning overhead but not the re-keying or re-formatting of data that needs to be “taken off” the reports . This is why many regulators are looking to new ways of receiving and managing their data and why many have opted to use data that has been “pre-formatted” using XBRL.

The Role of XBRL
XBRL is an enabling technology. What it does is use an agreed taxonomy to pre-format and describe data sent to the regulator so that it is easier to process and analyze electronically. XBRL is an open-source technology standard, so it can be leveraged for free, and it is extensible by design so that it can be adapted to suit the needs of any regulatory framework, anywhere in the world. XBRL has been around for almost a decade, continues to attract growing industry support, already provides many different kinds of data description taxonomies and is used or being investigated by many regulators around the world.

Using XBRL ensures that all data submissions to a regulator are done electronically and conform to a standard digital format that makes reviewing and comparing the data easier. XBRL also offers the verifiable transparency that all stakeholders in the information supply chain are demanding to prevent exceptions in the data going unnoticed. Using XBRL ensures that a single data source is all that is needed to present the data in many different ways to suit consumer needs, and that individual data elements are being used in the same way for the same purpose so that any number presented is truly the same and comparable.

The Platform for Regulation
Realizing the many benefits of using XBRL to pre-format regulatory filing data is not just a case of flicking a switch. It requires the deployment of a regulatory reporting framework (RRF) that has been built to suit this new kind of data source. Figure 2 exemplifies the functions that the components of this framework must perform.

Other than the regulator’s core data repository, three types of tool are required in this framework to support:

· XBRL Tagging and Validation

· XBRL Data Viewing

· XBRL Data Analysis and Reporting

The source data for a filing submission is typically a set of financial reports and/or a financial prospectus. Tagging and validation tools are required to “tag” the data to create the pre-formatted XBRL “instance” documents submitted to the regulator by the business filer. These tools may be used both by business filers and regulators. Business filers use the tools to create XBRL instance documents to file electronically to the regulator. The regulator may use the tools either to validate and re-tag the documents sent by the filer or to create and validate XBRL documents from non-XBRL data filed by a business. These tools should be available at a reasonable cost to minimize resistance from the filing community.

A special kind of template-based tagging tool is needed to format unstructured data that must be extracted from documents, such as mutual fund prospectuses. Tagging tools need to be XBRL-aware, operate within familiar desktop productivity tools like Microsoft Office and be simple to use so that linking a tag to a data item is as easy as dragging a source tag from a taxonomy and dropping it onto the target data item. A template-based approach to tagging unstructured data ensures that regulators can build templates to suit their own specific data collection needs. Templates that can then be reused and amended as needed to adapt to changing regulatory conditions.

XBRL-formatted data must be “rendered” into a viewable format by specific viewing tools. By rendering XBRL-formatted data into reports and charts so that the information can be consumed in different ways – say as a web page via a web portal – company information can be easily compared and contrasted. The SEC contracted with Rivet Software to develop its own Web-based XBRL viewer to enable investors to view and compare filings under its Voluntary XBRL Filing Program. This viewer is available for free use through the SEC’s Web site and has also been placed into the open source community for modification and use by regulators around the globe. Using the SEC’ s viewer there is no reason why filers and interested consumers can’t check this filed information and that of competitors via the SEC’s web portal as soon as the regulator has validated a filing.

The most important component in this framework is the repository database that is used to store the XBRL-formatted data or instance documents and the tools provided with this repository. The repository tools are used to extract, analyse and report the data for comparative and exception reporting. The repository database itself must offer the scalability and high performance needed to handle the large volume of reports that are submitted to regulators, often within specific short duration timeframes. It is from this tool that the real value will be derived from the regulatory reporting framework, as all the other tools primarily support the formatting and supply of data rather than the creation and publishing of information from the data.

The analysis and reporting tool must be sophisticated enough to get optimum value from the pre-formatted XBRL data by supporting customizable report formats and charts, trend analysis and exception reporting. This requires a reporting engine that both understands XBRL and has been specifically designed to deliver the range of reporting possibilities that XBRL-formatted data offers. It is also beneficial if the application can access historical, non-XBRL based data, and seamlessly combine both data types in developing composite analytical reports.

It is important to understand that this reporting framework does not need to be built from the ground up - an expensive and time-consuming task. Instead this framework can be constructed by proficient systems integrators relatively quickly, easily and cost-effectively using off-the-shelf packages, which slot directly into the framework. In fact many of these packages could be commercial-grade, open source products that can be licensed for free, further reducing the cost of implementing this kind of framework. Recent studies have shown that the costs of moving to an XBRL-based information supply chain are not as high as anticipated, particularly if the reporting framework used leverages an appropriate mix of open source and paid-for packaged software.

Figure 2 – Regulatory Reporting Framework

The Future for Regulators
Regulators can expect a number of significant benefits from moving to an XBRL-based reporting framework. Cost savings will accrue from a reduction in paper scanning and re-keying of data. Accuracy of the data will improve because it is submitted electronically and subject to a fully validated, pre-formatting phase.

It will be possible to identify and act upon exceptions in the data more easily and quickly so that regulators can perform their core mission more effectively. For those regulators that are able and willing to improve their information publishing capability, the move towards an automated, electronic information supply chain will mean they can serve their information consumer customers better. Data in XBRL format is easier to publish electronically using popular data syndication protocols such as really simple syndication (RSS) feeds. These feeds can then be consumed by various web services, in order to extract optimum value from the data.

The future for regulators who adopt the new electronic information supply chain powered by XBRL looks bright with lower processing costs and better exception forensics. And the future for all the stakeholders that they serve looks even brighter as XBRL-tagged reporting facilitates the standardized communication of financial information for better transparency.

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[Note: This article was originally written in 2007 for Rivet Software. The author is an advisor to the company.]

Related Links

• Rivet Software