Speech by SEC Staff:
Remarks for Financial Reporting Through XBRL Panel Discussion at FDIC Accounting Conference
Investor Advocate, Office of Investor Education and Assistance
U.S. Securities and Exchange Commission
May 24, 2007
Thank you for inviting me to join you today. It's a pleasure to be here. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author's colleagues upon the staff of the Commission.
I understand that recent news has put something of a damper on this event, but in tough times like these, I think we should all remember that, even though it's just twelve days before Paris Hilton is scheduled to be incarcerated, she would want us to go on living our lives, and if she could be here, I'm confident she would urge us to vigorously pursue enhanced communication of financial data.
You could not have picked a better day to discuss the promise and potential of new technology. It was on this very day in 1844 that Samuel Morse launched the world's first commercial telegraph line, when he sent a message to Baltimore from the old Supreme Court chamber in the U.S. Capitol building.
Morse obviously recognized the transformational impact that his telegraph would have on America and the world when he tapped out that famously dramatic first message — "What hath God wrought?" — expressed in the Morse Code which he had recently created.
This week we're reminded of a visionary who led truly revolutionary changes in technology. And today, we're witnessing another revolution as Americans continue to move their financial communications from paper to electronic formats and from static to interactive. Nielsen Net Ratings reports that there are now 209 million Americans who use the Internet at home, and almost 500 million worldwide. The Pew Internet and American Life survey finds tens of millions of Americans engaging in online banking and bill-paying. When it comes to managing their financial lives, it's very clear that the people we serve are moving away from paper. According to the American Bankers Association, fully "two-thirds of consumers pay at least one bill electronically."
Of course, the trend is not limited to banking services. We've all witnessed the growth in online securities trading and investing. Speaking at a recent SEC event, Jack Brennan, Chairman and CEO of the Vanguard Group, which manages roughly a trillion dollars of individual and institutional money, reported that last year, the majority of the company's new investors came to Vanguard online without ever speaking to anyone at Vanguard. Think about that — most new investors at one of America's — and the world's — largest mutual fund groups are now comfortable handing over their nest eggs to a money manager without even meeting a single person at the firm. We've seen this revolutionary change in our portfolios as well. As participants in the government's Thrift Savings Plan, which generally just assumes that we want the convenience of online tools, we rarely see any paper unless we specifically request it.
At the SEC, the commissioners and staff are not leading a technological revolution; we're following one, as investors increasingly choose digital communication and more user-friendly online tools, and we are determined to follow the investors that we serve as quickly as we can. We are also seeking to follow and learn from the FDIC and other federal banking regulators, who have already made the transition to interactive, user-friendly, more accurate data in the call reports submitted by more than 8,000 banks around the country and freely available online. Thanks to the FDIC's project, it's easy for bank investors and analysts to immediately pull up exactly the information they want — instead of having to read through dense documents — and it's easy to compare and rank financial institutions by whatever criteria the investor chooses.
Now, as you probably know, the SEC's EDGAR system, available via SEC.gov, does provide investors with online access to the various SEC-mandated filings made by public companies, mutual funds, and others. But EDGAR amounts to what our Chairman calls an "electronic filing cabinet," digital representations of long paper documents, not the interactive data that many of the people in this room are working so hard to make available. Current EDGAR, roughly 20 years old, with some enhancements made along the way, doesn't give investors the easy search and comparison tools that they have come to expect in other electronic contexts. And so, the Commission is spending $54 million over the next several years to upgrade technology to enable interactive data.
What EDGAR now houses electronically — long disclosure documents from companies and mutual funds — are of course required to be printed and mailed to millions of investors at a cost of billions of dollars. And then what happens, once companies and mutual funds have mailed all of those long disclosure documents to America's investing households? I've been the SEC's Investor Advocate since January of 2006 and I'm still trying to find retail investors who actually read this stuff.
So who does read this stuff? You might think perhaps that I'm talking to the regular folks, while the financial pros, securities lawyers, and sophisticated market observers all read the disclosure documents and find them highly interesting and useful. But last week, the Chairman of the Senate subcommittee that sets the SEC's budget, a lawyer by training who spends significant time studying issues related to financial services, asked our Chairman how anyone can read these documents.
It's absolutely true that SEC filings are an essential source — and generally the most important source of information about a company — for professional securities analysts. But talk to the analysts and you'll find that even the pros struggle with these disclosures. They want more plain English, an easier time finding a particular item, and, most of all, an automated process for sharing and using data, so they don't have to re-type all of the numbers in a company's financials into their own models, but instead could automatically download all the numbers into their spreadsheets for analysis.
Interactive data offers a solution, and recent participants in the SEC's series of roundtables report that the transition to XBRL for financial reporting is inexpensive and relatively painless. Xerox CEO Anne Mulcahy, whose company has participated as a volunteer in the SEC's test group of firms offering unofficial versions of their filings tagged in XBRL, said, "it is time to move on to the next level. We do believe that interactive data holds the promise of transforming the way we report and retrieve financial information."
Another one of the roughly 40 companies that are submitting unofficial filings to the SEC in the XBRL format is PepsiCo. PepsiCo's CEO, Indra Nooyi, reported at an SEC event last fall that the company spent $5,000 out-of-pocket on the company's first XBRL filing, and that for subsequent filings the cost dropped to $300.
Richard Daly of ADP called the company's transition to XBRL filings a "non-event." Smaller companies in the test group also reported low costs. And you can check out the results of these efforts by viewing the prototype interactive data viewer available on the SEC's website on the interactive data page, via a button on the left column of our homepage. In a few weeks, you'll be able to visit SEC.gov and see another demonstration of the power of interactive data, and that is a new online tool allowing you to view, search and compare the executive compensation for the CEOs and other top officers of America's largest companies.
More user-friendly tools, better search capabilities, an enhanced ability to make comparisons across companies and industries are all possible with interactive data, and for investors, this means that we can allow people to customize these intimidating documents, without dumbing down the disclosure or deleting vital information. Instead, we allow the investor to enjoy a layered approach, so the five things someone really cares about can be presented quickly and easily by standard software, while also allowing the user to dig deeper if she wants to read every detail in the notes or MD&A, for example. All of the numbers in the financials will carry unique XBRL tags, unique barcodes if you will, so that an investor can get, directly from the source, let's say, an immediate comparison of net income across eight or nine competitors in a particular industry. This is something you cannot get today on the current EDGAR system, unless you dig through each particular filing.
But XBRL goes beyond the financials, and in fact many in the accounting world believe that XBRL will deliver the most value when it comes to non-financial reporting. That's because today many financial data publishers spend large sums of money to transcribe the company financials from the SEC-filings into their databases and you can find them on numerous websites. Of course, they have to transcribe them until EDGAR offers tagged data, but according to PWC, only about 20% of the information in the average annual report is included in most financial databases. So a lot of very useful information about companies is only available if you dig through reports one at a time. With interactive data, narrative sections can be tagged and compared. For analysts, an immediate application might be software that flags anything that's changed in a company's description of risks from one reporting period to the next.
Making company reports more user-friendly with interactive data means that analysts will spend less time re-typing data into their own models, and could make it cheaper and easier for analysts to cover companies — a critical issue for small-cap companies.
A study by the SEC's Office of Economic Analysis, using December 2004 data from Vickers, I/B/E/S and Compustat found that for the more than 2,500 public companies below $100 million in market cap, the median number of sell-side analysts covering each company is zero. For the fully half of public companies that hold market valuations at or below $200 million, the median number of sell-side analysts covering each company is one.
Mark Augustine, founder of equity research shop Augustine Consulting, spent more than a decade as a Wall Street sell-side analyst, researching biotech companies. At a recent SEC roundtable, Augustine said that at many development-stage life science companies, the CEO and CFO spend 40% of their time just trying to attract analyst coverage. Regarding interactive data, Augustine said, "The benefits to small and mid-size companies in my industry group should be readily apparent. It's the opportunity to furnish somebody with full historical financials and all they have to do going forward is project on the fate of one or two products in development. I mean, that's a no-brainer for me as an analyst."
Interactive data is also a no-brainer for the average investor, harnessing the Internet and embracing the revolution that consumers and investors continue to drive with their preference for new, customizable, user-friendly digital tools. And investors should be very grateful for the leadership of the FDIC in helping to make this revolution happen. Thank you.