Speech by SEC Staff:
Remarks before the XBRL-US National Conference
R. Corey Booth
Chief Information Officer and
Director of the Office of Information Technology
U.S. Securities and Exchange Commission
San Jose, California
January 18, 2006
I'll thank Chairman Cox for that introduction - also, thanks very much to the XBRL Conference organizers for the invitation to address the group today. I spent a couple of years out here in the Valley earlier in life, and I always enjoy the opportunity to come back, drive along Skyline Drive, see what's new at Fry's Electronics, or whatever else I have time for. More importantly, though, I'm excited to be at this conference, because I believe that this group is doing truly important and impactful work, and I'm glad that the SEC is playing a role in it. As you may have noticed, the Chairman agrees; unfortunately for me, he's a hard act to follow. But, I'd like to follow up on his comments by talking more about what we're doing, how it fits into what you're doing, and how we can work together to take this enterprise forward. Before getting too far, though, I should remind you that my comments today represent my personal opinions only, and do not represent the views of the Commission, the Commissioners, or the staff of the SEC. So, you have been duly warned.
I think it's a reasonably well-established factual statement, though, that I'm not the only person at the SEC who thinks that financial reporting can be improved through technology. Chairman Cox has now addressed the XBRL conferences twice. Peter Derby, the former managing executive for operations, addressed this group in Boston last year. And many of you have heard Jeff Naumann and Brigitte Lippmann speak on occasion. They and I think of XBRL - and more generally, the adoption of modern data formats in financial disclosure - as a critical step in bringing corporate disclosure into the 21st century.
For perspective, let's look at where the SEC's disclosure program is today. We have over 15,000 companies registered with the agency, and we receive and disseminate over 700,000 filings annually through our EDGAR system. I think the agency can be proud of its use of electronic filing in improving the efficiency of the markets and informing investors. In fact, I think it's near best practice in what we in Washington sometimes refer to as "e-government". But look more closely, and you'll see that the vast majority of EDGAR documents are filed in ASCII text, and another large fraction in HTML. That means that to make use of them in financial analysis, you have to download the document, hit the print button, go get a cup of coffee, take a deep breath, and type all of the numbers back into your spreadsheet.
Since you're at this conference, I know you can all envision the alternative posed by XBRL and interactive data, so I won't belabor the point. The potential benefits are persuasive enough - greater transparency of financial information, reduced costs for investors and analysts, potentially even deeper coverage of midcap companies by analysts, and ultimately more efficient markets.
Let me paint what I think is an interesting scenario. Wall Street types have been talking for a couple of years about algorithmic trading - basically, using computers to process real-time streams of market data and making fast, automated trading decisions. Today, that market data is mostly about stock prices and volumes, since that's what's available in real time. But at some point in the not-distant future, I envision a hedge fund starting to algorithmically trade with XBRL-based balance sheet and P&L data in real-time as it's disclosed by companies. At that point, we will all know that interactive data has won the day.
We're not there yet, but a lot of progress has been made. The SEC, as well as others in this room, have been hard at work for the last few years. In early 2004, the agency launched a task force to look at XBRL and interactive data. That effort resulted in the launch of the XBRL voluntary filing program - as of last spring, any of the SEC's corporate or mutual fund registrants can file their financial information with us in XBRL format. Many of you here provided comments to us, and otherwise helped us think about the issues and options we faced in choosing our path; we appreciate the help. Those of you who have followed the SEC over time will perhaps agree with me when I say that this program has been an unusual one for the agency. More often than not, we have been late adopters rather than early adopters of new technologies and approaches, but the voluntary program has placed us closer to the leading edge. This is very exciting as well as occasionally uncomfortable, as most of you can appreciate through your own personal experience.
I just used the word uncomfortable. Why the discomfort? To be clear, the voluntary filing program is an important initiative, and I think we have pursued it appropriately. I must admit, though, I had hoped that we would have more filers in the first nine months of the program. To date, we have received 22 XBRL filings from nine companies - many of whom are in this room. Taking the long view, I think that's understandable. Technology and information interchange standards can take a long time to adopt. Color TV was invented in the 1940's. But it wasn't until 1972 that color TVs outsold black-and-white sets in the US for the first time. It took about thirty years for the Department of Defense's ARPANET to become the Internet on everyone's desk. But most of us can also observe that the cycle time for technology adoption seems to be moving faster these days, and certainly most of us in this room are interested in the adoption of XBRL sooner rather than later. So, let's examine for a few minutes what some of the barriers to broad adoption seem to be - in my mind, there are three broad categories.
First, the preparation of XBRL statements is still perceived to be difficult, and I believe there is also reality behind that perception. There are a lot of companies in the room who are working on software to aid in preparation, and many of these products are very effective and intuitive, but that's not the whole solution. The taxonomies are still the subject of vigorous discussion and further development, and it's clear that they will need to continue to evolve. Our examination of the filings received to date suggests that there is still a lot of room for technical judgment and interpretation in how to apply the taxonomies to a particular situation. That in turn implies that you need to have significant subject matter knowledge in order to effectively create an XBRL document. In other words, the preparer him-or-herself needs to be comfortable with both the technological aspects and the accounting aspects of the standard. I think we would all agree that that subject matter expertise isn't as easy to find as we would like; for example, compare the 212 or so people in this room to the 15,000 registrants I mentioned earlier. So, these are the kinds of challenges I see that affect the "supply" of XBRL submissions from companies.
The second issue is on the "demand" side - we have not yet seen an upswelling of broad-based demand for XBRL information by the investor community. As with the supply side, there are a lot of great minds at work in this room who are thinking hard about this problem, and I'm very pleased that half of today's sessions are going to be on the "analyst track" to deal specifically with this issue. I think the problems on this side are less inherently difficult - for instance, I don't think every retail investor or Wall Street analyst needs to understand the intricacies of XBRL in order to make use of it. Instead, there just needs to be a core group of technology providers and market data providers who understand it, and can provide the information and tools in useful ways. But we are still are not seeing the kind of demand pull that would truly catalyze the market, and in turn make more companies interested in solving the supply-side issues.
The third category of challenges affects both supply and demand, and really has to do with the core XBRL technology itself. Chairman Cox already referred to one important question about how to get more effort behind evolving and refining the taxonomies. That's important, and there are others too. Rendering is one of them: it remains a difficult problem to effectively render XBRL instance documents in human readable format, particularly if extension tags are involved. Another example: Validation standards can differ from product to product, which can raise questions as to whether your XBRL document is truly "kosher".
There are also some significant conceptual questions about the future roadmap for the XBRL standards themselves, and how they will evolve. In addition to the core XBRL specification, there are a number of supplemental modules on various development tracks; these include specifications for versioning, dimensions, formulas and functions. These developments in turn will impact future taxonomy efforts, and the creation of XBRL enabled software. So, the market needs clear information about the future development of the XBRL specifications, so decision makers and developers can make the right investments to support these future capabilities.
The SEC task force continues to look hard at the full set of technical challenges ahead of us. Many of you saw a Request for Information we issued a couple of months ago, where we solicited the tech industry for points of view on how close we are to overcoming these kinds of issues. The results of the RFI suggest to me that there are some very good minds at work on these problems, but to ensure success, it's important for the Consortium and other people in the room to develop a common perspective and game plan for addressing them.
So - that's a lot to think about. The good news is that I know that many of you have been thinking hard about the same issues for a long time, and that much of the discussion and head-scratching that will happen at this conference will target the same list of challenges. Collectively, I'm sure we have some great ideas for how to proceed. Since I have the podium for now, though, let me share a few thoughts for where I think we ought to be heading.
I'll start on my home turf, with the SEC. Because we are one of the primary distributors of financial data, I think the agency has an important role to play in the world of interactive data, and XBRL in particular. I intend to work with the Chairman, the Commissioners, and the staff to continue helping play that role. But I should underscore two items which I think should serve as guiding principles for the agency's ongoing efforts.
First, I believe that our role as a government agency should focus on supporting adoption, not dictating it. Some of you have asked whether the agency will quickly move towards mandatory XBRL filing. In its rule proposals last year, the Commission stated that it intends to consider such a move throughout the Voluntary Filing Program, so it's certainly a consideration for the future. But my personal belief is that a mandatory requirement ought to happen only after voluntary adoption spreads further. Some of you may have followed the Federal Communications Commission's attempts to define and promulgate high-definition television standards, and phase out low-definition broadcast transmissions. It's taken a very long time, and resulted in a lot of starts, stops, and reversals - because the standard is not yet widely enough accepted to enable a smooth transition. I think we can do better by aiming for a market-driven transition to XBRL rather than a Soviet-style mandate.
The other guiding principle I think the SEC should continue to pursue is to make sure registrants continue to have as much flexibility in the presentation of their financial statements as they currently do under US GAAP accounting. This is a different position from that taken by the FDIC, where their call reports tend to require that member banks report their numbers in more of a fill-in-the-blank approach. We actually tried a fill-in-the-blank approach several years ago when we introduced the Financial Data Schedule, which captured key financial figures in tagged format as an addendum to the company filings. Long story short, it didn't really catch on, and we discontinued it. The fact is that the universe of SEC registrants is extremely diverse, and we need to account for that. In addition, the SEC's disclosure approach has always been based on full GAAP accounting treatment, in order to give a full and nuanced view of a company's financial position, and I don't see that changing. Unfortunately, GAAP accounting has gotten rather complicated in the several hundred years since the medieval Italian merchants invented double-entry bookkeeping. While I'm sure there are opportunities to reduce the complexity of GAAP and IFRS, I think the SEC's XBRL needs to conform to the accounting standards, not to force a simplification of them. So, these requirements for flexible accounting create the need for flexibile taxonomies and extensions. Those in turn create challenges for validation, rendering, analysis, and other technologies. But if we want to accurately present company financials as audited and as reported, which I think all of us in this room want to do, this is what will be needed.
Besides posing challenges for the group, though, the SEC can also be helpful. I think we have a valuable role to play in working with the various players in the XBRL "ecosystem" to track and encourage its evolution. I think we can also play a role in facilitating dialogue around the specifications and taxonomies, and help bring the Consortium, the accounting standards bodies, and other players together. I also think the SEC should continue to make selective investments in technology for our own purposes to better validate, analyze, store, disseminate, and present XBRL information to the public.
For instance, we will soon be introducing a new XML-based "wrapper" for the XBRL documents we post to the SEC website. That will enable interested people to more easily locate XBRL filings, or take other steps to make the information more accessible.
In addition, we will be more aggressive in expanding the voluntary filing program and cultivating a dedicated base of filers. Chairman Cox already discussed our plan to designate a more formalized "test group" of registrants across a range of industry sectors who will commit to filing in XBRL format for a year, and we are now soliciting for volunteers. In return, we'll offer some incentives related to their EDGAR filings. Participating companies will receive expedited reviews of securities registration statements. If the participant is what we call a "well-known seasoned issuer", we will inform the company whether or not the staff will select their 10-K annual reports for review, within 30 days after filing. We look forward to kicking this test group off in earnest in the coming weeks, and would welcome your suggestions and referrals for volunteers.
Obviously, the SEC is only one cog in the wheel. There are plenty of important things others are doing and should continue to do to help work on the challenges I've outlined. Technology-oriented contributors should continue to refine their products, and help work on some of the unsolved problems associated with rendering, human readability, and other "tough issues". Some of these can be solved through individual firms' innovations; in other cases, it probably makes more sense to build them into the core set of standards and intellectual property owned by the Consortium.
With regard to those core standards - the XBRL spec, the linkbase definitions, the taxonomies, and other definitions that ought to be universal - my high-level guidance is that we need to strive for focus and simplicity where possible. The world of financial information is hugely complex, and covers the waterfront - from general ledger accounting to tax preparation to internal control audits to disclosure to equity analysis. Working XBRL into all of the specific niches will take a while, and require a lot of work to effectively encompass the various requirements. But the question for now ought to be: where are the most critical leverage points across the whole chain, where a relatively simple implementation of XBRL can create real value in the shorter term? And given that, what can we here do to make the standard successful and broadly adopted in that niche?
Here's one example: I think the idea of using XBRL to encode earnings release information is a very powerful one, whether it takes place through SEC 8-Ks and 10-Qs or through the press release services. This type of information is often relatively simple and condensed, and shouldn't require massive taxonomies. But it's also very valuable and time-sensitive information, and analysts are keenly interested in quickly and accurately digesting it. So, any efforts by the news and data services to promote the distribution and consumption of earnings information would be a major step forward in driving demand for XBRL among investors and analysts.
Another example of simplicity might be found within the SEC's own voluntary filing program. Our rules require participants to file the main financial statements in XBRL format, but they are not similarly required to file the notes in XBRL. Now, I think the notes are where a lot of the most useful information lies, but companies also seem to be facing a disproportionate amount of effort and challenge in encoding their footnotes. One approach could be to just file the main financial reports in XBRL the first time out, and begin providing XBRL footnotes a quarter or two later. Maybe this kind of simpler, walk-before-you-run approach would induce more companies to stick their toes in the water.
Finally, more broadly, I would raise the important question of building a critical mass of XBRL expertise. I think it's too much to ask in the shorter term that each of the SEC's 15,000 registrants have staff who are comfortable preparing XBRL filings, which means that help would need to come from external service providers. I'm aware that there are a number of players in the room who are working on offering those services in conjunction with EDGAR filing or other related services. In addition, there is another very large body of professional services talent in the accounting firms and law firms who help companies in financial reporting, and I believe they have an opportunity to provide help as well. Somehow, we need to figure out how to get past the fact that there are only 212 people in this room, and a very large amount of information to XBRL-ize.
So, to close out my portion of the day: I've wanted to celebrate the truly impressive progress that has been made, and also to give some food for thought to the great minds in this room about how we can continue that progress going forward. Make no mistake: interactive data in general, and XBRL in particular, is a great opportunity to help investors take full advantage of the information they are given, and to grease the wheels of the financial markets. I look forward to continuing to work with all of you to make this a reality. Thanks again.