Structured Data Can Become Virtuous Circle for Firms, Investors, Capital Markets

I delivered the latest news on structured data and the benefits it can bring to the financial reporting process at the XBRL US Investor Forum last week in New York City.

Addressing the audience of some 100 professionals, I shared what we at CFA Institute believe — that structured data will have a huge impact on the financial reporting landscape. So much so, in fact, that I am now writing a paper that examines the effects of data on the financial reporting process from start to finish.

The paper will begin with how data is collected, then look at its analysis and use in the production of financial reports, the audit of those reports, and finally the use of technology in the delivery of financial data and in the consumption of that information by users.

There are various parties — companies, auditors, investors, regulators, and other users — involved in this process; I focused on companies and investors during my talk. Specifically, how they can benefit from the use of standardized or structured data.

Companies can replace current manual processes in the production of financial reports through data standardization, and so can pull information from disparate data sources to write automated reports. This not only saves time and resources, but reduces errors since there is less manual intervention. As a result, investors receive higher-quality, more-transparent, and timely information, which leads to a more efficient dialogue between companies and investors.

CFA Institute has long supported the use of structured data by companies, in particular XBRL.

With the availability of XBRL and technology to sift through data, investors are now in a better position to perform faster, better analysis. Investors can research more companies, and/or they can take a deeper dive into the companies they already follow. Also many believe XBRL could bring better opportunities to small- and medium-sized entities by making it easier for investors to cover these companies.

Indeed, structured data could produce a virtuous circle. It helps companies by bringing about greater efficiencies and reducing costs, it helps investors by allowing them to make more informed investment decisions, and it brings greater investment to companies that were previously not so closely followed. All of this ultimately leads to a more efficient and transparent capital market.

The Challenges

But as with other technologies, we are experiencing growing pains in the implementation of XBRL.

Chief amongst the challenges is that companies see XBRL as a compliance exercise. What most companies do is follow a two-tier process. They prepare their interactive data as an additional step after their financial statements have been prepared simply to fulfill their regulatory filing needs. That’s why XBRL isn’t producing the intended results for companies that I describe above. We believe overcoming this challenge is really a matter of changing the corporate culture.

Another challenge is the quality of the data, which my colleague, Glenn Doggett, and I have blogged about recently. Data quality issues impact the automated analysis of XBRL data. This prevents companies from improving communication with investors.

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Image credit: iStockphoto.com/caracterdesign