Many companies complain that submitting their filings to regulators in a structured format (such as using XBRL) increases reporting costs for the company. CFA Institute believes this complaint to be a fallacious argument against automation. As we outline in our report Data and Technology: Transforming the Financial Information Landscape, by transforming regulatory reporting from documents into data, we can make markets more efficient, empower investors, and improve regulatory oversight while also reducing compliance costs.
Here we outline some key themes about how automation can improve efficiency and reduce compliance costs.
Need to Standardize Data at the Source
Let’s start with what companies do today. Currently, companies manually assemble and review financial reports, which requires both time and money.
These processes can be enhanced by standardizing data at the point of data capture — not simply at the point of filing the documents with regulators.
When data are standardized, disclosure management applications can be used to pull information from different data sources and write automated reports. Such standardization not only saves companies time and resources, but it also reduces errors in data because there is less manual intervention. According to a PricewaterhouseCoopers report, Disclosure Management: Streamlining the Last Mile, “…disclosure management application implementations have resulted in approximately a 30% reductions in cost and time.”
Standardization allows for more timely information so management can do more real time financial analysis on data than before — for example, identifying anomalies and performing trend analyses.
So, why is standardization not happening?
Misconceptions About Cost
The reason may be unfamiliarity with the use of XBRL, what companies can accomplish through its adoption, and the resources required to incorporate it into a company’s workflow at the beginning of the reporting process.
CFA Institute does not believe the concerns about the cost of tagging software are justified. The cost of the software is approximately $1,000, as reported in an article in the Journal of Accountancy, “ROI on XBRL.” The article also states that the hours involved in tagging XBRL documents are reasonable.
Unfortunately, because of the misconceptions regarding the compliance costs of XBRL, most companies follow a two-tier process. They prepare their financial statements and then prepare their interactive data as an additional step after simply to fulfill their compliance needs. Hence, XBRL does not produce its intended results — increasing the speed and frequency with which financial information is prepared, reported, analyzed, and used — nor does it result in cost reductions.
We recommend that companies instead take advantage of net cost/time reductions by integrating and pushing the standardization earlier in the reporting process.
Need to Implement Inline XBRL
CFA Institute also believes cost reductions can be achieved by having a single XBRL filing as the mandatory format for reporting. Dual filing in both PDF and structured formats does not fully bring about the efficiencies afforded by XBRL and could lead to added cost and complexity for preparers.
Dual filing is also not helpful to investors. It may lead to errors and inconsistencies between the PDF report and XBRL filing. Furthermore, if the Annual Report is only available in PDF, then that is the version investors are likely to use in their financial analysis because of their comfort with it, which renders the XBRL filing of only the financial statements less than useful.
We believe the solution to this issue is the implementation of Inline XBRL (iXBRL), which provides a means of viewing the XBRL filing in a human-readable and familiar format. This approach avoids the need for a separate means of converting XBRL data into human-readable form, thereby saving complexity and cost. The iXBRL report is also useful to both filers and users in ensuring that the filing is accurate, consistent, and complete.
Issuers in the European Union (EU) currently use iXBRL for reporting to tax authorities and other official bodies. iXBRL is also used in other countries, such as the United Kingdom and Japan. We maintain that for regulatory purposes, iXBRL is the most suitable format for mandatory use. Of course, this does not prevent companies from providing supplementary PDF versions of Annual Reports, for example, on their websites.
Indeed, in the United Kingdom, for example, smaller companies with less complex accounts use accounts production software to create iXBRL reports automatically. Once users enter accounting data in the usual manner, the software uses flexible templates to tie accounting data to the correct tags. Users do not need to have any special knowledge of XBRL and they do not incur any additional costs or effort in creating iXBRL accounts.
To sum up, we encourage companies to standardize data early in the reporting process and adopt iXBRL to maximize the benefits and reduce the costs of automation.
If you liked this post, consider subscribing to Market Integrity Insights.
Photo Credit: ©Getty Images/NicoElNino