Digital Financial Reporting

To me this blog is a bit like a lab notebook you would keep in science. I endeavor to figure things out, test things, see how things are working and take notes making those notes available on this blog.

As a CPA, I am interested how technologies like XBRL will impact financial reporting. As a business person I am also interested in how XBRL will impact general business reporting.

Over the last three years I have put a lot of focus on the US GAAP XBRL Taxonomy, SEC XBRL filings, and figuring out what it might take make cross business system information exchange work for the average business user. I have many, many posts on my blog relating to this.

In this blog post, what I am doing is going back through my lab book, examining my prior posts, consolidating that information, and trying to better understand the bigger picture and how the pieces of the puzzle fit together. I have summarized my thinking here:  http://www.xbrlsite.com/US-GAAP/.

You can read through that if you wish. I have provided links to details and you can drill into those details should you have that desire.  In the rest of this post, I am trying to make sense of these details, trying to figure out how the future might play out.

Vision

The vision I have is for financial reporting and other types of business reporting to work as elegantly and be as well integrated as an iPhone, iTunes, iPad, iPhoto, iMac.  If you have ever created an iBook you probably understand what I mean. While not perfect, Apple has done a marvelous job of hiding the technology from users while exposing useful functionality.  I would describe how this works as elegant. That is the world I want to work in and do financial reporting.

Imagine external reporting, internal reporting, ad hoc reporting, audit schedules which support the information, analysis of the information, all integrated.  Minimum of re-keying of information, technology helps the process where it can, humans do what they need to do.

Roadblocks

The way I tend to achieve things is to understand where I am going, figure out what is in the way, and eliminate all the things that are in the way and then you end up where you desire to be. What roadblocks exist which need to be removed for my vision to exist? 

• Software: Well first, to make this vision work we need software. Pretty much every piece of software which touches a financial report (or other business report for the bigger use vision) has to be able to exchange information with ever other piece of software. For this to happen, software vendors need to figure out where to cooperate/collaborate and where to compete.
• Standards: The software vendors are going to need to agree on the standards, things like XBRL but XBRL is not enough, which enable this interoperability. This HL7 video (slide 4) points out that for the business benefits of interoperability to occur you need three types of interoperability: technical, semantic, and process.
• Protocols: You can have standards, but within the processes or workflow there needs to be agreed upon protocols. Think about the steps of making a hotel reservation. That is a protocol. Calling the hotel, seeing what is available, getting prices, providing your credit card to hold the room, obtaining a confirmation number.  Similarly protocols are needed in the processes of business reporting.
• Motivation: Why would the average business person want to achieve this vision? Business benefit. Why would a software vendor desire to achieve this vision.  Business benefit. Why would an auditor want to achieve this vision? Business benefit. The business benefit is being seen and will be better seen as more software which shows the vision becomes available. But what would motivate a software vendor to support a standard? Big Business Intelligence (BI) vendors such as Oracle, SAP, IBM, Microsoft. Well, Oracle, SAP, and IBM already support XBRL. Others do also.  But, do they support it enough? Do they have the right standards and protocols?

Interoperability is not rocket science.  Or, heck, actually it is.  The more I dig into all this stuff, the more complex I realize this vision is. But we have plenty of rocket scientists, or rather IT experts, to make this work. If they can make the OSI model work, I figure these IT people can make interoperability of business systems work.

Levels of Interoperability

How much interoperability is enough interoperability? I looked at the paths I saw towards XBRL adoption in the past. This is another take at articulating the spectrum of possibilities of adoption of XBRL:

• Proprietary systems, little interoperability: There are lots of different approaches to implementing XBRL and there are many missing puzzle pieces. There are some benefits to software vendors because of this such as customer lock in to their proprietary systems; but little benefit to business users.  We, in fact, already have this today. There is nothing that XBRL does that a proprietary software solution cannot do.
• US financial reporting system, good interoperability: For, say, the SEC to be successful, comparability between information in the SEC XBRL database needs to be achieved. The SEC seems well down that path. The SEC has the hardest use case of XBRL that I have ever come across.  They use extensibility heavily, the domain is complex, the stakes are high, US GAAP is appropriate for paper-based reporting but needs changes to maximize what XBRL can provide.  Once the SEC use case is figured out by software vendors, the FASB, the SEC, and other parties; what prevents those software vendors from using what they have learned from making the SEC system work and applying those techniques in other US business domains? Nothing really. A de facto set of standards and protocols could be created between the SEC implementation and other implementations of XBRL. This seems highly likely, particularly if the financial reporting domain uses US GAAP.
• Global financial reporting system, good interoperability: What prevents the US SEC implementation from being copied globally? Well, if software exists and that software can be modified to support not just the SEC implementation of XBRL but other similar implementations; software can be leveraged across different implementations.  The SEC seems to be past the point of no return.  I cannot see major changes happening any time soon.  I do see the possibility of the SEC going to inline XBRL (sometimes called iXBRL). If the US adopts IFRS or if the SEC allows IFRS and a lot of US companies adopt IFRS, this could improve the chances of one global financial reporting standard used globally.
• Global business reporting system based on global financial reporting system: What if global use of XBRL is achieve in the financial reporting domain, and then because the benefits are seen and motivation for other domains rises, and then those other business domains simply leverage the approach financial reporting has used to make XBRL work in that domain.  That way, the same financial reporting software applications can be used in other business domains.

Is financial reporting's adoption of XBRL a done deal?

While I don't think that use of XBRL for all financial reporting is a done deal quite yet, it seems to me that we are getting closer and closer to that point. I think that I would be ready to declare victory if the SEC is happy with XBRL, the SEC filers are happy with XBRL, and analysts/investors making use of the SEC XBRL filing information are happy XBRL. Since there is a lot of investment being poured into software for SEC XBRL filings, it seems to me that turning back now is out of the question. While there are some rough edges to be polished, I really think the financial reporting domain will continue to be a leader in using XBRL.  Will other financial reporting domains use XBRL? Likely.  Will financial reporting's use of XBRL inspire other business domains? That is harder to say.