A financial statement is not an arbitrary set of numbers/text. A financial statement has what I refer to as "financial integrity". By financial integrity I mean that the relations within a financial statement are sound. For example, the balance sheet balances, the statement of changes in equity beginning and ending balances tie to the balance sheet, net income per the income statement ties to the statement of changes in equity and the cash flow statement, the proper policies and disclosures exist for line items which are used on the primary financials, and so forth.
These relations are so ingrained in accountants that they tend to disappear into the background when an accountant thinks about financial statements. Of course the financial report ticks, ties, foots, cross casts; otherwise it would not be a financial statement.
But how does a financial report become sound, having financial integrity as I have described above? When a financial statement is created using Microsoft Word, is it Word which makes sure all the relations are sound and that financial integrity exists? No. Word knows nothing about financial reports other than how to format them and organize them into tables. Word understands how to present things.
Microsoft Word and the printed paper report do nothing to enforce financial integrity. An accountant who understands the relations uses the paper report to read the numbers and other contents and then uses his/her skills in accounting and usually a calculator to make sure everything adds up. Why does the accountant need to manually go through this process? Because Word cannot help and the medium paper cannot help, other than show the accountant the information of the report.
This changes significantly with XBRL. In fact, because of the way XBRL is created after the paper or HTML version of the financial report today; XBRL is seen more of a nuisance than a helpful asset.
Here is what changes:
- First off, XBRL is a different type of medium. The XBRL medium has different characteristics than paper. One of the characteristics is that computer programs can read the information in the XBRL and understand what the information means. Because computer programs can read and understand the information; the computer program can enforce financial integrity rules rather than an accountant having to do it in many cases.
- Because the financial information is expressed in the XBRL medium an accountant has to either (a) understands the rules of using the medium or (b) have a piece of computer software which understands the rules of the medium in order to articulate the financial information in the XBRL medium correctly. Clearly the paper financial report and the XBRL financial report need to communicate the same meaning.
- Because computer applications can read the information and the business rules which make sure the information has financial integrity; investors and analysts can use those same rules within analysis software to help them analyze financial information.
Again, when I say financial integrity and business rules, I am not talking about XBRL syntax rules such as "all ampersands within a text block need to be double escaped." These sorts of syntax rules and even some business semantics rules enforced by say SEC Edgar filer manual validation such as XBRL Cloud are critical; but business users should never need to deal with these sorts of things. These rules should be hidden deeply in software which simply will not let users generate the wrong syntax.
What I mean by financial integrity relates to things such as the correctness, accuracy, consistency, and completeness of the financial information. Consider this sample SEC XBRL filing which I have created. I have taken great care to make sure the HTML has financial integrity. The XBRL medium version of the report must likewise have financial integrity.
I have taken great care in creating the XBRL version. Regretfully, like most other software out there these days the software does not really help you create the XBRL with financial integrity. Instead, I have to run validation reports to test the report after it is created.
What validation did I perform? Here is a list:
- Edgar Filer Manual validation (complements of XBRL Cloud), which shows that I have zero errors.
- XBRL calculations validation (complements of UBmatrix) which shows that certain computations add up.
- XBRL formulas validation (complements of UBmatrix) which shows that other more complex computations add up such as roll forwards and aggregations of dimensional information. (Note that there are 24 such business rules.)
- XBRL US consistency checks (complements of XBRL US) which checks for internal consistency of the information. (I don't have a physical report yet, hoping to get that. When my XBRL instance was first run against these consistency checks I discovered that my outstanding shares and issued shares of common stock did not properly relate and that I did not include earnings per share in my example which is a required disclosure for public companies). I still may have some errors in this category, this testing is not 100% complete as of yet.)
- Manual review. There is still that manual review that needs to take place, cannot get around that.
While achieving financial integrity today can be challenging because these sorts of business rules are not broadly available, few software applications support things like XBRL Formula validation (there are some), and the XBRL medium is not well understood by accountants; it is possible to do substantially better than most SEC XBRL filers are doing today. The first step is realizing that this not only can but must be achieved to make the information useful to those using the information for analysis.
In my next blog post I will provide an explanation of specific financial integrity rules at the high levels of a financial report. If you look at the XBRL Formula linkbase file of the example you can see most of these rules. The problem with that is the raw formulas can be challenging for accountants to read. Don't worry about that in the long term, software will make that much easier.