Digital Financial Reporting

When a professional accountant creates a financial report, one expects that financial report will add up correctly, will be created in compliance with accepted accounting rules, and will otherwise follow all the rules generally employed when creating a financial report.  And when these reports are created in the medium of paper, accountants generally do a very good job complying with the rules.  In particular, any accountant who works for an entity who reports to the SEC are among the best professional accountants there are.

When a professional accountant creates a financial report which is subsequently formatted using XBRL or when a professional accountant performs agreed upon procedures related to such an XBRL formatted financial report to be sure it is correctly created one would likely expect that the XBRL formatted report correctly articulates the financial information contained within that report.

I have personally been looking at SEC XBRL financial filings for many years in order to better understand SEC XBRL financial filings in particular and digital financial reporting in general.  In November 2009, I was happy when I found one SEC XBRL financial filing which would pass a battery of tests which I put together.  By March 2010, I was able to find 92 SEC XBRL filings which passed that battery of tests.  By September 2011, there were now 5151 SEC XBRL filings which passed that somewhat tuned battery of tests. And finally by March 2013, vast majority of the 7191 SEC XBRL financial filings I looked at passed a better tuned battery of tests.  Another thing which changed is that I don't need to do any of this testing any longer as commercial software is available to run these tests.  See the XBRL Cloud Edgar Dashboard.

However, most of those tests related to getting the representation of an SEC XBRL financial report correct.  There were about 9 accounting related tests to see if basic things such as "Assets" and "Net Income" and "Net Cash Flows" were reported, but the tests were rather basic.

Well, I now have approximately 50 fundamental accounting concept related tests and another 21 or so tests of the relations between these fundamental accounting concepts.  Click on the graphic below to see the results of these tests:

If you look in the "Percent" column you will see that of the 21 relationship tests, for 17 of the tests more than 90% of SEC XBRL financial filings pass the tests.  That is very good evidence that the test is a good test.

(Note that the column "No root entity" removes 54 SEC filings where I cannot get to any information using my processes, see why here.)

However, it could be that more SEC filers pass these tests or that the test needs to be modified to allow for situations which are not allowed for by the tests.  For example, it could be the case that someone would come to me and say that there are situations where Assets does not equal Liabilities and Equity.  They would point out the case where, for example, a filer uses "Net assets".  In fact, I don't take into account this exact situation.  I know my test set needs adjustment for this situation.  No problem, that would make my percentages go up and further support the notion that these fundamental accounting concepts and the relations between these concepts exist.

Does anyone pass ALL the tests?  Good question.  And the answer is yes, these 294 SEC XBRL financial filings pass all 21 tests.

I have a new wiki, Fundamental Accounting Concepts, which summarizes the concepts and the relations between the fundamental accounting concepts.  These relations don't change.  A US GAAP Taxonomy element cannot exist (or rather should not exist) in more than one category.  More on that later.

And while not every US GAAP financial statement reports all of this information that does not mean that the notion of that fundamental concept does not apply to a financial statement.  For example, if a reporting entity does not have equity method investments, then it will not have income (loss) from equity method investments.  That value is zero for that filing. Why is this important?  Comparison between financial reports.  EVERY financial report fits into this model other than reports which are explicitly excluded because they contain things which are rare.  For example, that is why I do not include net assets in my representation.  It is rare.  Need that representation?  No problem, it can be created.  I have just not created it as of yet.

Creating these XBRL-based financial reports is challenging particularly since the tools we have to work with today are not what they need to be.  How do we get SEC XBRL filings to follow these rules so there is even a chance that reuse of the information is possible?  Well, the SEC could enforce these sorts of rules via inbound verification when an SEC filing is submitted.  The FDIC does this, in fact they eliminated 18,000 mathematical errors on the first day they turned on the switch to the XBRL-based system they went live with in 2005. (See the bottom of this blog post)

Software vendors could also implement rules such as these within their software.  Some already are, for example XBRL Cloud. There are others.  Having software watch over the creation of SEC XBRL filings will reduce the number of time filers do something like use the inappropriate concept "us-gaap:AssetsNoncurrent" (like they did in this filing) to express "Total assets".  Now, they subsequently fixed that mistake in this filing. (Look at the report element name used for the balance sheet line item "Total assets" in both filings to see what I am talking about.)

Why do I think this is a new era?  Well, do you think that there are only 50 fundamental accounting concepts and 21 relationships?  This is the tip of the iceberg.  Eventually, software applications will help accountants do things like use a concept in one category within a totally inappropriate category and many, many other helpful things.  Like this idea?  Tell your software vendor.

Until software performs these tasks and/or SEC inbound verification does not except filings with these sorts of errors, XBRL master craftsmen need to watch out for these sorts of errors.  Otherwise Robocop may call you on the carpet.  These sorts of tests may end up being covered by the SEC accounting quality model.