Are you ready for XBRL? The de-facto standard for electronic business reporting provides auditors with an opportunity to increase efficiency and add value

Internal Auditor, August, 2004 by Dave Coderre

AFTER YEARS OF DEVELOPment, extensible business reporting language (XBRL) is beginning to live up to its promise of providing companies, financial institutions, and regulatory agencies worldwide an efficient and flexible means of capturing and reporting vital business information. XBRL is also giving internal and external auditors a powerful tool for reviewing their clients' compliance with the U.S. Sarbanes-Oxley Act of 2002.

XBRL is a platform-independent means of identifying, extracting, and presenting financial data and other business information in whatever way the user requires. Using XBRL, organizations can capture financial information at any point in the business cycle--from the creation of invoices and orders, to the collection, aggregation, and reconciliation processing performed by their financial departments. XBRL is also a specialized business reporting language for existing and emerging financial and business reporting requirements, such as regulatory filings, statements, and corporate reports. It makes the analysis and exchange of corporate information easier to facilitate, as well as more flexible and reliable.

Especially now that XBRL has gained substantial footing in the worldwide business community, no internal auditor can afford to ignore it. Auditors who familiarize themselves with XBRL and understand the benefits and potential pitfalls associated with its use can help their organization successfully implement electronic business reporting.

INVESTORS, REGULATIONS DRIVING XBRL

XBRL is intended to solve the long-standing problems organizations have had in obtaining and sharing information when carrying out aspects of their business, such as reconciling accounts and reporting to investors. The use of widely disparate and incompatible systems to process business data has made it difficult to communicate and use information both within and outside an enterprise. Inconsistent accounting terminology, principles, and practices sometimes define the value of an asset differently in the United States than in other parts of the world. Moreover, jurisdictional regulations can affect the way a single data field or element is defined, allowing that element to have many different definitions, such as "asset value" or "price."

Investor demands and regulatory requirements for more frequent and detailed financial reporting are other factors driving XBRL usage. In the United States, the Securities and Exchange Commission (SEC) now requires companies to provide information more quickly and mandates that high-level executives sign off on the accuracy of financial statements. To combat public mistrust, the SEC and the financial markets are also calling on companies to provide information in an easily understandable format that supports evaluative and trend analysis.

XBRL solves these problems by creating a vocabulary to describe precisely the bits of information included in a report, taking regulatory, jurisdictional, and other variances into consideration. It works in conjunction with extensible markup language (XML), an Internet-based language that serves as the universal format for data on the Web. XBRL allows organizations to label, or "tag," data in specific, meaningful ways that open the door to other potential uses. For example, by tagging financial data in an Excel spreadsheet using XBRL, users can publish or export this information digitally to documents such as balance sheets, statements of cash flow, and income statements. Or, they can use the same information for compliance, marketing, or communications purposes.

These capabilities can improve the quality and quantity of financial reporting data, which has led companies such as Morgan Stanley and Reuters to adopt XBRL as part of their external reporting processes. As a result, XBRL has been endorsed by the International Accounting Standards Board and is being used by organizations in nations such as Australia, Canada, South Korea, Spain, the United Kingdom, and the United States. In Japan, the Tokyo Stock Exchange has accepted financial information in XBRL format since early 2003, while Singapore's Ministry of Finance is examining XBRL for all Internet-based financial data exchanges. Meanwhile, Pricewater-houseCoopers, Microsoft, and NASDAQ have developed an online project that demonstrates how auditors, investors, financial analysts, and regulators can use XBRL to analyze corporate reports (www.nasdaq.com/xbrl).

A CRITICAL AUDIT TOOL

The growing use of XBRL worldwide means that internal and external auditors need to get up to speed about its benefits and risks. XBRL is fast becoming a critical tool for auditing key Sarbanes-Oxley provisions, such as the Section 404 review of management's assessment of internal controls and the Section 409 real-time reporting requirements. In addition, XBRL can enable powerful efficiencies in internal reporting systems and due diligence for audits of mergers and acquisitions.

Auditors need reliable information on a timely basis, in language they can understand, and in a reusable format they can easily employ for analysis. Previously, to reuse financial information, auditors had to search for and manually input data into different software. Although this method was faster than using paper, it didn't enhance the substance of the audit. XBRL improves the quality and effectiveness of audits by enabling auditors to retrieve data in XBRL format more easily and analyze it with greater accuracy. The format encourages more analysis of data, facilitates comparisons against external data, increases the timeliness of reported information, and provides greater transparency.