The XBRL engine builds speed: governments and regulators see interactive data as the key component in the global financial reporting machine, but companies and internal auditors have been slow to plug in

Internal Auditor, August, 2008 by Liz Fisher

IT IS A FEATURE OF TECHNOLOGICAL INNOVATION that an idea can move from theory and speculation to everyday acceptance in the blink of an eye. Twenty years ago, a mobile phone was an oddity; five years ago, most people couldn't access the Internet without plugging a cable into a phone line. The next change is upon internal auditors. Almost 10 years since it was first developed, extensible business reporting language (XBRL) is about to become an integral part of the world's business reporting framework.

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XBRL is not a technology of the future; it is already here and, if everything goes according to plan, the next few months and years will see an explosion in its use. The U.S. Securities and Exchange Commission's (SEC's) announcement in May that it plans to make XBRL filing mandatory for all U.S.-listed companies by the end of 2010 was the step that the technology's supporters had been waiting for (see "SEC Proposes Mandatory XBRL Use" on this page).

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"The move by the SEC answers a lot of questions that have been waiting to be answered," says Chris Rodgers, a partner with KPMG in London. "External financial information will be available in a form and in quantities that will make it worth while investing in the technology to analyze interactive information." That in turn will encourage faster development of software that will allow companies to make the best use of interactive data internally. "A lot of companies in the United States and Europe have not yet got to grips with what XBRL means," Rodgers adds. "They will have to wake up very quickly."

Among those waking up will be internal auditors, who so far have sat on the sidelines and watched others deal with XBRL development. While it is clear that XBRL brings many potential benefits to analysts (because it enables the easy and accurate comparison of financial information among companies) and regulators (because it allows for the easy exchange of information), what has been less widely discussed is the potential benefits it could bring to internal auditing. XBRL is seen as a vital element in continuous auditing because it allows auditors to extract and analyze near-real-time information from multiple sources. XBRL allows financial information to be captured at any point in the business cycle and eliminates the need for information to be sourced and manually input from different functions and software, greatly increasing the potential for accuracy and efficiency in the internal reporting and audit process. For the same reason, it is also seen as a critical tool in the audit of U.S. Sarbanes-Oxley Act of 2002 provisions such as the assessment of internal controls.

GLOBAL ACCEPTANCE GROWING

While interactive data--the SEC's preferred term for XBRL--has been steadily growing in acceptance around the globe, the United States has lagged behind. The commission's plans will bring the United States to the forefront of XBRL use, but more importantly, it will introduce widespread use--and associated benefits--of interactive data to the corporate world.

Several countries, most notably The Netherlands, Australia, and Japan, have already embraced XBRL and are enthusiastic about the benefits it can bring, but to date, the momentum toward interactive data has come from regulators and governments, rather than corporate users (see "XBRL Around the World" on page 54). The benefits of XBRL filing for regulators and governments are clear, since it allows data to be filed once and then used and shared in many ways by multiple agencies.

There are also many potential benefits for investors. The fact that XBRL makes financial analysis and comparison among organizations easier has been a strong driver for SEC Chairman Christopher Cox, one of the most vocal advocates of XBRL in the United States.

The SEC's proposal, if enacted, will result in large-scale mandatory XBRL reporting for the first time on the stock exchanges of a major economic power. China was the first country in the world to mandate XBRL reporting, beginning with a voluntary filing program in 2003. The Shanghai Stock Exchange now requires XBRL filing, and China has an estimated I,400 XBRL filers. Japan's Financial Services Agency will make XBRL mandatory for all financial statement filings beginning next year, with the Tokyo Stock Exchange expected to follow suit. More than 1,000 Japanese companies are already participating in a voluntary XBRL filing program.

Smaller stock exchanges, such as in South Korea and Singapore, have been quicker to pick up on XBRL because it opens up the possibility of fast and easy analysis of all companies that are using it. "The level of analysis that goes on around mid-tier companies is really minimal, but XBRL makes that much easier," Rodgers says. "It's no accident that banks have invested heavily in XBRL because at the moment they waste a lot of time keying in data from various sources. If they can reduce the time it takes to manipulate data, they can spend more time analyzing it, and therefore cover more companies. That's why the smaller stock exchanges are interested in XBRL--it gives them a competitive advantage."