After Sarbanes-Oxley, XBRL?


On Feb. 3, financial reporting took a giant step into the future with the Securities & Exchange Commission's announcement that it's ready to start accepting corporate financial reports that have been tagged with newly developed software code known as XBRL.

That jumble of letters stands for Extensible Business Reporting Language. Software developers will easily grasp that it's a kind of XML (Extensible Markup Language), in this case tailored for business reporting. But to most financial professionals, XBRL represents a confusing new intersection of high tech and finance that they aren't quite ready to embrace.

For the uninitiated, the easiest way to understand XBRL's purpose is by comparing it to the humble bar code, which can track a can of soup from the manufacturing plant through the point of sale. Similarly, XBRL tags financial information so it, too, can be tracked, from the first interactions with vendors, to reports submitted to various operating divisions within a company, and finally to become part of a consolidated earnings release. "XBRL will really facilitate the flow of business information" from public companies to analysts and regulators, says Mike Willis, a partner at PricewaterhouseCoopers and one of the programming language's architects.

THE FOUNDATION. Affixing a tag to each piece of data also makes it possible for software developers to create programs to analyze and manipulate financial data in new ways -- without requiring it to be keyed in as it moves from program to program. For example, investors will one day be able to visit a corporate Web site and in one click, create a spreadsheet populated with all of a company's financial records -- perhaps going back years.

Microsoft (MSFT), a pioneer in XBRL, already allows this with some key financial data. And on Jan. 25, Rivet Software announced a partnership where its "Dragon Tag" program to convert financial documents into XBRL would be offered to Edgar Online (EDGR) customers who could then use Edgar Online's "I-metrics" suite of XBRL tools to analyze and compare companies.

These early efforts are just the start. Eventually, XBRL will be the foundation for a whole new generation of financially oriented Web services that will make it easier for regulators to check for problems in financial data, executives to compare their company to competitors, and analysts to identify the best-performing stocks.

NOT GETTING IT. In the Feb. 3 announcement, SEC Chairman William Donaldson said the initiative was part of a broader effort to "improve the quality of information available to investors and the marketplace." Like many SEC voluntary programs, it's likely to become mandatory if it's successful.

For companies, XBRL should lead to having financial information more widely distributed and easily understood. "Everybody will do less with the mechanics of the data and do more analysis of the data," says Liv Watson, vice-president for XBRL strategy at Edgar Online and chairman of a task force developing international standards for XBRL.

The only problem is that most companies don't quite buy it yet. "From practitioners I'm still hearing the same message about XBRL," says Philip Livingston, vice-chairman of software company Approva and former chief executive of Financial Executives International, a trade group for corporate financial officers. "They say, 'I still don't quite understand exactly what it is and what it's going to do for my company.'"

SLOW BIRTH. Another wrinkle: Companies in the business of collecting and distributing financial data may face serious competition when XBRL-based applications become available. Information providers such as Standard & Poor's Compustat (a division of The McGraw-Hill Companies [MHP

], parent of BusinessWeek Online), Thomson Financial, and Bloomberg may find their business models threatened unless they can adapt in the way Edgar Online is trying to do now.

What's stopping many companies from embracing XBRL is that it has been talked about for years now, without seeming to gather much momentum. The technology was developed in 1999, but the big hurdle was getting companies to agree on the common language for how to tag financial data.

Watson remembers sitting around a table of the first meeting to develop XBRL tags more than four years ago and guessing it would take a year to create the so-called taxonomies. "Standardizing isn't so much a tech issue as it is a people issue," she says. The challenge was "getting people around the world to come together, sit at a table with competitors, and develop something that's good for marketplace."

SURPRISE COMING? Only in the last three to six months have the taxonomies for the bulk of companies become available, says Willis. Now 90% of companies are covered, while extensions of XBRL for specific industries, like oil or banking, are still being developed.

Today many corporate financial officers say XBRL is pretty far down the list of priorities -- after more pressing challenges like complying with Sarbanes-Oxley and other corporate-governance reform measures, says Livingston. But the SEC's announcement should serve as a wake-up call. If 20 to 50 companies were to voluntarily submit reports tagged with XBRL in 2005, the new standard would be well on its way to full adoption, he believes.

If that happens this year, it would likely catch many financial professionals by surprise. The good news is they may find digesting XBRL a lot more palatable than they expect. By Amey Stone in New York


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