Should Australia start tagging financial reports with XBRL?
In the US, financial reports tagged with XBRL can be quickly analysed by investors to make more informed decisions, and by corporate regulators to ensure financial market integrity, including crime prevention.
Would there be similar benefits in Australia?
The proliferation of the internet, the growth in social media and the explosion in the number of smart mobile devices have seen the corporate world increasingly engage with its stakeholders through digital channels. It’s only natural to assume that financial reporting should follow the same path, and that corporates would want to use cutting-edge information technology solutions to present financial metrics. Investors and other capital providers would then be able to analyse financial results in different ways – easily benchmarking and comparing and contrasting results to make informed investment decisions.
But so far this appears not to be the case in Australia. Published financial reports by corporates still remain entrenched in a paper-based approach, with “digital” methodologies restricted to formats such as PDF.
That’s not to say the technology to provide digital financial reports does not exist – it does, in the form of XBRL. Anecdotal evidence, however, indicates a low take-up of the XBRL technology in jurisdictions where it is not mandated, such as Australia.
Overseas, many corporate regulators and securities exchanges – including those in the US, Japan and Singapore – have mandated financial report lodgements using XBRL. US Securities and Exchange (US SEC)Commissioner Daniel Gallagher recently outlined its benefits: “What XBRL does do very effectively is ensure that information is disclosed and presented in a manner that promotes ease of analysis and comparison. So it seems to me, we must recognise that XBRL was and is a major step and must fully realise its potential for improving investors’ ability to analyse corporate disclosures.”
Being able to use software to manipulate and analyse the data within XBRL-enabled financial reports is attractive to other stakeholders, too. Corporate regulators benefit from XBRL when conducting their corporate monitoring and enforcement activities.
For instance, US SEC has developed the computer-based Accounting Quality Model (AQM) which analyses financial reports to identify risk signals that could indicate financial reporting fraud.
In some forums, the US SEC’s AQM is being referred to as “Robocop”, a reference to the sci-fi movie character that can rapidly analyse data to identify and respond to crime in real-time, and sometimes even prevent a crime before it occurs.
Being able to harness automation and machine intelligence to analyse and respond to huge amounts of XBRL-enabled financial data has been a major selling point of the technology to many corporate regulators around the globe.
While corporate regulators extract real benefits, so too should investors through a better regulated market. Commissioner Gallagher further comments that: “The SEC is first and foremost a disclosure agency.” XBRL appears to assist the SEC in meeting this disclosure objective.
Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC), has been able to accept XBRL lodgements since July 2010. But there is very little evidence that corporates are using this voluntary system.
The organisations that prepare financial reports are yet to be convinced that the benefits attributed to XBRL – including competitive advantage, lower compliance costs and better dissemination of financial information to stakeholders – outweigh the costs of incorporating XBRL into the financial reporting supply chain.
It’s hard not to recognise that paper-based methodologies are getting antiquated. Continued reliance on this format also fails to reduce the “disclosure overload” associated with financial reporting. Technology-based innovations to organise and deliver financial reports can aid in the efficient dissemination and analysis of financial data.
But although a potential solution exists in the form of XBRL, the technology is still developing and has some way to go before it can achieve widespread acceptance as the platform on which financial reports should be based.
It’s also obvious that many of tomorrow’s investors will be digital natives from generations Y and Z, who are adept at using smartphones and similar devices to communicate and share data. And it’s worth noting that apps which can access US public company financial data already exist.
So where does that leave Australian investors and companies? It was not long ago that Australia moved to a financial reporting framework based on international accounting standards. Reasons for this move included better understanding of Australian financial reports by overseas investors and the reduced cost of capital for Australian companies.
An internationally consistent technology-based platform such as XBRL could be worth considering for similar reasons, as a first step. A comprehensive cost-benefit analysis of using technologies such as XBRL for financial reporting would be worthwhile to examine if there are any advantages for Australian corporates, particularly listed companies, and ultimately for investors. Corporate reporting needs to continue to evolve so that corporates communicate effectively, and trends indicate technology will be a critical part of this process.
What is XBRL?
The eXtensible Business Reporting Language (XBRL) is part of the XML (eXtensible Markup Language) family. It provides a taxonomy (or dictionary) of standardised machine code that is used to “tag” information contained in financial reports. Once reports are tagged, software can be used to analyse and manipulate the information that is now machine-readable in different ways. XBRL can be customised and expanded to fit the needs of different industry sectors and reporting frameworks.
David Hardidge is the executive director, Financial Accounting Advisory Services, at Ernst & Young. Ram Subramanian is the policy adviser, Reporting and Audit, at CPA Australia. The views expressed in this article are the views of the authors, not Ernst & Young. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.
This article is from the May 2014 issue of INTHEBLACK magazine.