|By Bob Gourley||
|January 28, 2013 11:14 AM EST||
Last Tuesday Columbia Business School’s Center for Excellence in Accounting and Security Analysis released a definitive report evaluating the implementation of a structured data format for the financial statements that public companies file with the U.S. Securities and Exchange Commission. Over a year in the making and based on extensive discussions and surveys with corporate filers, investors, data and filing vendors, regulators, and others, the survey illuminates the promise of structured data to better serve investors, improve the enforcement of securities laws, and make the U.S. capital market more efficient. It also reveals serious flaws in the SEC’s approach thus far – flaws which have prevented the promise from being realized.
In 2009, the SEC adopted a requirement for public companies to file each financial statement in the eXtensible Business Reporting Language (XBRL) alongside the regular plain-text version. The requirement was slowly phased in over four years, starting with the largest companies and eventually covering all public companies. The XBRL format imposes a data structure on the financial statements and their notes and footnotes by assigning electronic tags to each item and defining how the items relate to one another.
Judging by potential impact, this is the most ambitious data transparency program ever undertaken by the U.S. government. The XBRL reporting requirement transformed all of the public financial statements in the world’s largest capital market from cumbersome text, which must be manually transcribed to allow quantitative analysis by investors and regulators, into an open, standardized, machine-readable format.
In theory, replacing unstructured text with structured data should, by now, have triggered revolutions and disruptions all over the financial industry. The SEC’s XBRL reporting requirement should, by now, have opened up corporate financial statements in the United States to Big Data platforms and applications.
- Investors and analysts serving them should, by now, have started using powerful new software tools to compare and analyze the newly-structured financial statements – and to mash financial figures together with other data sources. They should be making better decisions, evaluating a broader universe of companies, and democratizing the financial industry.
- Aggregators like Bloomberg and Google Finance should, by now, have started saving money and improving accuracy by ingesting corporate financial data directly from the SEC’s structured XBRL feed instead of manually entering the numbers into their own systems (or paying someone else to do that).
- The SEC should, by now, have incorporated structured corporate financial data into its own review processes, instead of relying on manual reviews of the financial statements in Forms 10-K and 10-Q.
- Other federal agencies should, by now, have started automatically checking the financial performance of companies as reported to the SEC before bestowing contracts or loan guarantees (among many other possible uses).
None of these things is happening on a large scale – yet. The Columbia report explains why. The Columbia report also hints at what the SEC and Congress can, and should, do about it.
What does the Columbia report tell us?
- Investors are demanding structured data – not unstructured text – to track companies’ financial performance. The Columbia authors “have no doubt that [investors'] analysis of companies will continue to be based off increasing amounts of data that are structured and delivered to users in an interactive [structured] format” (p. i). “[T]here is clear demand for timely, structured, machine-readable data including information in financial reports, and … this need can be met via XBRL as long as the XBRL-tagged data can reduce the total processing costs of acquiring and proofing the data, and that the data are easily integrated (mapped) into current processes” (p. 20).
- Nonetheless, most investors are not making any use of the structured-data financial statements that public companies are now submitting to the SEC. Fewer than ten percent of the Columbia study’s non-scientific sample of investors said they were using XBRL data downloaded directly from the SEC or from XBRL US (p. 61). Instead, most investors were getting their corporate financial information from aggregators like Bloomberg and Google Finance – some free, some not. Moreover, aggregators told Columbia that they were not using XBRL data either. Aggregators were mostly still electronically scraping the old-fashioned plain-text financial statements (which are still being filed alongside the new structured-data financial statements) and manually verifying the numbers – or paying others to do that “labor-intensive” work for them. (pp 26-27.)
- Two problems explain why most investors have not begun to use structured-data financial statements. First, they don’t yet trust the data. “XBRL-tagged SEC data are generally perceived by investors as unreliable,” say the Columbia authors, both because of errors in numbers and categorization and because of companies’ use of unnecessary extensions, hindering comparability (p. 28). Columbia’s review of the quality of structured-data financial statements filed with the SEC (conducted two years ago) revealed that fully 73% of filings had data quality errors (p. 32). Moreover, investors reported “a large number of seemingly unnecessary company-specific tags” (p. 21). Investors surveyed by Columbia were “especially hesitant about using the data until they are comfortable that the XBRL data matches the [plain-text] data in SEC filings” (p. 21). Aggregators, too, were holding off until accuracy and comparability improved.
- Second, investors don’t yet have a wide range of software tools to compare and analyze structured-data financial statements. “End users are also looking for easy-to-use XBRL consumption and analysis tools that do not require programming or query language knowledge. In general, these users are not willing or able to incur the significant disruption to their workflow that they perceived would be required to incorporate XBRL data without state-of-the-art consumption and analytics tools.” (p. 24)
- If these two problems were fixed, investors could make enthusiastic and productive use of structured-data financial statements. “[T]he potential for interactive data to democratize financial information and transform transparency remains stronger than ever, and many participants, including most investors and analysts, wish that the data were useful today,” say the Columbia authors (p. 4). For instance, “virtually all investors” frequently use information that is available only in the footnotes of corporate financial statements to make their decisions – information that is now submitted and published in XBRL as part of companies’ structured-data filings (p. 48.) “With respect to the detailed-tagged footnote data, in particular, several investors and analysts have communicated to us that they view XBRL data as potentially an excellent solution to manually collecting the data they need” (p. 31).
- Even if most investors aren’t directly using structured-data financial statements, there will be indirect benefits to investors and the markets if the SEC starts using such data for its own reviews. The study reported that “the SEC has begun to review the data to identify filer-wide, as well as individual company filing and financial reporting issues. XBRL data could significantly enhance the efficiency of the Division of Corporate Finance’s review of filings and facilitate a “red-flag” ex-ante approach to regulatory oversight.” (p. 25) “Representatives from the FASB and the SEC have both stated on the record that, in their opinions, the amount of time that it takes them to conduct their respective analyses has been reduced significantly by their use of the XBRL-tagged data (p. 26).” Even imperfectly implemented, the XBRL mandate could indirectly benefit investors and the markets by improving the SEC’s review and enforcement processes.
The SEC’s XBRL reporting requirement could deliver transformative data transparency. But it has not. So far its impact has been incremental, not transformative.
To be sure, the problems identified by the Columbia study are problems of execution, not shortcomings of XBRL itself or of the concept of structured data. Investors and the analysts serving them “would like to have the U.S. regulatory filings tagged in a structured (e.g., XBRL) format that would meet their information requirements” (p. 5). For the SEC to eliminate the XBRL reporting requirement entirely – as some filers seem to hope that it will – would be a backward move and a tragic mistake.
Nevertheless, structured data for financial statements is, without doubt, “at a critical stage in its development. Without a serious reconsideration of the technology, coupled with a focus on facile usability of the data, and value-add consumption tools, it will at best remain of marginal benefit to the target audience of both its early proponents and the SEC’s mandate—investors and analysts” (p. ii).
How can these problems be fixed?
How can the SEC fix these problems of reliability and analysis and deliver transformative transparency? The Columbia report suggests four answers:
- First, insist on accuracy and quality! The SEC does not require companies to amend their filings to correct tagging errors and unnecessary extensions. The Columbia report suggests strongly that it should. The Columbia authors fault “the reticence (or inability) of regulators and filers to ensure that the interactive filings data are accurate and correctly-tagged from day one of their release to the public and forward (or, to communicate to the market for this information that they were not insisting on this and why)” (p. 37). It is “critical” to reduce errors and extensions, either through “greater regulatory oversight and potentially requiring the audit of this data” or through third-party quality checks (pp. 42-43). The SEC’s own interests should motivate it to insist on accuracy once it becomes “serious about using the data in its Corporate Finance function and even for enforcement, as it should” (p. 43) (emphasis added). The need to improve quality might require the SEC and the Financial Accounting Standards Board to consider simplifying the underlying XBRL taxonomy (pp. i, 14, 43).
- Second, communicate that structured data is not a supplemental feature of a regulatory filing. Rather, it is the filing! The Columbia authors explain that “the reliability of the data has been compromised by the way filers have approached their XBRL filings … [perceiving] XBRL-tagging [as] an additional task in the financial reporting documentation process rather than as a part of the internal data systems” (p. 29). The SEC framed its XBRL reporting rule as a requirement to “create an XBRL-tagged reproduction of the paper or HTML presentations of their filings” (p. 37), rather than “making individual data points available for the end user to utilize or present as they required” (p. 39). Since filers think structured-data financial statements are “incremental to their existing [plain-text] filings, they do not perceive any user need” (p. 35) – and take few pains to ensure that investors using their structured data filings get an accurate picture of their finances. “We believe this presentation-centric step hindered or diverted what should have been an important evolution from a paper presentation-centric view of financial reporting information to a far more transparent and effective data-centric one” (p. 37). One way to correct this situation would be to move to a data format that is both human-readable and machine-readable, combining the plain text and structured-data tags in a single filing. Inline XBRL would do exactly that, and in fact the SEC is considering adopting this format (n. 48).
- Third, encourage the development of software tools that make structured-data financial statements come alive! This is something of a chicken-and-egg problem. More software tools will be created as investors demand them. But effective, lightweight, cheap XBRL analysis tools are already on offer – notably Calcbench.
- Fourth, expand the mandate! The Columbia report is clear that investors want more regulatory information tagged and structured, not less (p. 28):
i. The data that are required by the SEC to be XBRL-tagged are all relevant in varying degrees to some subset of the investor/analyst population, but more data are required than currently mandated—e.g., earnings release, MD&A, etc.
ii. If anything, users require more, not less, types of machine-readable data to be made available, because a significant amount of information they require are not from SEC filings or financial statements.
iii. The primary focus on data in the SEC filings of annual and quarterly financial statements seriously limits the perceived ongoing usefulness and relevance of the data.
Over and over, the report points out that the SEC’s current mandate for structured data is limited to the financial statements and accompanying notes (pp. 14, 18, 21, 24, 34-35, 42). Everything else that companies must file with the SEC under the U.S. securities laws is still submitted only in plain text. These other materials – earnings releases, corporate actions, executive compensation disclosures, proxy statements, officer and director lists, management discussions – could be valuable if tagged. But they are not. Investors “view access to the full array of footnote, management discussion and analysis (MD&A), and earnings release numerical data as the main reason to consider adapting their workflow to incorporate XBRL-tagged filings” (p. 21). But this demand is “pent-up” because such items are not – yet – included in the SEC’s mandate (p. 24).
What lies ahead?
The path forward for the SEC is clear. First, the agency must take the basic steps that are necessary to improve the quality of structured-data financial statements. Second, to tap the full potential of structured data, the agency must first stop requiring the simultaneous submission of plain-text and structured-data versions of financial statements. It should instead collect single structured-data version. That would encourage companies, analysts, and the SEC’s own staff to focus on data, not on documents. Second, data transparency requires full standardization as well as publication. Third, the agency must expand its structured-data mandate by phasing in more disclosures: earnings releases, management’s discussion and analysis, executive compensation, proxy disclosures, ownership structure, board and officer lists, insider trading reports – and, eventually, everything.
If the SEC is unwilling to act, Congress could insist. Our Coalition will call for the reintroduction, this year, of the Financial Industry Transparency Act. That bipartisan proposal, first introduced in 2010 by Reps. Darrell Issa (R-CA), Edolphus Towns (D-NY), and Spencer Bachus (R-AL), would require these steps as a matter of law.
Developing software for the Internet of Things (IoT) comes with its own set of challenges. Security, privacy, and unified standards are a few key issues. In addition, each IoT product is comprised of (at least) three separate application components: the software embedded in the device, the back-end service, and the mobile application for the end user’s controls. Each component is developed by a different team, using different technologies and practices, and deployed to a different stack/target –...
Aug. 31, 2016 05:15 PM EDT Reads: 258
Internet of @ThingsExpo, taking place November 1-3, 2016, at the Santa Clara Convention Center in Santa Clara, CA, is co-located with 19th Cloud Expo and will feature technical sessions from a rock star conference faculty and the leading industry players in the world. The Internet of Things (IoT) is the most profound change in personal and enterprise IT since the creation of the Worldwide Web more than 20 years ago. All major researchers estimate there will be tens of billions devices - comp...
Aug. 31, 2016 04:45 PM EDT Reads: 3,838
SYS-CON Events announced today that Numerex Corp, a leading provider of managed enterprise solutions enabling the Internet of Things (IoT), will exhibit at the 19th International Cloud Expo | @ThingsExpo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. Numerex Corp. (NASDAQ:NMRX) is a leading provider of managed enterprise solutions enabling the Internet of Things (IoT). The Company's solutions produce new revenue streams or create operating...
Aug. 31, 2016 04:39 PM EDT Reads: 146
As cloud adoption continues to transform business, today’s global enterprises are challenged with managing a growing amount of information living outside of the data center. The rapid adoption of IoT and increasingly mobile workforce are exacerbating the problem. Ensuring secure data sharing and efficient backup poses capacity and bandwidth considerations as well as policy and regulatory compliance issues.
Aug. 31, 2016 03:15 PM EDT Reads: 307
Why do your mobile transformations need to happen today? Mobile is the strategy that enterprise transformation centers on to drive customer engagement. In his general session at @ThingsExpo, Roger Woods, Director, Mobile Product & Strategy – Adobe Marketing Cloud, covered key IoT and mobile trends that are forcing mobile transformation, key components of a solid mobile strategy and explored how brands are effectively driving mobile change throughout the enterprise.
Aug. 31, 2016 03:00 PM EDT Reads: 788
Data is the fuel that drives the machine learning algorithmic engines and ultimately provides the business value. In his session at Cloud Expo, Ed Featherston, a director and senior enterprise architect at Collaborative Consulting, will discuss the key considerations around quality, volume, timeliness, and pedigree that must be dealt with in order to properly fuel that engine.
Aug. 31, 2016 02:30 PM EDT Reads: 2,098
The Internet of Things can drive efficiency for airlines and airports. In their session at @ThingsExpo, Shyam Varan Nath, Principal Architect with GE, and Sudip Majumder, senior director of development at Oracle, will discuss the technical details of the connected airline baggage and related social media solutions. These IoT applications will enhance travelers' journey experience and drive efficiency for the airlines and the airports. The session will include a working demo and a technical d...
Aug. 31, 2016 02:03 PM EDT Reads: 214
19th Cloud Expo, taking place November 1-3, 2016, at the Santa Clara Convention Center in Santa Clara, CA, will feature technical sessions from a rock star conference faculty and the leading industry players in the world. Cloud computing is now being embraced by a majority of enterprises of all sizes. Yesterday's debate about public vs. private has transformed into the reality of hybrid cloud: a recent survey shows that 74% of enterprises have a hybrid cloud strategy. Meanwhile, 94% of enterpri...
Aug. 31, 2016 02:00 PM EDT Reads: 3,280
Although it has gained significant traction in the consumer space, IoT is still in the early stages of adoption in enterprises environments. However, many companies are working on initiatives like Industry 4.0 that includes IoT as one of the key disruptive technologies expected to reshape businesses of tomorrow. The key challenges will be availability, robustness and reliability of networks that connect devices in a business environment. Software Defined Wide Area Network (SD-WAN) is expected to...
Aug. 31, 2016 11:12 AM EDT Reads: 255
Data is an unusual currency; it is not restricted by the same transactional limitations as money or people. In fact, the more that you leverage your data across multiple business use cases, the more valuable it becomes to the organization. And the same can be said about the organization’s analytics. In his session at 19th Cloud Expo, Bill Schmarzo, CTO for the Big Data Practice at EMC, will introduce a methodology for capturing, enriching and sharing data (and analytics) across the organizati...
Aug. 31, 2016 11:00 AM EDT Reads: 483
SYS-CON Events announced today that Pulzze Systems will exhibit at the 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. Pulzze Systems, Inc. provides infrastructure products for the Internet of Things to enable any connected device and system to carry out matched operations without programming. For more information, visit http://www.pulzzesystems.com.
Aug. 31, 2016 10:45 AM EDT Reads: 469
SYS-CON Events announced today Telecom Reseller has been named “Media Sponsor” of SYS-CON's 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. Telecom Reseller reports on Unified Communications, UCaaS, BPaaS for enterprise and SMBs. They report extensively on both customer premises based solutions such as IP-PBX as well as cloud based and hosted platforms.
Aug. 31, 2016 09:30 AM EDT Reads: 1,128
Almost two-thirds of companies either have or soon will have IoT as the backbone of their business in 2016. However, IoT is far more complex than most firms expected. How can you not get trapped in the pitfalls? In his session at @ThingsExpo, Tony Shan, a renowned visionary and thought leader, will introduce a holistic method of IoTification, which is the process of IoTifying the existing technology and business models to adopt and leverage IoT. He will drill down to the components in this fra...
Aug. 31, 2016 09:00 AM EDT Reads: 558
Pulzze Systems was happy to participate in such a premier event and thankful to be receiving the winning investment and global network support from G-Startup Worldwide. It is an exciting time for Pulzze to showcase the effectiveness of innovative technologies and enable them to make the world smarter and better. The reputable contest is held to identify promising startups around the globe that are assured to change the world through their innovative products and disruptive technologies. There w...
Aug. 31, 2016 08:45 AM EDT Reads: 935
There is growing need for data-driven applications and the need for digital platforms to build these apps. In his session at 19th Cloud Expo, Muddu Sudhakar, VP and GM of Security & IoT at Splunk, will cover different PaaS solutions and Big Data platforms that are available to build applications. In addition, AI and machine learning are creating new requirements that developers need in the building of next-gen apps. The next-generation digital platforms have some of the past platform needs a...
Aug. 31, 2016 07:45 AM EDT Reads: 977
With so much going on in this space you could be forgiven for thinking you were always working with yesterday’s technologies. So much change, so quickly. What do you do if you have to build a solution from the ground up that is expected to live in the field for at least 5-10 years? This is the challenge we faced when we looked to refresh our existing 10-year-old custom hardware stack to measure the fullness of trash cans and compactors.
Aug. 31, 2016 02:45 AM EDT Reads: 1,917
The emerging Internet of Everything creates tremendous new opportunities for customer engagement and business model innovation. However, enterprises must overcome a number of critical challenges to bring these new solutions to market. In his session at @ThingsExpo, Michael Martin, CTO/CIO at nfrastructure, outlined these key challenges and recommended approaches for overcoming them to achieve speed and agility in the design, development and implementation of Internet of Everything solutions wi...
Aug. 31, 2016 02:15 AM EDT Reads: 2,311
Today we can collect lots and lots of performance data. We build beautiful dashboards and even have fancy query languages to access and transform the data. Still performance data is a secret language only a couple of people understand. The more business becomes digital the more stakeholders are interested in this data including how it relates to business. Some of these people have never used a monitoring tool before. They have a question on their mind like “How is my application doing” but no id...
Aug. 31, 2016 02:00 AM EDT Reads: 2,050
Cloud computing is being adopted in one form or another by 94% of enterprises today. Tens of billions of new devices are being connected to The Internet of Things. And Big Data is driving this bus. An exponential increase is expected in the amount of information being processed, managed, analyzed, and acted upon by enterprise IT. This amazing is not part of some distant future - it is happening today. One report shows a 650% increase in enterprise data by 2020. Other estimates are even higher....
Aug. 31, 2016 01:45 AM EDT Reads: 3,128
Smart Cities are here to stay, but for their promise to be delivered, the data they produce must not be put in new siloes. In his session at @ThingsExpo, Mathias Herberts, Co-founder and CTO of Cityzen Data, will deep dive into best practices that will ensure a successful smart city journey.
Aug. 31, 2016 01:00 AM EDT Reads: 1,731