Welcome!

Search Authors: Carmen Gonzalez, Lori MacVittie, Liz McMillan, Shelly Palmer, Lacey Thoms

Blog Feed Post

Big Data accessiblity for SEC reporting? Not yet. Columbia report explains why.

By

[This post by Hudson Hollister is cross-posted on the Data Transparency Coalition's blog.]

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.

Data Transparency CoalitionThe Columbia report is a call to action by both the SEC and Congress. The Data Transparency Coalition is going to pursue that action in 2013.

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.

Read the original blog entry...

More Stories By Bob Gourley

Bob Gourley, former CTO of the Defense Intelligence Agency (DIA), is Founder and CTO of Crucial Point LLC, a technology research and advisory firm providing fact based technology reviews in support of venture capital, private equity and emerging technology firms. He has extensive industry experience in intelligence and security and was awarded an intelligence community meritorious achievement award by AFCEA in 2008, and has also been recognized as an Infoworld Top 25 CTO and as one of the most fascinating communicators in Government IT by GovFresh.

@ThingsExpo Stories
The Internet of Things will greatly expand the opportunities for data collection and new business models driven off of that data. In her session at Internet of @ThingsExpo, Esmeralda Swartz, CMO of MetraTech, will discuss how for this to be effective you not only need to have infrastructure and operational models capable of utilizing this new phenomenon, but increasingly service providers will need to convince a skeptical public to participate. Get ready to show them the money! Speaker Bio: Esmeralda Swartz, CMO of MetraTech, has spent 16 years as a marketing, product management, and busin...
Samsung VP Jacopo Lenzi, who headed the company's recent SmartThings acquisition under the auspices of Samsung's Open Innovaction Center (OIC), answered a few questions we had about the deal. This interview was in conjunction with our interview with SmartThings CEO Alex Hawkinson. IoT Journal: SmartThings was developed in an open, standards-agnostic platform, and will now be part of Samsung's Open Innovation Center. Can you elaborate on your commitment to keep the platform open? Jacopo Lenzi: Samsung recognizes that true, accelerated innovation cannot be driven from one source, but requires a...
SYS-CON Events announced today that Red Hat, the world's leading provider of open source solutions, will exhibit at Internet of @ThingsExpo, which will take place on November 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. Red Hat is the world's leading provider of open source software solutions, using a community-powered approach to reliable and high-performing cloud, Linux, middleware, storage and virtualization technologies. Red Hat also offers award-winning support, training, and consulting services. As the connective hub in a global network of enterprises, partners, a...
P2P RTC will impact the landscape of communications, shifting from traditional telephony style communications models to OTT (Over-The-Top) cloud assisted & PaaS (Platform as a Service) communication services. The P2P shift will impact many areas of our lives, from mobile communication, human interactive web services, RTC and telephony infrastructure, user federation, security and privacy implications, business costs, and scalability. In his session at Internet of @ThingsExpo, Robin Raymond, Chief Architect at Hookflash Inc., will walk through the shifting landscape of traditional telephone a...
SYS-CON Events announced today that Matrix.org has been named “Silver Sponsor” of Internet of @ThingsExpo, which will take place on November 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. Matrix is an ambitious new open standard for open, distributed, real-time communication over IP. It defines a new approach for interoperable Instant Messaging and VoIP based on pragmatic HTTP APIs and WebRTC, and provides open source reference implementations to showcase and bootstrap the new standard. Our focus is on simplicity, security, and supporting the fullest feature set.
BSQUARE is a global leader of embedded software solutions. We enable smart connected systems at the device level and beyond that millions use every day and provide actionable data solutions for the growing Internet of Things (IoT) market. We empower our world-class customers with our products, services and solutions to achieve innovation and success. For more information, visit www.bsquare.com.
How do APIs and IoT relate? The answer is not as simple as merely adding an API on top of a dumb device, but rather about understanding the architectural patterns for implementing an IoT fabric. There are typically two or three trends: Exposing the device to a management framework Exposing that management framework to a business centric logic • Exposing that business layer and data to end users. This last trend is the IoT stack, which involves a new shift in the separation of what stuff happens, where data lives and where the interface lies. For instance, it’s a mix of architectural style...
SYS-CON Events announced today that SOA Software, an API management leader, will exhibit at SYS-CON's 15th International Cloud Expo®, which will take place on November 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. SOA Software is a leading provider of API Management and SOA Governance products that equip business to deliver APIs and SOA together to drive their company to meet its business strategy quickly and effectively. SOA Software’s technology helps businesses to accelerate their digital channels with APIs, drive partner adoption, monetize their assets, and achieve a...
From a software development perspective IoT is about programming "things," about connecting them with each other or integrating them with existing applications. In his session at @ThingsExpo, Yakov Fain, co-founder of Farata Systems and SuranceBay, will show you how small IoT-enabled devices from multiple manufacturers can be integrated into the workflow of an enterprise application. This is a practical demo of building a framework and components in HTML/Java/Mobile technologies to serve as a platform that can integrate new devices as they become available on the market.
SYS-CON Events announced today that Utimaco will exhibit at SYS-CON's 15th International Cloud Expo®, which will take place on November 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. Utimaco is a leading manufacturer of hardware based security solutions that provide the root of trust to keep cryptographic keys safe, secure critical digital infrastructures and protect high value data assets. Only Utimaco delivers a general-purpose hardware security module (HSM) as a customizable platform to easily integrate into existing software solutions, embed business logic and build s...
Connected devices are changing the way we go about our everyday life, from wearables to driverless cars, to smart grids and entire industries revolutionizing business opportunities through smart objects, capable of two-way communication. But what happens when objects are given an IP-address, and we rely on that connection, sometimes with our lives? How do we secure those vast data infrastructures and safe-keep the privacy of sensitive information? This session will outline how each and every connected device can uphold a core root of trust via a unique cryptographic signature – a “bir...
Internet of @ThingsExpo Silicon Valley announced on Thursday its first 12 all-star speakers and sessions for its upcoming event, which will take place November 4-6, 2014, at the Santa Clara Convention Center in California. @ThingsExpo, the first and largest IoT event in the world, debuted at the Javits Center in New York City in June 10-12, 2014 with over 6,000 delegates attending the conference. Among the first 12 announced world class speakers, IBM will present two highly popular IoT sessions, which will take place November 4-6, 2014 at the Santa Clara Convention Center in Santa Clara, Calif...
Almost everyone sees the potential of Internet of Things but how can businesses truly unlock that potential. The key will be in the ability to discover business insight in the midst of an ocean of Big Data generated from billions of embedded devices via Systems of Discover. Businesses will also need to ensure that they can sustain that insight by leveraging the cloud for global reach, scale and elasticity.
WebRTC defines no default signaling protocol, causing fragmentation between WebRTC silos. SIP and XMPP provide possibilities, but come with considerable complexity and are not designed for use in a web environment. In his session at Internet of @ThingsExpo, Matthew Hodgson, technical co-founder of the Matrix.org, will discuss how Matrix is a new non-profit Open Source Project that defines both a new HTTP-based standard for VoIP & IM signaling and provides reference implementations.

SUNNYVALE, Calif., Oct. 20, 2014 /PRNewswire/ -- Spansion Inc. (NYSE: CODE), a global leader in embedded systems, today added 96 new products to the Spansion® FM4 Family of flexible microcontrollers (MCUs). Based on the ARM® Cortex®-M4F core, the new MCUs boast a 200 MHz operating frequency and support a diverse set of on-chip peripherals for enhanced human machine interfaces (HMIs) and machine-to-machine (M2M) communications. The rich set of periphera...

SYS-CON Events announced today that Aria Systems, the recurring revenue expert, has been named "Bronze Sponsor" of SYS-CON's 15th International Cloud Expo®, which will take place on November 4-6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. Aria Systems helps leading businesses connect their customers with the products and services they love. Industry leaders like Pitney Bowes, Experian, AAA NCNU, VMware, HootSuite and many others choose Aria to power their recurring revenue business and deliver exceptional experiences to their customers.
The Internet of Things (IoT) is going to require a new way of thinking and of developing software for speed, security and innovation. This requires IT leaders to balance business as usual while anticipating for the next market and technology trends. Cloud provides the right IT asset portfolio to help today’s IT leaders manage the old and prepare for the new. Today the cloud conversation is evolving from private and public to hybrid. This session will provide use cases and insights to reinforce the value of the network in helping organizations to maximize their company’s cloud experience.
The Internet of Things (IoT) is making everything it touches smarter – smart devices, smart cars and smart cities. And lucky us, we’re just beginning to reap the benefits as we work toward a networked society. However, this technology-driven innovation is impacting more than just individuals. The IoT has an environmental impact as well, which brings us to the theme of this month’s #IoTuesday Twitter chat. The ability to remove inefficiencies through connected objects is driving change throughout every sector, including waste management. BigBelly Solar, located just outside of Boston, is trans...
SYS-CON Events announced today that Matrix.org has been named “Silver Sponsor” of Internet of @ThingsExpo, which will take place on November 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. Matrix is an ambitious new open standard for open, distributed, real-time communication over IP. It defines a new approach for interoperable Instant Messaging and VoIP based on pragmatic HTTP APIs and WebRTC, and provides open source reference implementations to showcase and bootstrap the new standard. Our focus is on simplicity, security, and supporting the fullest feature set.
Predicted by Gartner to add $1.9 trillion to the global economy by 2020, the Internet of Everything (IoE) is based on the idea that devices, systems and services will connect in simple, transparent ways, enabling seamless interactions among devices across brands and sectors. As this vision unfolds, it is clear that no single company can accomplish the level of interoperability required to support the horizontal aspects of the IoE. The AllSeen Alliance, announced in December 2013, was formed with the goal to advance IoE adoption and innovation in the connected home, healthcare, education, aut...