19th XBRL International Conference

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19th XBRL International ConferenceReducing
regulatory burden with XBRL a catalyst for
better reportingJune 22-25, 2009Paris, France

• Will XBRL Improve Corporate Governance?
• Michael Alles
• Rutgers Business School
• Maciej Piechocki
• International Accounting Standards Committee
  Foundation

2
Answer Seems Obvious

• KPMG Improve Governance with XBRL
• For todays enterprise, the issue of
  understanding report consolidation and the
  controls that exist around those reports is a
  critical part of corporate governance. In
  addition to building a corporate culture of
  accountability and accuracy, there is a very real
  need to re-examine the manner in which
  information is produced, verified and disclosed
  We believe that for many enterprises the use of
  XBRL technology will prove the most suitable,
  platform-independent way to impose rigor on the
  framework of reporting.
• http//www.kpmg.com/Global/WhatWeDo/Audit/Pages/g
  overnence.aspx

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Great Example from SEC Chair Cox

• Cox said on February 9th, 2007 the timing of
  the options backdating scandal coincided with the
  SEC's decision to begin converting Form 4
  submissionsthe form companies use to report
  stock option exercise transactionsinto
  interactive documents.
• Before 2003, information filed on the SEC's Form
  4 was analyzed the old-fashion wayretyped into
  SEC databases and spreadsheets before being
  scrutinized. Not surprisingly, for all of that
  time, the backdating phenomenon was never
  uncovered, Cox said.
• http//www.law.com/jsp/article.jsp?id11712874696
  93

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XBRL Drove Better Governance

• More recently, however, the SEC started
  collecting Form 4 data in an interactive format,
  which made analyzing the information easier. The
  SEC also issued new rules around the same time
  requiring real-time reporting of options
  awardswithin two days of the grant.
• Once real-time disclosure was combined with
  interactive data XBRL we began to find clues
  that had previously gone undetected. That led
  directly to the discovery of what we now know
  were billions of dollars of backdated stock
  option awards, Cox said.
• http//www.law.com/jsp/article.jsp?id11712874696
  93

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H0 XBRL Improves Governance

• What is the alternate hypothesis? Surely XBRL
  cannot not improve corporate governance?
• But just because something should, doesnt mean
  that it will. Otherwise, why didnt XBRL VFP
  suffice?
• Issue is not the potential of XBRL to improve
  governance, but how to get there from here. The
  missing link is the decision support processes
  that take advantage of XBRLs potential and
  translate it into better governance decisions.
• Need to focus less on the technology of XBRL and
  more on the managerial and human behavior issues
  that will determine how XBRL will change the way
  in which governance is conducted.

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Rethink Takeaway From Cox Example

• SEC also invested in the people to use XBRL
• The chairman even compared his team of
  enforcers to the characters in the hit TV show
  Heroeseveryday people with extraordinary
  abilities they didn't know they had. Cox said his
  enforcement staff are a group of otherwise
  ordinary people with extraordinary talent and
  dedication. "In other words, Save the
  CheerleaderSave the World, Cox said, intoning
  the show's mantra. He added that while his staff
  may not possess super powers, by sheer willpower
  and hard work they routinely accomplish great
  deeds.
• http//www.law.com/jsp/article.jsp?id11712874696
  93

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Governance Process Not Outcome

• SEC succeeded in indentifying stock option
  backdating not just because they had the
  technology of XBRL, but because it was part of a
  process that took advantage of XBRLs
  capabilities
• Real Time Reporting Reducing lags in monitoring
  so that analysis is timely enough to be
  actionable.
• Analytical Capability A large and well trained
  staff that gave the SEC the capability to make
  use of the XBRL-enabled data and to analyze it to
  see patterns they previously missed.
• Motivation A clear goal of catching and
  deterring earnings management.

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Demand Side of Governance Process

• Boards of directors, internal and external
  auditors, analysts, ratings agencies and
  investors all have a role to play in governance,
  but their informational needs and capabilities
  differ.
• The ultimate source of governance is the
  discipline of market forcesthe stock price and
  cost of capital.
• Thus the communication of firm information to
  users outside the firm has to be the main
  priority of XBRL.
• But identity of user is less important with a
  general purpose tool like XBRL than the
  understanding of the process by which any user
  makes their decisions about governance.

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The Information Value Chain

• Use Information Value Chain to establish role of
  XBRL in governance process
• Bob Elliott http//newman.baruch.cuny.edu/digita
  l/saxe/saxe_1998/elliott_98.htm
• Data ? Information Use training and experience
  to extract relevant information from raw data.
• Information ? Decision relevant knowledge
  Analyze information to obtain and assess decision
  alternatives.
• Knowledge ? Better decision making Weigh
  alternatives in light of goals and incentives of
  decision makers.

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Impacting Value Chain With XBRL

• Key is that XBRL is a means towards the end of
  better governance, not an end in itself.
• XBRL cannot fundamentally change governance if
  all it does is to speed up existing information
  flows.
• Takeaway from Value Chain Analysis is that new
  ways of viewing and manipulating data yields
  better information, which when combined with more
  powerful analytic tools leads to the knowledge
  that allows better decision making about
  governance.
• Value added from XBRL comes from using it as a
  tool to disaggregate and reformat data so that
  users, by seeing problems in a new way, are
  stimulated to generate new information and
  knowledge.

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Information Presentation Content

• With traditional financial statements, users
  perceive presentation format to be as much a
  source of informationintentionally or
  implicitlyas content, leading to functional
  fixation and firms worrying about placement of
  information in footnotes versus in the body of
  the statements.
• A logical outcome is the FASBs Financial
  Statement Presentation project which aims to
  reform the presentation and display of financial
  statement information, including the
  classification and display of line items and the
  aggregation of line items into subtotals and
  totals.
• http//www.fasb.org/project/financial_statement_p
  resentation.shtml

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Top Down vs. Bottom Up Formatting

• Underlying FASB assumption is that the format and
  presentation of the statements drive decision
  making.
• To its credit, the project is contemplating truly
  dramatic changes, such as violating the
  accounting equation and using different valuation
  tools for different parts of the statements.
• But still in pre-XBRL mode, since the FASB
  product is a top down imposition on users of what
  it determines is a better format for financial
  statements.
• By contrast, XBRL tagged data enables users to
  see financial data in multiple different formats
  and using multiple different assumptions.

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Information Content in Presentation

• Consider
• Versus insights from
• Louder Than Words. Financial Reporting Council,
  2009.

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Relaxing Constraints on Information

• FASB proposes using both historic cost and fair
  value in different parts of the balance sheet to
  facilitate dual goals of asset valuation and
  asset preservation.
• Problem is resulting lack of comparability and
  consistency tradeoff between reliance and
  reliability.
• With XBRL this tradeoff not necessarycan use
  both bases, enabling users to see data in
  different ways and from different perspectives.
• Similarly, reconcile different accounting
  standards, GAAP vs. IFRS.
• Analogous to the different decision perspectives
  approach (strategy, cost, operations, short run,
  long run) that revolutionized Strategic Cost
  Management.

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From Information to Knowledge

• Exploit FASBs assumption of functional fixation
  by using XBRL as a tool to shape the perception
  of governance decision makers.
• By disaggregating data, XBRL drives flexibility
  in information presentation, in order to give
  users different decision perspectives.
• For example, Enhanced Business Reporting
  Consortium worried about whether financial
  statement should be presented in a Balanced
  Scorecard format or using the PwC value reporting
  format.
• But why impose that choice? XBRL-enabled web
  reporting allows for turning the dial
  flexibility about how financial information is
  viewed and perceived.

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XBRL Data ? Information ? Knowledge

• XBRL can liberate data, allowing users to view
  information differently and create new knowledge,
  rather than being forced to use a one size fits
  all statement.
• More fundamentally, data format choice shifts
  from preparer to user. Infomediaries can offer
  different views of firm data, using proprietary
  methods that drive insights.
• That, after all, is essentially what academics do
  in empirical capital market research, often
  finding anomalies that are highly relevant to
  governance, such as identifying earnings
  management.

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Using XBRL in Governance Process

• In theory, XBRL enables analysts, auditors and
  boards of directors to replicate academic
  analysis for their firms more easily, in time to
  be actionable.
• What XBRL cannot do is change the incentives and
  motivation of governance players. If they dont
  care now, they wont when they have access to
  XBRL.
• But governance players, such as directors and
  auditors, could be required to see data in
  different formats and to account for those
  differences.
• Need to think outside the box for how the
  capabilities of XBRL can be used to drive
  fundamental changes in governance value chain.

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Document vs. Data-centric XBRL

• Realizing that potential impact on governance,
  however, requires overcoming the limitations
  posed by the document centric nature of the
  current XBRL FR model, which does not facilitate
  the disaggregation of data for governance
  purposes.
• In an ideal world the possibility to view
  financial information differently would be
  considered at the level of taxonomy modeling.
• While the potential to view financial 
  information in a disaggregated fashion is present
  at the level of taxonomy modeling, XBRL is today
  predominantly a document-centric model and only
  moving slowly to a data-centric model.

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Governance Facilitating XBRL

• XBRL Global Ledger (XBRL GL) or XBRL Dimensional
  Taxonomies (XDT) will go a long way towards
  giving XBRL the flexibility needed to unlock the
  full value added inherent in tagged data.
• But regardless of the extent of tagging, to take
  XBRLs potential to improve governance requires a
  systematic examination of how data is used in the
  governance decision making.
• Our paradigm for XBRL-enabled governance
  indicates that it is the combination of
  multidimensional data centric modeled taxonomies
  combined with support for custom viewing and
  rendering that will maximize the potential of
  XBRL to enhance governance.

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Taxonomy Modeling Alternatives

• The XBRL 2.1 specification pushed most taxonomies
  towards the document-oriented approach. Most
  modeling was highly document oriented, especially
  the use of such modeling techniques as
  presentation hierarchies or having a single
  concept per cell of a tablefor example, in
  tables representing Movements in Property, Plant
  and Equipment, a 10x10 table was expressed by
  the means of 100 individual concepts linked
  together as a graph.
• With the introduction of the XDT specification
  this focus changed. Instead of beginning by
  asking the question what does the financial
  report which the taxonomy represents look like?
  taxonomy developers started by asking the
  question what are the logical relationships
  between data entries which need to be modeled in
  the taxonomy?
• COREP and FINREP taxonomies were the main drivers
  which led to the development of XDT and were the
  first examples of a multidimensional data-centric
  approach to XBRL. COREP, in particular, is a
  highly dimensional taxonomy utilizing up to seven
  dimensions in one hypercube (by comparison, the
  IFRS and the US GAAP taxonomies usually provide
  only one dimension for a given measurefor
  example, Revenue reported for breakdown of
  Geographical areas).

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Is XBRL Redundant?

• Some argue that analysts can already replicate
  what XBRL makes possible. More expensive perhaps
  to manually pull apart 10ks, but since it is
  already being done, XBLR is unlikely to have much
  of an impact.
• The world is full of obvious things which nobody
  by any chance ever observes. Sherlock Holmes,
  Hound of the Baskervilles.
• Researchers need to examine frameworks within
  which XBRL can potentially impact governance.
• Keep in mind that different perspectives may lead
  to different decisions, not necessarily better
  decisions.

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H0 Supported? Conditionally

• XBRL does indeed have the potential to
  significantly improve governance. But only if
  those pushing XBRL understand the value chain of
  information of governance players and establish
  role for XBRL in driving better governance
  decisions.
• XBRL has to be more than a distribution mechanism
  for data. It enables data to be disaggregated and
  reformatted in a way that can lead to new
  insights and decision relevant knowledge.
• Whether processes will be created to take
  advantage of that capability will determine the
  extent to which XBRL transforms corporate
  governance.