An emerging XML standard called XBRL, or eXtensible Business Reporting Language, promises to simplify the mechanics of working with financial statements. As XBRL catches on, analysts will be able to spend less time building intricate spreadsheets from scratch and more time scrutinizing companies' finances and accounting practices-which they're bound to be doing more of in the wake of the Enron scandal.
Indeed, XBRL, while nothing more than a standard, could have a fundamental impact on the financial services industry, in the manner that the barcode changed inventory management or the MP3 compression standard upended the music business.
"The track record of proprietary methods of structuring data is mixed," said Zachary Coffin, global XBRL leader at KPMG and liaison chair to the XBRL Committee. "The track record of Internet standards is outstanding."
The beneficiaries of XBRL aren't limited to analysts or public companies. Virtually all of the participants in the financial information supply chain will find it worthwhile to take advantage of the enhanced data. "No industry will benefit more from XBRL than banking," said Coffin. "A bank plays in numerous places around that supply chain."
To wit, banks have controllers, tax analysts, investor relations personnel, loan officers, credit analysts, and regulatory and compliance officers. Furthermore, converged financial institutions have brokerage, investment banking and research capabilities under the same roof. "Literally, it hits them in about 20 different ways," said Coffin.
Essentially, XBRL allows preparers of business information to designate the purpose, denomination and time frame for each and every number, statistic and statement in a document, drawing from a standard dictionary of financial terms and accounting classifications. Non-standard elements can also be included, as long as they're also described within the document.
Standards for describing information make it far easier for software developers to work with financial data. Accordingly, the industry is gearing up to provide XBRL-compatible tools for providers of business information. IBM, Microsoft, Oracle, PeopleSoft and SAP are among the many software companies involved with the standard-setting body.
For example, FRx Financial Reporter, from Microsoft Great Plains, Fargo, N.D., will connect to over 24 general ledger systems. "Users of the data that need to feed the banks financial information will be literally a few mouseclicks away from feeding the banks an XBRL product," said Rob Blake, the Microsoft representative on the XBRL Committee.
Banks, in turn, can benefit greatly from receiving XBRL-formatted financial information from their borrowers. "It would reduce both the credit risk and the operational risk," said Philip Walenga, assistant director in the insurance division of the FDIC.
Among other things, the ability to systematically process incoming financial information will make it possible for banks to automatically evaluate the fiscal status of a large number of companies, prioritize the workload of loan officers and analysts, and detect loan covenant violations.
The standard will also make it easier for banks to communicate with regulators. "With XML, it's easier to reuse data, so there's potential for banks to see other benefits," said Walenga. "If a report is required for a regulator and the same data could be used internally for other reports, now they can reuse the data instead of having to re-key it in."
The FDIC anticipates working with other bank regulators on helping to speed adoption of XBRL. However, this won't necessarily require wholesale changes. "It's not an issue of changing regulations," said Walenga. "It's a matter of making information requirements more clear and potentially more accurate."
Other markets have begun to encourage use of XBRL, including the Australian Stock Exchange, which will allow XBRL as an optional filing format for listed companies. "ASX wants Sydney to be viewed as a beacon for 21st century investing," said Coffin.
The next big step will come when national regulators begin to require the use of XBRL. "Singapore will probably be the first country to adopt XBRL as a whole," said Coffin. Countries supporting XBRL may have a comparative advantage over neighboring countries where information is found in a "digital cloud." That's because global investors tend to like transparency, not to mention language-independent access to financial data.
From there, it's anybody's guess as to how markets and regulations might change. One possibility is a move toward more frequent reporting. "If companies can produce reports more quickly, there will be more pressure to do so," said Coffin.
New reporting standards will also have a profound effect on the market data industry. "Intermediaries that do not redefine their value will go by the wayside," said Coffin.