Is your IT dept ready for the XBRL mandate?

Given all the pressures IT is under, another compliance initiative may seem to be one too many. There is such a mandate: to submit financial reports using XBRL (Extensible Business Reporting Language) tags.

How much will the XBRL mandate add to IT’s burden? At first, the burden will be small, but it will increase over time — as will the opportunity to use XBRL for better internal operations, not just for reporting compliance.

The purpose of the XBRL mandate is to make corporate financial information more easily available to stockholders — and to make sure companies are really reporting the same things, the federal government has mandated the use of XBRL (Extensible Business Reporting Language). The Toronto Stock Exchange tested out XBRL in 2003. The US taxonomy could be particularly useful for the 200 largest companies in the country that inter-list on both the Toronto and New York Stock Exchanges.

The first SEC deadline for public companies with a market cap of US$5 billion or more to submit financial reports in interactive data, aka XBRL format, is set for Dec. 15, 2008. A year later, most Fortune 1500 companies must provide interactive XBRL data, and a year after that, all public companies will be required to submit the annual 10-K and quarterly 10-Q financial reports as interactive data.

After that, companies should expect the SEC to require more financial documents to be published in XBRL format and for other government agencies to begin mandating its use as well, says Diane Mueller, vice president of XBRL Development for JustSystems, an XML tools provider. John Stantial, assistant comptroller at the conglomerate United Technologies Corp. (UTC), expects to see the Department of Labor, the Internal Revenue Service, and the Bureau of Economic Analysis adopt XBRL as a requirement.

So what must IT do to make its company’s financial reporting XBRL-compliant? Initially, XBRL requires just a minimal role for IT Under the SEC’s initial reporting requirements, there is not much case for IT involvement, says Mike Willis, a partner at auditor PricewaterhouseCoopers and the founding chairman of XBRL International, a supply-chain consortium representing more than 600 companies.

According to a survey by the Information Systems Audit and Control Association, various forms of regulatory compliance will be the leading business and technology issues facing IT managers worldwide over the next year.

Most of the initial XBRL effort is to tag the financial statements with the correct taxonomy, using XBRL markup terms, to describe a particular financial concept or fact in, say, a profit-and-loss statement. That effort is entirely a financial reporting activity, notes David Blaszkowsky, director of the SEC’s Office of Interactive Disclosure.

The work can be done in-house or outsourced to a financial publisher.

IT’s role in tagging is simply to assist the finance team with the software, an effort akin to helping a user figure out how to get a business card scanner to import the information into Outlook.

UTC, a large conglomerate with almost 250,000 employees, decided to do the tagging in-house when it became one of the first companies to participate in the SEC’s voluntary filing program for interactive tagging three years ago. “We did it ourselves. Just a bunch of finance guys, no IT,” says UTC’s Stantial.

Three years ago, there were just three tools available to help with the tagging, so the self-supporting approach to tagging was a riskier prospect than it is today. Stantial’s team chose Rivet Software’s Dragon Tag, since its name kept popping up in searches. “At a cost of $300, if we couldn’t figure it out, we could just throw it away,” he says.

Today, there are plenty of software tools to help do the tagging, notes the SEC’s Blaszkowsky, and it makes sense for the financial management and technology management teams to work together to discuss software options.

Although UTC has a large, first-class IT department that could have done the work, Stantial’s team decided it should figure out XBRL for itself, especially since they didn’t understand how to work in XML, which forms the foundation of XBRL. After all, the tagging needed financial expertise, and the accuracy of the results ultimately belonged to Stantial’s group.

IT’s role will increase as XBRL usage, complexity grow The initial tagging can be done with minimal IT involvement, but at some point, IT needs to get deeply involved in XBRL efforts. For example, as the SEC XBRL requirements grow more complex over time, it will be critical to understand how the XBRL-compliant reporting software might operate with the company’s existing processes and platforms. By then, the decision is no longer a simple one of buying the easiest package to use and being able to “throw it away” if it’s not suitable.

In fact, Stantial points out UTC later switched to Fujitsu’s XWand, which he says has stellar editing tools for making changes after the document has been converted to XBRL. Of course, the price is much higher: An XWand software license starts at $10,000.

The IT role will grow further as ERP and other financial applications begin to integrate XBRL into their platforms. While it is a financial decision as to how to tag the data and reports, it will be up to IT to understand the implications of the how the software works with data and other applications — especially when a company has multiple ERP and financial systems due to mergers and acquisitions, notes Blaszkowsky. “XBRL is a powerful tool to apply, and it is in part a financial team and a technology team decision,” he says.

IT has a role to help automate processes using XBRL Beyond reporting, enterprises can use XBRL to enforce consistent financial processes through its ERP and financial systems. UTC has been exploring this in its quest to achieve a “zero-day” financial close, in which it can issue accurate, up-to-the-minute financial reporting at any time.

Such an effort begins when companies start looking at all of the manual processes used during the “last mile” of financial reporting so that they can understand what might be automated, says PricewaterhouseCoopers’ Willis. The automated assembly of reports and collaborative review of documents, along with the aggregation of all notes and MD&A (management discussion and analysis) disclosures are just a few of the areas where XBRL implementations, with the help of IT, can make a huge difference in accessing financial data, increasing collaboration during the report-making process, and reducing the final time to complete a report, Willis says.

It also gives all those involved the ability to drill down to lower-level systems to access information needed to explain changes in the business. For example, rather than doing the traditional linear review in which case documents are e-mailed to a review committee and “some poor sucker has to aggregate all the responses,” Willis says, XBRL will allow IT to create a Wikipedia-like structure.

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Jim Love, Chief Content Officer, IT World Canada

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