While more than a dozen pilot companies are minding their interactive Ks and Qs, Securities and Exchange Commission Chairman Christopher Cox is pushing extensible business reporting language (XBRL) beyond quarterly filings to a new way for consumers to pick investments.
And mutual fund companies will play a significant role in providing investors with XBRL to allow them to compare apples-to-apples information between funds instantly side-by-side, on a single screen.
"If we want to help investors be successful, participating in these types of initiatives will be providing them the right tools to make investment decisions," said John J. Brennan, chairman and chief executive of The Vanguard Group, speaking last week at the SEC's third roundtable on XBRL.
XBRL will technologically transform the industry the way that toll-free telephone hotlines did in the 1970s, personal computers did in the 1980s and the Internet did a decade ago, Brennan said. The fact that today 80% of all Vanguard's interactions with its customers occur online underscores the importance and long-term value of providing investors instant delivery of the information they need on the Web, Brennan added. It would also help mutual fund investors, long notorious for failing to look at, let alone read, the reams of paper they receive from fund companies, become more engaged investors.
In January, the Investment Company Institute released its draft of XBRL tagging taxonomy on its website for comment, and this month, the ICI submitted a letter of support to the SEC's voluntary program allowing mutual fund companies to submit XBRL-tagged risk and return profiles.
Brennan, like the ICI, urged the SEC to look beyond the risk and return profiles to the possibility of shortening the overall length of the prospectus, and making the entire document interactive.
What the ICI has termed the "prospectus profile," or a shorter, two-page summary, is a more useful, usable report, Brennan said. "This is the groundwork for more transparent, more readily available information," he said.
Cox offered no indication during the meeting of whether the Commission planned to vote on a profile prospectus delivered electronically to those who choose, replacing the bulky long-form document that now, per regulation, is mailed to every investor. However, he did emphasize his commitment to the XBRL movement.
The next push from the Commission will be tagging the executive compensation data for all reporting companies and posting them to EDGAR. This is so important, Cox said, that SEC staff will tag this section in all companies' second quarter 2007 filings. With time, the program would be expanded to include data that is not strictly financial, such as discussions relegated to the footnotes.
"Remember, analysts, investors and [the] press will have the same tools, and will be doing the same comparisons instantly," said John W. White, the director of the SEC's division of corporate finance.
Market Quality
"While I will not say that this initiative will re-make American capitalism, I will say that the whole quality of American markets requires this type of usable, quality and analyzable data," said Richard Bennett, chief executive officer of the Portland, Maine-based governance watchdog The Corporate Library. "It's a simple, but important measure of accountability," he said.
The SEC is relying on American capitalism to drive that process faster. EDGAR has a software plug-in for an open-source XBRL reader. Because the software is open-source, the code that makes it run is public information, Cox said. That makes it available for anyone with computer savvy for tinkering, or, essentially, to build a better, possibly proprietary, XBRL reader. The more functional the reader, the more desirable a tool it will be, and the more important access to tagged data will become.
Preparing that data for an interactive format can be time consuming, especially in the beginning, according to 11 panelists from companies that are participating in the SEC's pilot program for filing their quarterly and annual financial data.
"It gets easier as you go forward," said James Cinquegrana, IT team leader at General Electric. Although GE's first filing took about 100 hours to code, the third quarter 2006 filing took only about three hours, he said.
"We had to make a decision up-front whether we wanted to be experts in tagging," said Thomas D. Jacob, who manages financial reporting at 3M in Minneapolis. "We decided it was too much, so we got help," he said.
In terms of the cost, even fund companies that don't dedicate 25% of their budgets to technology spending the way Brennan said Vanguard does, can probably bear the expense.
"Our external cost was less than $5,000 in aggregate," said Lawrence J. Salva, chief accounting officer and controller for Comcast of Southfield, Mich. And while the first filing took about 150 hours of manpower, subsequent filings have taken about 20.
Panelists agreed that the learning curve was steep but surmountable, but none anticipated moving to the next step: tagging harder-to-define non-financial information, such as footnotes.
That's because the taxonomy is still developing, said Elmer H. Huh, senior vice president with the enterprise valuation group at Lehman Brothers in New York. But that doesn't mean companies can't start with what is already available. "We as analysts and investors need to understand what drives value," he said. And the numbers don't tell the whole story.
"I don't think the taxonomy is ever complete," said Harold I. Zeidman, a partner with KPMG. "Accounting rules change all the time, and the taxonomy needs to change with them."
Cox noted that companies will not be required to have independent certification of their tags. "One way to ensure this suffers an early crib death is to take that approach," Cox said. However, companies will still be subject to reporting accurate numbers, he said.
Bennett emphasized the value of constantly adapting systems for an ever-evolving marketplace. "With understanding you get participation, and that can only be good for the growth of the capitalistic system," he said.
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