Financial Systems: Fact, Fancy … Fast?

The truth, the whole truth, and nothing but the truth: this may be the case in our justice system, but is it true in our financial systems? Managers and investors alike question the relevance and timeliness of traditional financial reporting systems. Add to that the Internet and its new economy, as well as market capitalization run wild — you have a mess waiting for an answer. Part of that answer may be a new specification from the accounting industry: XBRL.

Vital Stats, Once Removed
Imagine what life would be like if doctors tracked our vital statistics the same way traditional accounting systems report on the performance of our businesses.

Me: “So, how am I doing, Doc? This flu is really getting me down”
Doctor: “Not bad, Mr. Cohen. Your height is 20 inches, and your weight is six pounds, four ounces.”
Me: “Doc! Look at me. I have shoes bigger than that.”
Doctor: “Of course. We have to report at lower of cost or market.”
Me: “That's silly. How about my fever?”
Doctor: “98.4. That's normal.”
Me: “How can I be normal? I'm burning up!”
Doctor: “Well, that was measured at the end of your last fiscal year. I can get you a quarterly reading forty five days after March 31.”

Business headlines highlight the weaknesses of traditional accounting systems. Billion-dollar public offerings and ballooning market capitalizations aren't based on balance sheets, old or new. Million-dollar domain name sales bloom from a seventy-dollar seed. Excellent employees, consistent customers, and best business practices make the difference between incredible success and being an also-ran – but none of these business assets are entered in any double-entry bookkeeping system.

Accounting systems maintain the historical costs of things purchased. They don't measure value. They don't show increases in property values, measure the value of patents, or attempt to keep up with the trade value of a domain name. No rational person believes the value of Amazon.com or Priceline.com is found in its property, plant and equipment. So, new performance measurement systems are beginning to emerge.
Performance Measurement

The battle for the best performance measurement system is on:

1. To recognize the right things to measure and
2. To be able to measure and communicate those measurements completely, accurately, and on a timely basis.

The global accounting firms have delivered financial models, new reporting for the new economy. Each model boasts quadrants, grids, and tantalizing tales of technology triumph. Some describe the changing role of the financial reporting department. Others call for a move away from balance sheet and income statement and their complementary effect showing changes in cash, in favor of new reports on the growth of the operation and the real resources at its disposal.

Changing Roles
What do you think of when you think of a CPA? A “numbers cop”? Our starting point in the changing role of financial reporting is the perception of the accountant at his or her basest. Perhaps you know the image: green-eyeshade wearing, bean counting, backward looking, and non-value adding scorekeeper. This is the accountant where, “what they say is absolutely true, but completely useless to the organization.” This is accounting as odometer.

Perhaps the accountant has more power in your organization. Then they stand as guardian of assets, cold, and heartless, standing between you and your expense reimbursement. This is the accountant as speedometer.

Modern day systems may position the accountant as business partner, providing guidance and direction through the muck and mire. This is accountant as diagnostic system.

And what will categorize the system of tomorrow – would you believe the accountant as “action hero”?

Salvo for Systems
A few action heroes have set out to make financial information more timely and useful. Every action hero needs a weapon; our new weapon is called XBRL. These action heroes haven't set out to change the rules – they just make it a lot easier to abide by them.

While the new measurement systems are evolving, a major weapon for making the present way of recording information more relevant has been announced. This tool is called XBRL – the Extensible Business Reporting Language.

Based on XML, the Extensible Markup Language, XBRL is a cross-platform, application-independent, self-describing specification for making financial information more accessible, shareable, and useful. There is tremendous support for this cooperative international effort.

Perhaps the most amazing thing about this effort is the cooperation between competitors. The Big 5 CPA firms and smaller CPA firms jointly developed the shared vocabulary of XBRL. The developers of accounting software products from small-business Peachtree (Sage Software) to enterprise-enabling SAP AG (as well as Best Software, Epicor Software Corporation, Great Plains, Hyperion, Lawson Software, and Navision Software) all took part. The guardians of the accounting profession in the US (AICPA, IMA), Canada (CICA), Australia (ICAA), England & Wales (ICA), and internationally (IASC) all oversaw the creation. IBM, Microsoft Corporation and Oracle Corporation contributed.

The first fruits of the project were revealed in early April, as an official request for comment of the specification was made (http://www.xbrl.org/). All involved in the creation, communication, and use of financial information are encouraged to comment on XBRL, with a final release of the first effort planned for early July.

XBRL offers a specification for the tagging of financial data. This data can then be easily created by systems, communicated between systems and incorporated into web sites, found by search tools, and manipulated by common financial tools. XBRL offers the prospect of speeding up the publication, collection and analysis of financial data from weeks to seconds.

XBRL benefits from the tremendous promise of XML. XML offers both contextual benefits (relevance) and content benefits (completeness) that are missing from current search engines like Yahoo (rich in context) and AltaVista (rich on content).

While XBRL is a specification with the present in mind, it has been designed to facilitate the measurement systems of tomorrow as well. As the dust clears among the dueling performance measurement models, and even if the dust never clears, XBRL will adapt to provide a specification embraced by the major players in the accounting industry. With agreement and implementation by the members of the XBRL.org group and the additional partnerships that will develop as the specification matures, XBRL stands to revolutionize financial and business reporting, as we know it.

Financial reporting needs to change. Numerous efforts are underway to promote that change. XBRL will make the current system more practical while paving a highway for the changes of the future.

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