XBRL – eXtensible business reporting language – the Internet-based computer language for business reporting, has steadily gained visibility and momentum over the past two years. While it's still regarded by many as a back-office technology best left to computer geeks who understand taxonomies, schemas, mark-up language and all that jargon, XBRL is poised to revolutionize business reporting — and in the process, upset the delicate balance characterizing today's corporate reporting supply chain.
How could a computer language shake things up so much? Think back to the giant metal boxes that changed the face of global shipping and trade.
Up until the 1960s, the shipping industry handled the goods it carried the same way it always had: as individual pieces of cargo. Goods passed from one link of the supply chain to another — from truck to railroad and onto a ship; each piece of cargo had to be separately loaded, packed, arranged and unloaded. Besides huge logistical problems, this method of cargo handling resulted in significant breakage and pilferage.
Like the shipping industry of 40 years ago, the “transport” of business information along the corporate reporting supply chain — from public companies to regulators, accounting firms, data aggregators and investors — is rife with logistical bottlenecks. As business information passes from one link in the chain to the next, every individual piece of data must be interpreted, cleansed, reformatted, re-keyed and re-validated. This approach to transport — like the shipping industry's early methods — is time-consuming, costly and exposes the information to breakage and pilferage in the form of distortions, errors and, sometimes, even fraud.
For the shipping industry, a technology called “containerization” turned the situation around. The various links in the shipping supply chain — truckers, railroads and ship owners — agreed to build the infrastructure to handle giant metal boxes of a single standard dimension that could be packed at the cargo's source and handed off quickly and easily from one link to the next. In effect, these containers defined a single standard for moving any and every kind of cargo. Containerization resulted in huge efficiency gains, along with steep declines in costs. Today, about 90 percent of the world's trade moves in containers.
Corporate Reporting's “Container”
Like containerization, XBRL posits a single standard that permits business information to be “packed” at its source and “shipped” faster, at far less cost and with far greater security, through all the links in the corporate reporting supply chain. Considering what that might mean for corporate reporting, it's useful to keep in mind an important lesson of containerization: technology need not be complex to be revolutionary.
There's nothing complex about giant metal boxes. Likewise, there's nothing terribly complex about XBRL; it's just a computer language. The significance of both lie in their power to integrate an otherwise fragmented supply chain around a single, common standard. With containerization, separate and disparate links in the shipping supply chain act as one to enable the seamless, efficient delivery of goods across roads, rails and water.
XBRL promises to have a similar effect on the transportation of business information – both within the enterprise and out from the enterprise to the wider world of regulators, accounting firms, data aggregators and investors.
Over the last decade, thousands of companies have invested billions of dollars in enterprise resource planning (ERP) systems in order to capture many more kinds of data about their operations anywhere in the world. At the same time, the Internet has established itself as an information distribution system of unparalleled flexibility and reach.
XBRL provides the missing piece of the puzzle — a computer language understood by all varieties of computer hardware and software. Putting all the pieces together will provide the capability to capture ERP-generated data, pack it just once into secure XBRL containers, shuttle those containers as required between their own disparate information systems and send them out to anyone, anywhere in the world with an Internet connection. Compared to conventional methods of corporate reporting, that represents an order-of-magnitude improvement in terms of speed, security, reach and efficiency.
Containerization holds another lesson: The indirect effects of revolutionary technology can be as dramatic and far-reaching as their direct effects. For example, as containerization drove down shipping costs by up to two-thirds, overseas manufacturers suddenly found that they could afford to export less expensive goods — a boon for developing nations. Likewise, domestic manufacturers were able to move many of their manufacturing operations into low-cost environments overseas, paving the way for the globalization of industry. Of course, containerization disadvantaged other players, like the inner-city ports that lacked adjacent acreage to sort and stack containers. The same holds true for carriers that failed to make the required infrastructure investments.
Like containerization, XBRL's initial impact will be to slash the cost of generating and consuming business information, Its subsequent impacts may be even more significant. Just as the decline in shipping costs opened up new markets for imported goods, XBRL will likely encourage new kinds of reporting — data about a company's market share, customer base or intellectual capital — that, until now, were too difficult to extract from corporate information systems.
As XBRL streamlines the corporate reporting supply chain, companies will be able to close their books faster and report on their performance more frequently. In fact, the combination of ERP, XBRL and the Internet comprise all the basic building blocks necessary for continuous, Web-based corporate reporting. That is good news for companies looking to comply with new and demanding reporting requirements, and for investors looking for more timely, accessible and transparent reporting. (It's also good news for software vendors selling XBRL upgrades for existing product lines.)
Beware and Be Ready
But XBRL will also result in discontinuities, favoring some in the corporate reporting supply chain while disadvantaging others. Companies that adopt XBRL have much to gain in terms of cost savings, operational efficiency and enhanced analyst coverage. Contrarily, laggards that continue to rely on paper as their primary reporting medium will find it increasingly hard to be heard in an online world in which XBRL-encoded information is continuously refreshed and available on demand.
As corporate reporting migrates to this on-demand model, regulators may be moved to adopt new reporting metrics — both financial and non-financial — that correspond with the full range of information that investors want when making investment decisions. At the same time, information intermediaries will find themselves in a suddenly information-rich world in which data aggregation services, by themselves, will decline in value. Consequently, information intermediaries will look for new ways to add value to their business model.
What challenges does XBRL present to the accounting profession? To answer that question, consider the original analogy of the giant metal boxes; this time, however, bear in mind an important distinction between containerization and XBRL. While one can surely applaud the export of inexpensive goods made possible by containerization, the prospect of XBRL being used for similar purposes — that is, to deluge investors with corporate reporting of lesser quality — is wholly untenable. Traditionally, the public has looked to the accounting profession as the guardian of corporate reporting quality. But will accountants be able to cope with the torrent of business information made possible by XBRL? Will they have the resources to ensure that their audit clients pack their XBRL “containers” only with goods of the highest quality? And, at the same time, will they be forward-looking enough to use the power and potential of XBRL to help shape a new model of corporate reporting?
Many in the accounting profession are working diligently to that end. Unlike the doubters, accountants have come to the sobering conclusion that XBRL is not a geeky back office technology — but is, rather, the future of business reporting. To think otherwise is to run the risk of being left behind when the Information Age takes what looks to be a giant step forward — featuring XBRL for corporate reporting.
FRANK BROWN (firstname.lastname@example.org) is PricewaterhouseCoopers LLP's global leader for Assurance and Business Advisory Services. MIKE WILLIS (email@example.com) is a PricewaterhouseCoopers partner and was the first chairman of XBRL International.