What’s the big idea?

A new age of financial disclosure is dawning. Soon financial information about companies and mutual funds will be stored in a powerful new SEC database. The information will be ready to be downloaded into the computers of investors, analysts and researchers anywhere around the world as soon as it’s filed.

Identifying tags – think of them as barcodes – will be attached to every piece of data. These will safeguard the integrity and accuracy of the information and enable users to slice and dice it in any way they choose. When you try to envision the myriad of opportunities presented by interactive, ready-to-use financial data straight from filing entities and available through a user-friendly SEC database, you may come to the conclusion that this is an idea whose time has come.

In fact, IDEA (short for interactive data electronic applications) is precisely the name the SEC has chosen for the system that will initially supplement and eventually succeed the SEC’s EDGAR database, which dates from the 1980s. ‘The decision to replace EDGAR marks the SEC’s transition from collecting forms and documents to making the information itself freely available to investors to give them better and more up-to-date financial disclosure in a form they can readily use,’ the SEC said when it unveiled IDEA in August.

‘We’ve been collecting information as documents for an awfully long time,’ says David Blaszkowsky, director of the SEC’s office of interactive disclosure. ‘Initially they were paper documents; now they’re electronic documents.’ Even though electronic documents may be easier to find and obtain, Blaszkowsky says they still have ‘all the drawbacks’ of paper documents: ‘The data, the numbers, the facts that are inside financial reports can’t just be lifted out and used. They are just characters. Any useful information is indistinguishable from the non-useful information to a computer, or to someone using a computer who wants to do real analysis, spreadsheet analysis or model building. IDEA enables anyone involved in investments or strategic analysis to be able to get high-quality information files instantly and at no cost.’

The SEC promises that robust capabilities built into IDEA will let investors and other users search the SEC’s vast database and compile information from thousands of companies and forms to generate reports and analyses. In the past, the only way to compile this kind of information was to go through one report at a time and ‘rekey’, or type in, the information, or to cut and paste it – laborious and time-consuming processes subject to errors. As the SEC switches to IDEA, interactive ‘IDEA-like features’ will be ‘grafted’ onto EDGAR. This will enable investors to ‘tap IDEA’s advanced search capabilities and to use the information from EDGAR within spreadsheets and analytical software,’ the SEC states.

‘[IDEA] will facilitate the ability of analysts and other investors to quickly pinpoint information of interest to them,’ says Neil Hershberg, senior vice president of global media at Business Wire. ‘From what I gather, it will lead to a more efficient system than currently exists.’

Harnessing the power

IDEA is the culmination of SEC chairman Christopher Cox’s series of initiatives around interactive data, or XBRL (extensible business reporting language). Earlier this year, the SEC formally proposed new rules that will require financial information from public companies and mutual funds to be submitted using XBRL.

IDEA is still an idea that is gradually taking shape, but it aspires to be more than a way of describing EDGAR after it has been XBRLized. Because IDEA hinges on interactive data, the best way to understand it is to look at XBRL and how corporate America is making the transition to using it.

‘XBRL is really just a way of barcoding information on financial statements or other types of documents, just as you get physical barcodes on products in supermarkets,’ says Sunir Kapoor, CEO of XBRL solution provider UBmatrix and a board member of XBRL US. A primary benefit of XBRL is that it enables investors and analysts to ‘more easily look for, understand and then compare or digest very complex information.’

The unveiling of IDEA is sending a signal that the days of interactive data reporting are close at hand. ‘If any of your readers were still on the fence about whether or not the SEC was serious about XBRL, I think the IDEA announcement should probably put that to rest,’ says Rob Blake, senior director of interactive services at Bowne. Blake was a founding member of XBRL International, an industry consortium formed in 1999 which now includes about 500 organizations.

Some say the principal beneficiaries of IDEA will be investors. ‘Small investors have always been at a disadvantage relative to large investors, mutual funds and private equities,’ says Steven Balsam, professor of accounting at Temple University’s Fox School of Business. ‘EDGAR sort of leveled that playing field. IDEA is just going to continue that trend. It’s going to put more tools at small investors’ disposition.’

All investors, small and large, will benefit from the ability to download data straight into their financial models. Plus, the SEC wants to make sure that analysis tools are widely available. Glenn Doggett, policy analyst for the CFA Institute Centre for Financial Market Integrity, says professional investors have been following the SEC’s ‘interactive data movement’ for several years. ‘But you could only see one company at one time,’ says Doggett of early XBRL viewers offered by the SEC. ‘So we’re excited that they’re making that step forward, away from the sort of one-off electronic sheets of paper to providing a foundation for doing quick and easy comparisons across companies.’

Eventually, IDEA may help investors lower the cost of collecting corporate information. ‘We are used to using third-party processors right now to get the information in a standardized format,’ adds Doggett. ‘So, if we can reduce our costs and use some of that information directly from the SEC, that’s a positive.’

To err is not acceptable

One of the main benefits promised to everyone will be a reduction in errors. In the process of compiling and formatting information culled from EDGAR, errors can occur. Experts point out that most companies report thousands of data elements in their financial statements but data aggregators like Bloomberg, Thomson Reuters and FactSet may summarize just a few hundred. ‘Interactive data will allow companies to get their story in an unfettered way right into analysts’ models,’ says Philip Moyer, CEO of EDGAR Online.

At United Technologies, which participates in the SEC’s voluntary XBRL filing program, John Stantial, assistant controller for financial reporting and analysis, confirms those concerns about aggregated data. ‘You’re getting limited information. It may have been interpreted wrongly. It is subject to all kinds of human error,’ he says. ‘You could have investors and analysts making key decisions on your company based on erroneous data.’ With XBRL, however, ‘You don’t have anybody else interpreting your numbers. You’ve tagged them so there’s no human error.’

‘Those intermediaries are using proprietary taxonomies that often distort or omit key corporate disclosures,’ says Mike Willis, partner at PricewaterhouseCoopers, who was founding chairman of XBRL International. Should that come as a surprise, Willis suggests companies compare information on public websites to what is actually disclosed in their own reports. ‘It’s that level of distortion and omission that may be of concern to corporate chief financial officers and controllers in terms of how effective their existing communication is with their stakeholder community, both in terms of accuracy and time.’

Until the announcement of IDEA, some observers were skeptical about whether the SEC would make XBRL filings mandatory. However, IDEA, coupled with the SEC’s XBRL proposal from May, puts pressure on more companies to begin exploring their XBRL options. For example, will they tag their financial statements themselves or outsource the job?

Fortunately there is a wealth of free educational information available to help companies get up to speed. Interactive data consortiums such as XBRL International and its US component, XBRL US, are trying to be helpful, as are the many vendors gearing up for the XBRL transition. Seminars and webinars abound as disclosure newswires such as PR Newswire, Business Wire, Marketwire and NASDAQ’s GlobeNewswire partner with XBRL vendors.

Financial printers are also taking an active role. ‘Any time there is a change in SEC document filing requirements, companies look to their financial printer,’ says Craig Clay, executive vice president at RR Donnelley. ‘We certainly want to provide our clients with the educational tools they need to do their jobs more effectively.’

Among the initiatives taken by Bowne, another financial printer, is an interactive data viewer (which enables any user to upload documents for review to see how they would actually look in XBRL without needing to first submit them to the SEC), a plain English summary of the proposed SEC ruling and XBRL ‘Tag It’ client seminars.

Don’t forget plain English

In an initiative related to IDEA, the SEC has tapped William Lutz, a securities lawyer and plain English disclosure expert, to examine new ways investors get information, how companies and regulated entities compile and report it and how the SEC makes it available to investors and the markets. Lutz says he wants to learn how companies compile their data internally and organize it for the SEC: ‘We want to know that process and understand it better so that we can match how the SEC will move into electronic data filing in a way that is compatible with the way that companies work now electronically.’

IDEA, Blaszkowsky concludes, is ‘really the first opportunity to get off that document arc that we’ve been on since the very beginning and to move to thinking about the information that companies provide as useful data from the moment it’s created.’