SEC mandates open standard for financial records

The Securities and Exchange Commission passed a rule on Thursday requiring public companies and mutual funds to use a standard electronic format to publish financial information, bringing more transparency, and presumably oversight, to corporate balance sheets and earnings.

SEC commissioners voted 4-1 to require companies to use extensible business reporting language, or XBRL, when filing financial disclosures. The commission also required them to publish information on the SEC's Web site as well as their own.

XBRL is based on software programming called extensible mark-up language, or XML, which uses tags attached to documents so users can easily find and share electronic data. The tags are similar to those used in HTML, the language commonly used to create Web sites. Computers can use XBRL to identify data, and even the context within which that information resides, that are common to every financial disclosure.

Adding XBRL tags to financial disclosures makes them searchable and much easier to compare. What used to be available only to financial professionals now will be easily accessible to anyone with an Internet connection. Investors, and regulators, in theory, will be able to analyze data faster and more easily, and possibly finding anomalies in corporate financial statements and investments.

"Interactive data will help provide investors with the information they need, rather than just a warehouse of forms on which they can try to find it," SEC Chairman Christopher Cox said in an online statement. "Interactive data will enable new analysis tools to put key information at every investor's fingertips within seconds, exactly as the investor wishes to see it."

The new rule, while not necessarily helping SEC and investors uncover problems that led to the collapse of the financial industry or discover investment fraud such as that allegedly perpetuated by Bernard Madoff, will improve financial analysis. To do so, XBRL would have to be applied to filings on all types of securities, including asset-backed securities and collateralized debt obligations.

"The availability of financial reports in the form of interactive data will transform how investors evaluate companies and securities and, more broadly, transform the relationship between the filer and the investor," David M. Blaszkowsky, director of SEC's Office of Interactive Disclosure, said in the online statement. "Markets depend on and improve with better information, and even more so in difficult times. This action by the commission is timely and welcome for investors in the United States and all over the world."

The move will bring the United States into alignment with worldwide practices, said Diane Mueller, a member of the XBRL international steering committee and vice president of XBRL development at software vendor JustSystems.

She said the commission's embrace of XBRL is part of an international movement toward common data and financial reporting standards. "It's about searchability and accessibility," said Mueller. "[It] is a brilliant stroke for Chairman Cox to get behind this."

Currently, financial disclosure records that public companies and mutual funds file are large, unwieldy documents often thousands of pages long. Only large financial institutions have been able to devote the time and staff necessary to parse through the documents and glean the most pertinent information and figures for analysis.

"It's hugely time-consuming and requires large teams to pull information from annual reports," Mueller said. "You can only focus on the most active stocks on the market."

Because of the difficulty associated with searching companies' financial records, Philip Moyer, president and chief executive officer of EDGAR Online Inc., a private company that files financial data on the Internet, said stock analysts don't cover half the companies trading on American stock exchanges. "It's not because there are [too few] analysts; [it's] because documents are so hard to analyze," he said.

The adoption of XBRL, however, is likely to significantly change the way companies are analyzed. The addition of data tags will allow software to instantly comb through reports and identify the most critical information and figures. XBRL "makes for much easier and timely comparisons between companies," Moyer said. "Today it's extraordinarily difficult for investors to compare between balance sheets of two banks. They have different reporting styles, etc. [XBRL] starts to conform balance sheets and give you more comparability."

Another advantage of XBRL for the commission is regulators will know instantly if a company's filing is missing any key information because the software will automatically identify what data is missing when corporations electronically file documents and then notify the company and SEC. Previously, regulators had to manually check files to find missing information, Mueller said.

Mueller compared the adoption of XBRL to the development of the PC and the Internet. "This will dramatically increase the amount of information available on publicly traded companies," she said. "Think about it, . . . you can really see if this data is out there and freely accessible, a couple of people in their garage writing really interesting algorithms to crawl the Web, looking for XBRL data and doing real-time analysis to make stock choices."