XBRL standard could highlight financial risks

Just days before a federal regulatory body will vote on whether to require publicly traded companies to use a specific business data language to report their financial data, IBM is launching a major initiative to create new standards for the language, thereby making it even more useful.

The Securities and Exchange Commission is expected to vote on Wednesday on whether companies will have to submit their financial filings in Extensible Business Reporting Language (XBRL). Filings submitted in XBRL use XML data tags to describe business and financial information, making the documents much more searchable than the current official SEC filings, which are submitted in HTML or plain text format. Elements of a report, such as executive pay, are much more accessible, and the new format allows for more extensive cross analysis.

The IBM Data Governance Council is announcing Monday an initiative to develop a new XBRL taxonomy to describe risk and market losses. The council, a group of 50 global companies including American Express, Bank of America, and Citibank, believes a XBRL risk taxonomy could provide a more thorough picture of risk that is incurred in the overall economy--thereby preventing the sort of market meltdown that occurred this year because of the lack of understanding of the risk in subprime mortgage derivatives.

The council is soliciting proposals from financial institutions, corporations, vendors, and regulators for ways to create consistency and semantic clarity in the ways companies disclose operational, market, and credit risk.

"What's convenient about this language is that it's become widely adopted, so there's a wide body of knowledge about how to prepare reports using the language, and it creates the opportunity to normalize information," said Steve Adler, chairman of the IBM Data Governance Council. "It allows regulators to compare financial results to each other, and that comparable nature gives regulators enormous power to understand trends."

Other industries, he said, can follow the model of insurance companies, which pool their risk data to create a picture of the overall market that allows them to map and forecast market trends.

"One of the things we've learned from the subprime credit crisis is that we have so much information flying around today, nobody is able to discern the impact of their decisions on the larger market and the economy," Adler said. "Semantic clarity makes the information comparable, not just for human beings, but also comparable for computers that can assimilate the information and create business intelligence frameworks."

In late February, the council will discuss the risk standard specifications in a meeting with the SEC, the Enterprise Data Management Council, the Financial Services Technology Consortium, XBRL International and XBRL.US. Adler said that the council cannot speak for all of its member companies but that some corporations such as Key Bank have expressed interest in developing the standards.

XBRL reporting has been widely adopted internationally. The SEC started a voluntary XBRL filing program in 2005, and in May 2008 published its proposal to require companies to submit their financial statements in XBRL format starting in the first quarter of 2009.

However, not all companies have adopted XBRL reporting because they are waiting for the SEC to vote on whether it will be required. There is hesitation to incur the cost of transfering to a new reporting system, XBRL software vendors said at the 18th International XBRL Conference in October.

"I think, especially in this recession, cost is always a concern for every organization, but it's far too early to assess what kinds of costs or resistance would evolve" to developing a risk standard, Adler said. "We think this has benefits for many parties--for financial institutions, for regulators, and for markets--and we want to hear the concerns of organizations. That's part of the standards process, listening to everybody's perspective and building consensus."

Adler said he could not speak to how likely it is the SEC will vote in favor of XBRL filing requirements on Wednesday, or to whether the vote will have an impact on the interest in developing a risk taxonomy.

"The standard is a valid standard because of international adoption," he said. "What the SEC does on Wednesday won't have an impact on our decision to move forward with this process."