Transparency, or more accurately the lack thereof, in financial reporting has borne the burden of the tag of a major factor in causing the global financial crisis. Credit default swaps, collateralised debt obligations, mortgage-backed securities?neologisms for complicated financial derivative instruments never before heard of?became synonymous with toxic assets. As a lack of transparency emerged as one of the biggest reasons for market failure, measures to improve upon this crucial element of business reporting caught the fancy of regulators, investors and businesses alike. Xbrl, or extensible business reporting language, has been acknowledged as the ?harbinger of transparency? in financial reporting and is often described as a barcode of data, much like barcodes of retail items. A simple search on Google with the terms ?xbrl? and ?transparency? generates 348,000 results. However, xbrl and its mechanisms largely remain shrouded in mystery. One way to define xbrl is as a mechanism that drives data interchange. At present, text files are the industry?s favourite format to share data. But there is no defined structure to a text file. As lengthy annual reports have become the norm rather than the exception, adding more data to an already dense 300-plus page report only adds to the confusion, not clarity. Can you imagine sifting through an interminable report trying to find the two paragraphs that are relevant to you? Therefore, while data is abundant, information is not so easily found?data is what is reported by corporates, while information is generated by individuals through an intellectual process, says Bill Lutz, the chair of the twenty-first century disclosure project. This is why xbrl is an ideal standard for data-interchange, where data is defined by an agreed ?taxonomy?, a key element missing from text-based data interchange.
First off, xbrl is not an accounting standard; it is a language for the electronic communication of business and financial data. So unlike a text file, instead of treating data like a block of text, it gives each item of data a computer-readable identity tag. It offers cost saving and improves the accuracy and reliability of data by eliminating manual re-entry and comparison. Xbrl can also handle data in different accounting standards and its extensible nature allows flexibility to support all aspects of reporting across countries and industries.
So how does it increase transparency? A study by Myiris covering companies in the manufacturing and services sectors found that the financial results of over 209 listed Indian companies have discrepancies. A difference of Rs 2,927.5 million exists in MTNL?s consolidated financials, under the sundry debtors schedule (the sum of line items, say, A, B and C). MTNL?s standalone financial report has an additional line item ?Income Accrued from Services?. This appears to have been clubbed with ?C? in the consolidated debtors schedule for FY2008 but not for FY2009, which explains the sub-total error. Such errors, indicative of an attention deficit rather than fraud, can easily be caught using xbrl, illustrating that its proper implementation will prevent companies from making errors in reporting. That said, its mandate does not extend to catching errant/fraudulent companies.
Wait, this doesn?t sound like xbrl prevents companies from creating fraudulent reports. But it does. What?s the best way to reduce the risk of fraud? Making it harder to pull off! Auditors have to analyse hundreds of pages of data and, so, far from being their raison d?etre, fraud becomes a pain. Therefore, instituting a single data standard for firms enables the analysis of large data pools to be carried out easily, making the search for anomalies much more efficient.
To this end, the capital markets in China and Korea have moved to xbrl and all financial reporting systems have moved to xbrl in Japan, Australia and the Netherlands. Banks in the US have been filing in xbrl for five years now. India, too, has begun reforms but has a long path ahead. So far, banks are filing only Basel 2 returns in xbrl.
NSE and BSE have adopted an xbrl-based reporting system called the CorpFiling system, which is used by the top 100 companies in the country to submit their disclosures to the exchanges. To extend its reach, the C Rangarajan committee has recommended the adoption of xbrl in corporate reporting, which is to be expanded to all other areas in a phased manner, in addition to a roadmap to move all reporting by banks to xbrl.
Xbrl has utility wherever information is exchanged. It is a data standard and standards make communication easier. In addition to reducing the risk of fraud, a potential use of xbrl could be in anti-money laundering reporting to track terror financing. Not to say that the standard is easy to implement. There is a serious lack of knowledge about xbrl?it?s wrongly seen as a technological matter only for computer experts, its taxonomy is complex?it?s like learning a whole new language, initially time-consuming and there are a limited number of readers of the language. But its advantages supersede its shortcomings and, so, the phased switch to xbrl must be taken seriously and implemented effectively.
?nikhila.gill@expressindia.com