Robert Kugel's Analyst Perspectives

For several years the U.S. Securities and Exchange Commission (SEC) has mandated that filers apply eXtensible Business Reporting Language (XBRL) tags to their financial statements. XBRL was developed to make it easier for investors to use a company’s financial information. Now XBRL US has kicked off its second annual XBRL Challenge, a contest designed to encourage development of open source analytical tools that can use XBRL-formatted corporate financial data from the SEC’s EDGAR database. Sponsoring the effort are the American Institute of Certified Public Accountants, the CFA Institute (of which I am a member) and the Wharton School of the University of Pennsylvania. XBRL US hopes to raise awareness of the wealth of available XBRL data and provide incentives for application developers to create open source software that enables broader and more frequent use of the standard. The contest will award $20,000 grand prizes to the two teams, and judging will be based on how well each submission improves access to corporate data and provides analytic capabilities in an original, user-friendly way. This competition is a terrific idea because it addresses the least well developed element in the drive to improve the communication of corporate data to investors. Earlier this year I reviewed some of the submissions to the first XBRL Challenge. Although the first round of software offered a good start, much more needs to be done to encourage use of XBRL.

In some ways, the situation with XBRL today mirrors the evolution of ERP systems in the 1990s. Companies deployed them expecting finally to have easy access to accounting and corporate data that had been difficult to reach in the scattered proprietary systems that the new software replaced. Instead, they discovered they needed complementary technologies – business intelligence tools, analytical applications and data stores – to derive full value from those ERP investments. Although ERP systems are great at collecting and storing data, they need other systems to enable people to access and use the data. Similarly, without useful applications easy for the general public to use, the tagged information from more than 8,800 companies in the SEC’s EDGAR database will remain underutilized.

Before I assessed the winners of the last competition I asked myself what I should expect from an open source application. After some reflection my answer was: quite a lot. After all, there are plenty of examples of open source software that meet the needs of demanding users, some of which are every bit as sophisticated and full-featured as proprietary offerings. Others may fall short of what professionals would demand, but nevertheless offer sophisticated features aimed at “prosumers” – enthusiasts who want products that fall between expensive and complex professional applications and consumer-grade software. In the first go-round, there were examples of simple, easy-to-use consumer apps but nothing that reached the prosumer level.

The world of “free” software supports business models that enable developers to monetize their efforts, even if the software is free to the user. And the software itself could be completely transparent to the user. I expect that at some point investor sites such as Yahoo! Finance and online brokers will offer XBRL-enabled features.

Though we’re still in the data collection phase of XBRL’s evolution, that doesn’t mean that companies are being asked to make too much effort or that the effort is useless. I expect steady progress over the next several years in making XBRL-tagged data usable and useful. Mass adoption is not far off, and when it comes it will give United States financial markets an advantage over their competitors. I hope to see submissions to the new XBRL Challenge that provide steps in this direction.

Regards,

Robert Kugel – SVP Research