Why Reporting Is Different

Even organizations that have fast closes find it hard to reduce the time it takes to report results to investors and regulators. UTC takes only five days to close its books each quarter, but it takes another 17 days to prepare the 10-Q quarterly filings for the SEC. And the annual 10-K takes a few days more.

The review process relies largely on human effort. Lots of people — executives, legal staff, board members — have to go through the financial data and projections, as well as the legal, labour, personnel and other issues that may need to be disclosed. Even if automated tools are used to gather all the financial data for these filings (rather than just the data needed to close the books), this other information requires human judgment to articulate. And not all organizations have knowledge management systems that can track and make such information easily available, says KPMG's Kuehn.

To speed the process and improve filing accuracy, UTC deployed a legal case tracking system so the status of all legal issues can be found quickly. The company is also using a two-year-old technology standard called the Extensible Business Reporting Language (XBRL) to tag its filings, and that's a horse of still another colour (for more on XBRL, see Lingua Banca).

A New Business Language

XBRL has been touted by the SEC as a way to make information more easily accessible to investors and regulators, but there's a direct benefit to the enterprise itself. XBRL makes all information in a filing accessible through standard, tag-based formatting, as XML does for transaction data. But XBRL also provides structure for validation rules, queries and analysis rules, notes Mike Willis, a Pricewaterhouse­Coopers partner. If XBRL were introduced throughout the enterprise's financial closing and reporting process, rather than simply used as a report format after the fact, users would gain new controls and insights into their data, Willis says. "They can automate analytic rules rather than auditing manually, which would reduce costs and speed the process," he adds. Plus, the use of XBRL would ensure that a company's reports reach their stockholders (and analysts) unfiltered by third-party aggregators. "It lets companies tell their own stories," says Willis.

That scenario is probably a year or two away, predicts John Stantial, UTC's director of financial reporting, since the SEC currently does not accept XBRL reports as the official filing (they can be filed in addition as part of a testing program). In the meantime, companies can use XBRL and convert the data to the SEC's official format.

Stantial believes an XBRL-based reporting workflow would reduce the time to produce quarterly reports by 20 percent, because the tagged data would let the reporting systems automatically update the financials. Stantial says that companies like UTC typically spend one to three weeks per report on all sorts of government-required information, such as labour statistics, unemployment statistics and tax reporting. "With XBRL, I could push a button and get that in five minutes," he says.

The SEC is spending $US54 million to make its electronic Edgar reporting system XBRL-capable, and the effort to complete the standard SEC reporting taxonomies should be done by June, so Stantial speculates that XBRL-based reporting will begin by 2008. (Gartner has made similar predictions.) And he expects the Department of Labour and the IRS to follow suit.

Beyond making reporting easier, XBRL will improve internal visibility into company financials, Stantial predicts. Although UTC has a fast, five-day close with standard processes, there's still room for interpretation in what's reported. For example, an executive may want to know the operating expenses as a percentage of sales for all UTC's major locations. But "operating expenses" could be interpreted differently. Plus, it can take several days to respond to requests, and the answers may come back in different forms, such as e-mails and Excel spreadsheets, that must then be consolidated manually. But if the various general ledgers and ERP systems in use throughout UTC's subsidiaries were XBRL-enabled, Stantial wouldn't have to wait for the financial data to be prepared in UTC's standard format; XBRL makes it automatically accessible.

Several commercial tools now come with XBRL capabilities, including Hyperion Financial Management, Oracle Financials and Cartes is. Willis and Stantial expect XBRL capability to be built into most commercial financial applications as they are upgraded.

"XBRL is not expensive, and it's not technical; it's all there for a layperson. And there's a very impressive support network out there," Stantial says, which is why he's frustrated that few companies have adopted it. Most view XBRL simply as a new data format that no one is required to use, so why spend time looking into it?

But there are signs of increasing interest. "Usage picked up substantially in 2006," says Jeff Neumann, an SEC technology specialist. He suspects that Burl's release around the time of Sarbanes-Oxley doomed it to the back burner for the past two years.