Christopher Cox, chairman of the U.S. Securities and Exchange Commission since August 2005, was not expected to be the activist reformer that his predecessor, William Donaldson, became in the wake of the collapse of Enron Corp. Unlike Donaldson, who will be remembered for initiating enforcement of the Sarbanes-Oxley Act and aggressively penalizing violators of trading rules, Cox has distinguished himself by fighting losing battles, such as those to require independent-director majorities on mutual fund boards and registration of hedge fund advisers.
But Cox has adopted one cause that could equal in significance, and perhaps outlast, any single financial policy prescription of the Bush years. And it’s not even a regulation — at least not yet. It’s XBRL, and Cox stumps for it as if he were running for office (as he did successfully nine times when he represented a Southern California district in the U.S. House of Representatives).
XBRL, or extensible business reporting language, is a technical standard for coding data in financial reports. Introduced by the accounting profession in 1999 as an auditing tool, XBRL has attracted support from regulators, corporate filers of financial documents and securities analysts, not to mention software companies that see potential profits in helping the process along.
These constituencies have coalesced behind XBRL — and in organizations such as New York–based XBRL International, which brought together 350 people from more than 20 countries at a Vancouver, Canada, conference in December — because they see it as a way to automate data entry and analytical comparisons within and between companies. Cox has described the standard as a way to “liberate business and financial information that is currently trapped in dense documents.” He anticipates its evolving into “a financial reporting version of Moore’s Law, in which the speed of analysis doubles every two years.”
XBRL International has gotten a lift by having such a prominent financial regulator as an ally and advocate. But XBRL is also subject to another paradigm from technology, Metcalfe’s Law, or the network effect. It states that the value of a network increases exponentially with its number of participants. On this score — U.S. adoption of XBRL, to be specific — Cox’s battle is far from won.
To date, fewer than 100 out of 10,000 registered public entities have participated in the SEC’s voluntary pilot program for XBRL filings into the agency’s Edgar database. The vast majority appear reluctant to invest in the software, which John Stantial, director of financial reporting at United Technologies Corp., a pilot participant, regards as a “disconnect.” Stantial likes XBRL because “data that is trapped and lacking in context, such as PDF or HTML files, can now be electronically accessed and manipulated in seconds.” He says many companies are uneducated about XBRL or have not done cost-benefit analyses. The open-standard software can cost as little as $1,000, and once users get past the learning curve, tagging and filing an 8-K earnings release requires about four person-hours, Stantial wrote in a UTC case study.
That’s just the kind of endorsement Cox can use. “We have companies saying they get a payback the first year because they can organize things in ways they couldn’t previously,” he notes. He points out, moreover, that the U.S. lags behind the rest of the world in XBRL adoption, an inconvenient fact at a time when the SEC is moving to accommodate the International Financial Reporting Standard, a step Cox believes goes hand in hand with XBRL modernization. Tax and regulatory authorities across Asia and Europe are implementing XBRL programs. China has already mandated XBRL filings by listed companies, and 800 are in the program, up from 50 when voluntary compliance began in 2003. “We’re just trying to keep up with the Joneses,” Cox said during the Vancouver conference.
Selling XBRL in user-friendly terms, Cox talks of “improving life for investors” and describes the data-tagging process as the equivalent of bar coding or labeling. In October he centered XBRL efforts in a new Office of Interactive Disclosure, which on December 5 released for public comment standard tagging taxonomies covering 15,000 data elements.
Satisfied so far to let the free market take its course, Cox hasn’t said whether XBRL will be mandated, but industry observers believe it’s only a matter of time. Sue Childs, executive vice president of marketing and business development at data services provider Edgar Online in Norwalk, Connnecticut, anticipates that a gradual phase-in will start this year for “primary financial statements. Where the SEC goes, the financial community follows,” says Childs. “Cox has been a consistent proponent, and his message has not wavered.”
