Curated for content, computing, and digital experience professionals

Day: August 3, 2005

Justsystem Announces U.S. Office Opening

Justsystem Corporation (JASDAQ: 4686) announced the opening of its first U.S. office in Palo Alto, Calif. The new office opens following the release of the Beta version of xfy (pronounced x-fi). Justsystem is the largest Japanese software development company and maker of the most popular Japanese-language word processor. The xfy product, which is the catalyst for opening the U.S. office, is a software architecture that allows any XML document containing diverse XML vocabularies to be rendered, authored and edited as a single data set. The U.S. office will focus on development and deployment of xfy and provide technical support to customers and partners around the world. The Palo Alto office will be fully functional in marketing, sales, and customer and technical support beginning September 10, 2005. xfy Basic Edition 1.0 will be distributed free only for non-commercial personal/individual use, and academic research. ,

Solimar Systems Announces SOLsearcher Enterprise v2.18

Solimar Systems, Inc. announced the release of SOLsearcher Enterprise v2.18, providing organizations with secure electronic document distribution and Web presentment for transactional documents. SOLsearcher Enterprise provides a tool for securely sharing and distributing content with individuals via a Web browser. SOLsearcher Enterprise enables users to quickly search, retrieve and view collections of electronic documents that are identical to the original printed version, including text formatting, color characteristics, messages, special offers, forms and graphics. Version 2.18 of SOLsearcher Enterprise introduces a redesigned User Interface based on ASP.NET technology. In addition, SOLsearcher Enterprise v2.18 also includes an enhanced Document Assembler capability which enables users to select and consolidate multiple documents into one single document. Consolidated documents from the Document Assembler can be viewed, saved or printed in a single step.

XBRL and The Truth

Can tags lie? Of course they can. But this is usually not a problem because incorrect or misleading tagging typically causes trouble for the very same people who are doing the tagging. This gives them an incentive to get the tags right. And, if the tags aren’t right, there is an incentive to fix them.

Consider an XML-based publishing application. I want to get the tags right so that the presentation comes out right.  Or, in a syndication application, I want my tags to be semantically, not just syntactically correct, because I want someone else to use and link back to my information. Even in an XML-based commercial transaction, where there might in fact be more incentive for me to have the tags tell lies — increasing the quantity of goods shipped, for example — the external controls already built into the transaction (counting the quantity of goods received, for example) create an incentive to ensure that the tags tell the truth, reducing overall processing costs and ensuring repeat business.

All of this changes when we use XBRL to communicate financial information to analysts and investors. The incentives to misrepresent information or, in some cases, to hide it altogether, are substantial. This makes XBRL different from many other XML applications and requires a different approach to validation. This is not just a detail. The shift from intrinsic incentives that help get the tagging right to a need for external controls changes the way XBRL is used. It also adds to the list of capabilities that must be in place to build an XBRL market.

I want to dwell on this last point for a minute, since I am about to launch into a few paragraphs about accounting, attestation standards, and so on. The accountants who are reading this piece already know this stuff. The real value here is for the non-accountants who are trying to make decisions about the XBRL market.  If you are an XBRL vendor, you need to know what has to be in place for the market to grow. If you are thinking of using XBRL, you, too, need to understand how the pieces and requirements fit together.

The accounting profession’s interest in XBRL arises from an interest in focusing more on high-value work.  As Charles Hoffman–CPA and “the father of XBRL”–explains it, the interest in XBRL has to do with reducing “friction” in the financial reporting and auditing process. In an interview in this month’s Journal of Accountancy, Hoffman speaks of the days before spreadsheets, when the high point in an audit was when the rows and columns of the lead schedules added up and cross-checked. Electronic spreadsheets and auditing tools changed the focus from addition to analysis, freeing the auditor to focus on making judgments and rendering an opinion. But Hoffman notes that there is still a great deal of friction left in the process, primarily related to the way that financial data is still communicated as unstructured text in tables and footnotes.. Hoffman built the first XBRL prototypes in the late 1990s with the goal of transforming these “unstructured clusters of text into structured data that computers can process to facilitate their re-use.”

Along with this desire to move from text to structured data, the accounting profession understands that taking the human readers and translators out of the data conversion process and moving to direct publication of machine-readable data opens new opportunities to misrepresent the data. Detecting and preventing financial misrepresentation is at the heart of auditing, so it should come as no surprise that accountants are at the leading edge of thinking about how we can know whether or not we can trust what is in an XBRL document. Here are references to a few recent articles, papers, and presentations on the topic that you might find useful:

  • “XBRL and Financial Information Assurance Services” by Stephanie Farewell and Robert Pinsker — The CPA Journal Online, May, 2005.

This brief article is written for CPAs to help them understand the market opportunity for XBRL assurance services. The authors argue that assurance service opportunities exist not only among companies that are sending information out, but also within companies and institutions that are taking information in. They note, for example, that

“Institutional investors typically can correctly analyze company financial information. Providing institutional investors with XBRL-tagged financial information allows them to spend more time on data analysis instead of data reentry. Companies currently providing XBRL-tagged instance documents on their websites are doing so without assurance that the information had been attested to by a trusted, independent party for compliance with appropriate technical specifications.”

This line of reasoning is of interest to accounting professionals for obvious reasons. But it should also be of interest to others in the XBRL marketplace–vendors and users of XBRL–because it suggests how assurance services might emerge in a number of forms, for a number of purposes.

  • PCAOB Staff Questions and Answers: “Attest Engagements Regarding XBRL Financial Information Furnished Under the XBRL Voluntary Financial Reporting Program on the Edgar System” — May 25, 2005

The title of this document shows that the Public Company Accounting Oversight Board is not attending to marketing in place of substance. However, despite the very narrow focus claimed in the title, the document is much more generally useful than you might expect.  It tells us something about what the PCAOB thinks is important in making judgments about XBRL financial reports..

You do not have to be an accountant to make good use of this Staff Q&A document. However, it will be helpful to know a couple terms and definitions. It helps to know, for example, that an “Attest Engagement” is similar to an “audit” in that it is a professional engagement intended to provide assurance about a document or about some set of assertions.  Audits provide assurance about historical financial statements. Attestations are a kind of superset of audits, and cover a much broader range of assurance services, including assurance that a particular set of XBRL tags accurately reflects the information in an EDGAR filing.

Attestation engagements, like audits, are governed by standards of practice.  For attest engagements, the governing standard is “AT Section 101.”  The requirements specified in the standard are very broad.  For example, “The engagement shall be performed by a practitioner having adequate knowledge of the subject matter” and “The practitioner shall perform the engagement only if he or she has reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users.”  What the PCAOB Staff Q&A does is take these very general statements and apply them to the particulars of an engagement dealing with XBRL submitted as part of the SEC’s voluntary XBRL filing program.

So … what do they say about providing assurance about XBRL financial reports?  Apart from the particulars of the SEC’s voluntary program (for example, the inclusion of required disclaimers), there are four things about this Staff Q&A that stand out as being particularly important:

  1. The XBRL data is tested to see that it agrees with an official, reference version of the EDGAR filing.
  2. The “XBRL-Related Documents” (instance documents, taxonomies, extensions, and other XBRL documents included in the filing) are tested to see that they are syntactically valid and have all the required elements.
  3. Semantics matter — tags must be used in appropriate ways, relative to content.
  4. Extensions are a potential headache.

The first point reflects the fact that XBRL is young and we are in a transition phase. Something elseis the audited document, presumed to be correct.  The goal, at the moment, is to see that the XBRL says the same things as the reference document.  At some point, if and when we are ready to actually audit the XBRL–rather than audit something else and then attest that the XBRL is consistent with it–we can collapse these two operations into a single engagement. (See an earlier posting for some thoughts about this audit process.)

The third point is especially interesting and important. How you tag something really matters. By being a little loose with the use of tags, a company might, for example, move assets from long-term to current, and improve its apparent current ratio and level of working capital.  The accountants therefore need to do much more than make sure that the document parses, they also need to assure users that it expresses the truth.

Which brings us to the fourth point. In financial matters, truth is partly a matter of convention. When a company extends a taxonomy, making up new tags, who is to say what is true?  This relates to the third attestation standard: “The practitioner shall perform the engagement only if he or she has reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users.”  Boiled down, the third standard means that we need to agree on just what “truth” is.  Q&A number 5 in the staff document leaves the question of whether use of an extension taxonomy will be permitted open to judgment by the auditor.

  • “Assurance & XBRL: Status Update” — Presentation made by Dan Roberts of Grant Thornton at the XBRL in Government and Industry Conference, Washington, D.C., 19 July 2005

This presentation provides an update on activities undertaken by the AICPA’s Special Working Group on Assurance and XBRL. This group did much of the original work that was picked up by the PCAOB Staff Q&A on XBRL Assurance. The group is working through a “mock audit” and intends to use this experience to provide accountants with sample audit plans, workpapers, and examples of documentation that might be provided by the client. One of Roberts’ central arguments is that XBRL distribution of financial reports on the Internet will displace paper reports over time, and that there will be a presumption that this information is accurate, whether it is or not. His view is that the accounting profession needs to get ahead of this wave, creating a way for people to readily determine whether information is coming from a trusted source.

So … summing all of this up:

  • The accounting profession has made a major commitment to the success of XBRL. The reason for this is that XBRL can remove much of the low-value, error prone effort from audits and financial reporting work while opening up new opportunities for higher value services.
  • Providing assurance services directly related to XBRL is a major part of this commitment.
  • These assurance services will include tests of both form and content–accountants will make judgments about whether the use of particular tags is appropriate in a given context.
  • Taxonomy extensions will present special problems.
  • Detailed guidance for practitioners is on the way.

All of this work is important because, without it, XBRL will not succeed as a way to distribute financial reports to third parties. Financial information is simply not useful unless there is reason to believe that it is correct. Unlike so many other XML languages, where the motivation to “get it right” is intrinsic to the use of the language, there are strong incentives to misuse XBRL to hide bad news, overemphasize good news, or distort analysis. Those who want to see XBRL succeed will need to counteract these incentives by providing external controls and trust mechanisms. Fortunately, the accounting profession is signing up for the job.

Note that this need for external controls, in lieu of intrinsic incentives to get the tags right, is unique to the financial reporting side of the XBRL market. When XBRL is used internally, for management accounting, decision support, and other internal reporting purposes, there will be intrinsic rewards to encourage good use. This is not a black and white difference–there is, for example, a need for internal controls in such applications–but the difference is still substantive and important. For internal applications, XBRL can be broadly useful without having to build an external trust infrastructure.

One last thought: There is likely to be a chicken and egg problem here.  Many accountants will not make the investment in the training required to provide XBRL assurance services until there is some demand for those services. On the other hand, more use of XBRL for external reporting depends on having the assurances services in place. This is not an unusual problem for early markets — twenty years ago, for example, I was trying to figure out how to get reference publishers to invest in CD-ROM products when few libraries had CD-ROM players and how to get libraries to invest in CD-ROM players when there were no publications to use on them. But it is, nonetheless, a problem that needs to be solved.  The generally anticipated solution is a government requirement to use XBRL, but, as I have argued in other writings, that is not a sure bet.  Another possibility is that XBRL will find early adoption for internal use, where companies do not need this external infrastructure, and the external use will follow over time.

We’ll see …

Oracle, Context Media and the EII or ECI Market

Although not officially announced, a number of trade publications have reported on Oracle’s acquisition of Content Media, and Tony Byrne succinctly captures what is of immediate interest to followers of the content management market.

What we started calling EII (Enterprise Information Integration) a few years ago, and what many vendors called ECI (Enterprise Content Integration) remains one of the biggest challenges organizations face – too big to be served by a small niche market, as evidenced by Oracle’s move, as well as by the earlier IBM and EMC acquisitions. For a more in-depth look at the problem, players and the market see our article on What is Enterprise Information Integration (EII)?

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