COX SAYS XBRL STANDARDS ARE ANTIDOTE TO DATA ERRORS

5 June 2006

Investment News

(c) 2006 Crain Communications, Inc. All rights reserved.

WASHINGTON - Citing a dramatic drop in the amount of investment research being done by Wall Street firms and "unacceptably high" errors reporting data on financial statements, Securities and Exchange Commission Chairman Christopher Cox last week called for public companies voluntarily to switch to using interactive-data systems for their financial reports.

If companies and mutual funds switch to using Extensible Business Reporting Language, known as XBRL, for their reports, it will allow investors and analysts to get the information they want more easily, more quickly, more accurately and in a format that will allow them to compare data with those of other companies, he said at a conference here sponsored by the Washington-based American Enterprise Institute for Public Policy Research.

"We are still today relying on the open-cry pit system of the 1700s and the printed page of the Gutenberg press of the 15th century," he said. "This won't do any longer."

Moving financial reporting to an interactive-data system has been one of Mr. Cox's top priorities since he became chairman last year.

Using an XBRL system would allow easy access to "tagged" data, such as revenue or prepaid expenses or goodwill, which users could then download and use in their personal software. It also would allow companies to communicate with investors on a constant basis rather than waiting for quarterly or annual reports, Mr. Cox said.

Data used by analysts and investment professionals typically are extracted and re-keyed from financial statements filed with the SEC by companies that are in the business of reporting such information, and the error rates are high, Mr. Cox said.

One study found that computers taking down data from SEC filings get the numbers right just 72% of the time.

Pilot using Edgar

Edgar Online Inc. of Norwalk, Conn., which reports information from SEC filings and resells it, has used XBRL to tag more than 10,000 company statements, including all 10K and 10Q reports going back several years, and reports a 99% accuracy rate, Mr. Cox said.

The SEC is conducting a pilot program with 21 public companies using the system, including General Electric Co. of Fairfield, Conn., and soft-drink maker PepsiCo Inc. of Purchase, N.Y., he reported.

"This can't come a minute too soon," Mr. Cox said. He noted that research budgets have dropped "precipitously" since 2000 at the seven largest Wall Street firms, and some investment banks, such as Wells Fargo & Co. of San Francisco, have dropped their research business altogether.

Much of the new growth in research is being done on the buy side, Mr. Cox said, and is being sold exclusively to hedge funds and other money managers, so it isn't available to retail investors.

Accounting disclosures vary by jurisdiction, by the company's industry, by individual companies inside an industry, and even from one quarter to the next and from one year to the next, said Mark Schnitzer, executive director at Morgan Stanley of New York. Even with today's technology, comparing the data is an onerous task for Wall Street analysts, he said.

Modest advances

Business reporting has made only modest advances since the 1930s, Mr. Schnitzer said. Even though financial reports are available online, they are no more understandable than they were then, he said.

Sell-side analysts are in a race to get quarterly earnings information out to the buy side, Mr. Schnitzer said. As a result, after the first reports are sent out, later reports usually are ignored, regardless of the quality of the analysis they contain.

"This whole world is going to change with interactive data," Mr. Schnitzer predicted. "Interactive data is going to enable us to compare data across all these different dimensions.''

Although the new system, which is in use in many foreign countries, won't make analysis a "one-click process," it will reduce errors "and enable analysts and investors to spend more of their time on making informed investment decisions based on solid analysts, not on who can build the fastest and most interesting spreadsheets."

Sara Hansard can be reached at shansard@crain.com.

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