Speech by SEC Chairman:
The Promise of Interactive Data
by
Chairman Christopher Cox
U.S. Securities and Exchange Commission
14th International XBRL Conference
Philadelphia,
Pennsylvania
December 5, 2006
Thank you, Jim [Glassman, Senior Fellow, American Enterprise Institute]
for that kind introduction. It really is a pleasure to be introduced by
Jim Glassman. He is the consummate optimist. And it's always nice to be
introduced by someone who's upbeat.
Of course it takes a true optimist to write a book, right on the eve of
the dot-com crash, titled "Dow 36,000." I had to laugh the other day, when
I was doing a little Internet research on Jim — because I knew he was
going to be introducing me — and I found his book on Amazon.com. And you
know how Amazon always tells you, "Customers who bought this item also
bought" some other book? And you know what the #1 book that customers who
bought Jim Glassman's "Dow 36,000" also bought was? It was John Kenneth
Galbraith's "The Great Crash of 1929."
No wonder hedge funds are so popular these days.
But truly, I am grateful, Jim, for that kind introduction. And of
course none of us ever wishes to be introduced by a pessimist. You all
know the classic definition of an optimist and a pessimist. The pessimist
says, "This is terrible. Things can't possibly get any worse." And the
optimist says, "Sure they can."
Besides Jim Glassman, who has no peer when it comes to understanding
the intersections of technology and investing, I'd like to recognize Sir
David Tweedie, who, as a matter of fact, is a peer. It's an honor
to join in this program with a man who has made so many contributions, in
so many ways, to the development of the world's capital markets, including
service as head of Britain's Accounting Standards Board, and who now is
leading the International Accounting Standards Board.
With apologies to Sir David, I can't help but observe the significance
of our meeting in Philadelphia today. After all, this is where the
Declaration of Independence was born, as the patriots united behind the
battle cry of "no taxation without representation." And here we are today,
Brits and Americans from both sides of the Atlantic, uniting behind a
battle cry of "no taxonomies without documentation."
Well, let me tell you, I am absolutely committed to that objective.
XBRL-US intends to document every taxonomy that's necessary to produce
financial statements for any industry using US GAAP by no later than
mid-yr 2007. And because the SEC strongly supports that goal, we have
contributed major funding to quickly complete the taxonomy writing
process. In that endeavor, we're fortunate to have the participation and
commitment of the Financial Accounting Foundation, the Financial
Accounting Standards Board, and many of their able leaders — including Bob
DeSantis and Bob Herz, both of whom are participating in this
conference.
This job of completing the XBRL taxonomies for U.S. GAAP is already
finished for many industries. And more than a year and a half ago, the
staff of the Public Company Accounting Oversight Board recognized that the
current U.S. GAAP taxonomies, because they were developed by a widely
recognized group of experts using due process, meet the regulatory
requirement of providing the "suitable and available criteria" that
auditors need to do their jobs.
Because this is an international conference, it's worth noting that the
SEC is committed to doing everything in our power to ensure that XBRL
remains a truly international, stateless, and open source standard. All of
the XBRL software development that we do, and that we support, will be
open source. It will be contributed to the global effort to eliminate
friction in the exchange of financial information, so that company data
can travel at the speed of light, 24/7, with built-in automated quality
control.
At the SEC, we're excited about the way that interactive data is
already providing us with the capability of real-time reporting and
real-time analysis. And in the days ahead, across the Commission's
thousands of professional staff in a dozen offices throughout the country,
it will free up human capital to perform the subtle analyses and make the
careful judgments that machines can't replicate.
Interactive data will do the same for millions of analysts, business
journalists, investment professionals, and individual investors across the
country, and around the world — not to mention the companies that use XBRL
themselves, who will have the benefit of real-time financial reporting for
an endless variety of internal management control purposes.
Beyond the many uses that companies, investors and analysts will make
of interactive data, it's easy to imagine more that the world can do with
this powerful new capability. As Sir David and I follow the roadmap to
2009 that our agencies have laid out, by which we hope to eliminate the
requirement that reports using International Financial Reporting Standards
be reconciled to U.S. GAAP, it is already possible to imagine that XBRL
taxonomies — written without bias toward any particular set of accounting
rules — could be used to instantly translate any given set of financial
data from one accounting system to another. So even if the world is never
quite possessed of a global accounting Esperanto, we will still be able to
speak the same language.
Of course, the United States is strongly committed to the establishment
of a high-quality, comprehensive set of generally accepted international
accounting standards in cross-border securities offerings. We've long
believed that this will promote global capital formation, and that it will
make it easier for foreign issuers to access America's capital markets and
list in the U.S. I have no doubt that the widespread use of XBRL, and the
exploitation of the many possibilities of interactive data, will
accelerate the development of a set of truly global accounting
standards.
The fact is, the XBRL development effort is already completely
international. Not only this international conference, but also the
ongoing work of XBRL International and its member organizations around the
world, are ample demonstrations of that fact.
I want to commend the XBRL International Assurance Working Group, which
met at the World Congress of Accountants in Istanbul last month, and will
meet again here on Thursday. The Working Group is absolutely right to
consider how the adoption of XBRL might improve the audit process. Just
last month, in a report issued at the Global Public Policy Symposium in
Paris, six of the world's top accounting firms extolled the benefits of
XBRL, and firmly stated their belief that its adoption will significantly
lower both internal and external audit costs.
From our vantage point at the SEC, it's also clear that interactive
data will significantly improve audit quality. Last month, the SEC's
Deputy Chief Accountant, Scott Taub, noted that over half of recent public
company restatements were the result of misapplying basic accounting
rules. Only about 5% of restatements were due to deliberate errors, or to
fraud. So there is an enormous opportunity for automation to help
corporate finance staffs and auditors avoid simply missing things — and to
avoid the kinds of unintentional mistakes that can have big
consequences.
Because it's so flexible, XBRL can ensure that the right information is
classified properly at each step where it's implemented — potentially
without the need for any human judgment or intervention, and therefore
without the risk of human error. Interactive data can improve quality and
accuracy for vast categories of material information, from the moment of
an initial transaction to the ultimate disclosure of a public company's
aggregate data.
Just consider the areas that cause a large number of restatements:
mundane but detail-laden issues such as lease contracting, income tax
accounting, and revenue recognition. Now imagine that a company's lease is
itself an XML document, with XBRL fields, so there's almost no chance of
error in moving info from the lease to the company's accounts. And
supposing that same company classifies its income according to accounting
rules that properly apply XBRL codes — and hardwires its revenue account
to its invoicing system. Significantly reducing the chance of error in
this way can go far toward eliminating the over half of accounting
restatements that are unintentional and result from misapplication of
accounting rules.
You may have heard that the SEC is waging an all-out war on accounting
complexity. That's because today's overly complicated accounting standards
are difficult for many filers — and can themselves be a source of
accounting errors. But the noble work that the Financial Accounting
Standards Board is undertaking to codify its standards, and reduce the
level of accounting complexity, will take time. In the meanwhile,
automating the process of applying today's excruciating accounting detail
using XBRL can save companies valuable time and money, and get users of
financial reports much more accurate information than they've ever had
before.
And I should point out that not only can XBRL help reduce errors in the
first place, but it can also help detect them after they occur. Here's an
interesting example of how that might work. Just this year, a group of
students at Emporia State University in Kansas won the Sixth Global XBRL
Academic Competition at Bryant University by creating a software
application that continuously identifies tagged transactions which should
come to the attention of internal or external auditors. It's not hard to
imagine that in the very near future, companies of all kinds will be able
to rely on interactive data to flag anomalous data and fix accounting
errors in real time.
In this example, as in so many others, the enormous contribution of
interactive data is that it makes human beings more productive. Instead of
spending time on backward-looking, manual re-checking of stale data,
companies and their employees can spend more time on forward-looking,
strategic thinking.
And interactive data will make investors more productive, too. Instead
of wading through incomprehensible financial disclosure that's mandated by
the SEC, investors can have access to meaningful information in a form
that they can use. Financial intermediaries will be able to offer their
retail customers decision-making tools that make comparative shopping
easier, and performance tracking more accurate and more meaningful.
As the arbiter of the way that every public company in America shares
their financial information with the public, the SEC has an important role
to play in this technology revolution.
We need to get out of the way.
After all, it's our 1930s-era reporting standards that are acting as a
brake on the rapid adoption of better disclosure technology that's
shelf-ready right now.
By scrapping our 1980s-era EDGAR system and moving to a 21st century
interactive data platform, we're not leading the XBRL revolution — we're
just observing what's happening all around us, and all around the world,
and keeping up with the times.
By contributing resources to the XBRL taxonomy writing effort for US
GAAP, we're not being early adopters — we're just insuring that
government-mandated reporting requirements don't inhibit companies and
investors from using modern tools that the private sector has already
developed, and that the entire planet is voluntarily embracing.
That's why, on September 25, I announced a series of contracts that
will completely rebuild the SEC's public disclosure system and make it
interactive. I'm pleased to announce that today — a mere 70 days later —
the first product of those efforts is available to the public. Today, on
our website at sec.gov, we've launched a demonstration release of our new
software for viewing and analyzing the interactive data filings that are
already being submitted by a broad cross section of U.S. companies. It's
now available for a test drive by investors, analysts, bus journalists,
academics, your Mom or Dad — or anyone who wants to try out our new
software to get a sense of the possibilities of interactive data.
Because this new software is for demonstration purposes, you can be
sure it's just the beginning. In the very near future, we'll enhance the
capabilities of the demo version, and make it even easier for all of the
SEC's customers to use.
It's important for everyone in this audience to know that despite our
enthusiasm for interactive data, the SEC has no intention of getting into
the financial analysis business, or the financial software business, and
we won't attempt to compete with web-based financial portals or other
financial service providers. In fact, because all of our software
development is being contributed to the public domain, we hope to
stimulate the private sector development of software that uses SEC data
feeds, so that investors will have better and faster information from the
analytical tools created by securities analysts, private software
developers, web publishers, and other media outlets that rely on publicly
disclosed financial information.
A great example of private sector leadership in this area is being
provided by the Investment Company Institute, which even now is busy
writing XBRL taxonomies for mutual funds to adopt voluntarily. Tagging
mutual fund data will enable funds to automate the "risk/return summary"
provided by each fund. If you Google "risk/return summary," you'll find
out that this is the graphic historical comparison of the fund to its
index — as well as other key fund data that the SEC requires every mutual
fund to produce. But you'll also find that commercial vendors are selling
fancier, more detailed versions of these disclosures.
They're expensive to make. And whether they're paid for up front by
mutual fund companies or information providers, in the end, they're paid
for by investors. So not only will interactive data empower investors to
make faster and more detailed comparisons among funds, but also it will
cut the costs that investors have to pay for this information.
When it comes to satisfying investors' concerns, there's no limit to
the usefulness of XBRL. There is so much data out there that could be
tagged — earnings releases, analyst research, credit ratings, mutual fund
strategies and styles, and plenty of industry-specific information — that
the only remaining question is not whether this is good for investors, but
how fast can we get this better information to them?
And that's where all of you come in.
Even now, six years into the 21st century, far too many people still
think XBRL might be a new car model, or maybe a newly discovered medical
condition.
There are more than 10,000 public companies in the U.S., and many of
them aren't yet aware of the possibilities.
So what can every one of you do to continue to build XBRL awareness as
broadly as possible? The enthusiasm of the crowd here in Philadelphia
needs to spread to beyond the largest accounting firms, to the medium and
smaller firms, to the law firms, the financial printers, the institutional
shareholders, the exchanges, and every other Wall Street and professional
services firm that can help.
I've been greatly encouraged by the progress that's been made over the
past year in providing XBRL toolsets — whether for taxonomy development,
instance creation, validation, rendering, or analysis. And as you know,
there's a lot of work going on this week related to technical questions,
including XBRL's core standards, its renderability, the use of
calculations, versioning, formulae, functions, and dimensions. You are the
ones who have accepted these important challenges to the future of
business information. I hope you'll add to that mission the role of
ambassador.
In doing so, you'll be performing a vital and urgent national service
of updating disclosure technology for the benefit of all. You'll be
serving a cause with the potential not just to change how a bunch of suits
in New York and London do their jobs, but to change the lives of every
person in the world for the better.
Every one of you here this morning is building a better future in which
business information can be used more efficiently and productively to find
ways to conserve energy, to ship and produce healthy food less
expensively, to bring life saving drugs to market more quickly, or to
reduce pollution.
You're not just writing code — you're changing the world.
What better place than Philadelphia to start another world-changing
revolution? I'm excited by everything I've seen here, and I know you are
too. Thank you for all that you're doing. We at the SEC are proud to be
your partners.
http://www.sec.gov/news/speech/2006/spch120506cc.htm
Modified:
12/05/2006