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February 25, 2010

XBRL introduction presents few opportunities for auditors

By Nicholas Moody

The imminent arrival of eXtensible Business Reporting Language (XBRL) as the preferred format for financial reporting will have a minimal effect on the workload of US audit firms, according to two mid-tier firm partners.

The Securities and Exchange Commission (SEC) last year announced that domestic and foreign large accelerated filers will have to submit their financial statements in XBRL format this year. The new rules for SEC filings will be phased in over three years beginning with fiscal periods ending on or after 15 June.

Initially, auditors will not be required to provide assurance on XBRL filings. This means the XBRL roll-out will have a negligible impact on firms such as BDO Seidman, according to Jeff Lenz, a partner in the firm’s national SEC department.

“I suppose some people will have the view that the investment community will like it better if there is some sort of auditor requirement but I would not expect an overwhelming demand for that,” Lenz said.

RSM McGladrey’s international assurance services group partner Bob Dohrer said the firm welcomed the XBRL roll-out and agreed there would be minimal revenue generated from the new format until regulators require mandatory assurance.

Lenz and Dohrer said their clients are either completing the XBRL tagging themselves or being assisted by specialist tagging companies; audit firms are not being engaged.

“As far as assisting non-audit clients with the process, it is an area where our firm is not heavily focused right now because in large part it becomes a mechanical exercise, there will be a lot of commercial providers,” Dohrer noted.

XBRL tags allow individual items to be uniquely identified in a company’s financial statements so they can be easily searched online, downloaded into spreadsheets, reorganised in databases and used for other comparative and analytical purposes.

A recent Institute of Internal Auditors survey of more than 200 chief audit executives worldwide found 51 percent of respondents did not have any knowledge of XBRL, and 42 percent only knew the very basics.

Lenz also downplayed the costs involved with the introduction of the tagging system and said comparisons between the costs required to implement XBRL and Section 404 of the 2002 Sarbanes-Oxley Act were “vastly overstated”.

“Some people have compared [XBRL] to implementing Section 404, which requires reporting on internal controls. We do not see this as remotely close to that in terms of cost,” he said. “I couldn’t quote a number on audit fees from 404 but I would say it is a significant number and I think the fee revenue we will get from XBRL will be a trivial number.”

Dohrer predicted that regulators will not require mandatory assurance on XBRL filings for at least five years.

“If we look into the future one can only imagine that the current EDGAR [electronic data gathering, analysis and retrieval] filings will be replaced by the XBRL filings and at that point audit firms are certainly going to be asked to provide some assurance around that XBRL process,” he said.

Dohrer said there will be a lot of questions around what kind of assurance auditors will be asked to provide.

“When we issue our audit opinion it is on the financial statements as a whole. There is a significant question around when users of that information pull out just the domestic trade receivables number; how is the assurance around that number going to be communicated in a virtual world?” he said.

Meanwhile, an investment analyst has warned that investors might not embrace XBRL with open arms, despite the benefits XBRL is supposed to offer.

JPMorgan Cazenove head of accounting and valuation research Peter Elwin has questions regarding the cost, how the taxonomy has been formulated and how changes in accounting rules will affect the taxonomy.

“I do not think investors have engaged with XBRL at all, because they don’t have to,” Elwin said. “It is far too esoteric for them to engage in debates about the taxonomy. That is the worry.

“Is what has been created ultimately a form of Esperanto which has been designed by a few clever people but in reality may not match the way the real world works? That would be one of the big risks.”

Elwin said investors would ideally like between three and five years worth of financial data before they consider investing in XBRL search engines.

“There is a tipping point. If the SEC requires companies to submit data in XBRL then that quite quickly gets you to a stage where you have a useful data set,” he said.

Nicholas Moody

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