“The entire financial ecosystem is trying to survive on inadequate data,” said Philip Moyer, President and CEO of EDGAR Online, when asked for his views this week on the credit crisis, and how EDGAR Online can help. “The credit market is frozen because we still don’t know what balance sheets to trust.” The three-part solution, says Moyer, is a combination of technology, improved Securities and Exchange Commission (SEC) regulations, and refined accounting definitions made possible by XBRL.
Since companies started reporting to the SEC in the 1930s, the public has relied on these huge paper-based documents. “These reports are very difficult to understand and analyze; it’s it’s hard to find and evalute assets in a company’s financial statements,” said Moyer. “I can’t even look at my own 401(k) and know my personal exposure to AIG, or Lehman Brothers, or Fannie and Freddie.”
“People found they couldn’t really understand these new or exotic asset-based securities and derivative products. And it is nearly impossible for people to question the rating agencies unless they went through these onerous, multithousand-page documents and parsed the numbers on their own. So there’s no ecosystem of counter-party analysis that was raising red flags.”
Regarding the frozen markets, Moyer said that “without being able to understand a bank’s balance sheets or to see what and where the assets are, you can’t measure a bank’s exposure. Therefore, the banks had no reason to trust their counter parties, and everyone feared being left holding the bag. The ecosystem of information, from assets to investor, is broken.”
Moyer had just checked the markets when we spoke and was clearly agitated by the fear and uncertainty gripping the market he said, “because there is a solution that can shine light in the dark corners of these balance sheets.” It involves XBRL technology, regulation, and accounting. “I hope the SEC uses this crisis to fix the infrastructure problem, he said. “It’s not glamorous work, but we have we have the opportunity to modernize the entire information supply chain that underlies the financial markets.”
“XBRL is a major part of the technology solution,” said Moyer, and that part is underway. The SEC has already proposed that companies be required to file using XBRL as early as next year. The eXtensible Business Reporting Language (XBRL) format is superior for communicating business data and is computer-searchable for automated analysis, ending the reliance on paper-based information that is difficult to read, copy, and paste into spreadsheets.
But technology is only one part of the solution, says Moyer. The regulatory solution is critical, and the accounting profession needs to develop better definitions. “For example, how does a company account for the value of its assets? How do we define liabilities, or fuel costs, or oil reserves? Since July of this year, oil has fluctuated from a high of $147 per barrel to just below $90 today. So how can a company state the value of its oil reserves? How can any analysts know what price they used last quarter to determine the value of their reserves? With XBRL and better industry-standard accounting definitions, this is all doable.”
Having an open, common standard that everyone is required to use is a fundamental step in fixing the problem—from a technology standpoint. “XBRL gives everyone a common language format,” says Moyer. “Industry accounting groups can use it to define these things, and the SEC can better state what needs to be reported. We should have the information that XBRL financials can deliver”
He compared financial data to a health care data, in which a patient has a chart that anyone (primary care physician, emergency room, surgeon, etc.) can reference to see the patient is allergic to penicillin. “Likewise, investors and analysts should be able to see, instantly, that a particular company is, for example, a big holder of asset-backed securities and they would be allergic to a downturn in that asset class.”
EDGAR Online, as far back as 1989, has been working on the basic problem of “inadequate data” In absence of the regulatory mandate for XBRL reporting, EDGAR Online has already translated SEC reports of over 12,000 U.S. public companies into XBRL format, broken down into more than 6,000 separate elements for in-depth automated analysis. “We look forward to working closely with the government regulators and with industry accounting groups to upgrade the information supply chain from businesses to investors, with more granular, transparent XBRL information,” says Moyer.
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