 f
you thought Lotus 1-2-3 revolutionized
spreadsheets, get a good grip on your mouse
because XBRL will do even more for financial
reporting and analysis. Here’s the
breakthrough: XBRL (extensible business reporting
language), a new global open standard for
formatting financial information, makes reporting
and analysis faster, cheaper and significantly
easier to automate. It also improves access to
information that often has been difficult to
locate in financial datasets. In addition, XBRL
reduces inconsistencies—such as ambiguous
business terminology and myriad data
formats—that often necessitate manual
intervention and slow financial reporting.
Recently the JofA spoke with the father
of XBRL, Charles Hoffman, CPA, who currently is
director of innovative solutions for UBmatrix, a
software development firm in Kirkland, Wash. In
this interview he credits the AICPA for initial
and ongoing support of the concept he originated
as a member of a small CPA firm, and he shares
his thoughts on how all CPAs can help their
employers and clients—indeed the entire
business community and the public—benefit
from the power of XBRL.JofA: Are there any CPAs who don’t
need to learn about XBRL?
Hoffman: No. XBRL is fundamental to the
communication of business information and is
changing how we report and analyze it. All CPAs
owe it to themselves, their clients and employers
to develop a basic competency in XBRL, which soon
will be embedded in literally every aspect of
internal and external business reporting. As
[AICPA President and CEO] Barry Melancon said,
“XBRL fundamentally transforms and improves
the way companies, investors, lenders, analysts
and regulators exchange, aggregate and analyze
business information.”
XBRL will significantly improve
the ability of CPA financial managers to
distribute information to stakeholders precisely
as reported, rather than as condensed or
otherwise modified by third-party data
aggregators to facilitate distribution. CPAs in
public practice will need to know XBRL when
working with CEOs and CFOs, who will use it to
issue financial reports and to obtain credit from
lenders. Members in industry, with corporate
management and boards of directors, will use it
as a common frame of reference, as will
independent auditors working with audit
committees. CPA/PFSs will employ XBRL to assess
investments for their clients, and accounting
educators will prepare students to use XBRL in
the marketplace.
CPAs in government and those
dealing with regulators will be the first groups
to use XBRL to make basic decisions. Federal
banking regulators require financial
institutions, beginning in October 2005, to file
quarterly summaries of their financial condition
in XBRL format over the Internet (www.ffiec.gov/find). And the SEC launched a voluntary
program under which public companies can file
required documents online (www.sec.gov/spotlight/xbrl.htm).
JofA: How did the AICPA react when you
approached it about XBRL?
Hoffman: The AICPA’s early support helped
launch this open standard, and its ongoing
nurturing greatly contributed to the building of
XBRL’s infrastructure and to global
acceptance. In 1998 I informed the
Institute’s High Tech Task Force of the need
to create a global open-standard data-tagging
protocol for financial information. An open
standard typically is developed by many parties
and is available royalty-free to all software
developers for use with any application.
Conversely, proprietary standards usually are
developed by one company and are available to
others only if they pay royalties, which inhibits
creation of software for those who need it. Soon
we had a plan, and the AICPA funded the creation
of a prototype. Knight Vale & Gregory, which
now is part of RSM McGladrey, Inc., absorbed some
of the costs and gave me time to work on the
prototype. Once it was complete, the AICPA
created and promoted XBRL International, a
not-for-profit global consortium of companies and
agencies working to develop the computer-readable
XBRL open standard and support its adoption. The
consortium now has more than 300 members, and
XBRL use is growing around the world. In the
United States, the Federal Deposit Insurance
Corp. (FDIC) and the SEC have established XBRL
programs.
JofA:
What did that tell
you about the Institute’s support for small
firms and individual CPAs?
Hoffman: At the time, it amazed me how one CPA
from a relatively small firm could get the
AICPA’s attention. I couldn’t have done
this without the Institute and its dedicated
staff members.
JofA: Are you satisfied with the progress
toward widespread XBRL adoption?
Hoffman: Very much. We have a proven and stable
specification (version 2.1; www.xbrl.org/specifications). Around the world, government and
private groups agree that XBRL implementation is
a goal worth pursuing. We have
software—although still in the early stages
of its evolution—that makes it possible to
use XBRL, and there are several major
implementations that demonstrate XBRL’s
practical benefits (www.xbrl.org/showcase).
JofA: What is your vision for XBRL?
Hoffman: My vision is one of financial reporting
and auditing that is “friction-free” in
the sense that it involves minimal unnecessary
manual intervention. By that I mean turning
unstructured clusters of text into structured
data that computers can process to facilitate
their re-use. In such an environment, intelligent
software tools driven by XBRL metadata would
integrate the various work flow components that
contribute to financial reporting, reduce
rekeying of data, automate disclosure checklists
and automatically validate the complex
information contained in financial statements and
the supporting audit schedules. Metadata are
computer-readable descriptions of financial data
in a document, and intelligent software tools use
metadata to understand the relationships between
different pieces of data and thus help computers
to process them.
There is untold inefficiency
embedded in the process of collecting financial
data from various corporate systems, moving them
into internal and external audit schedules,
connecting them to lead schedules that summarize
the details of audit documentation, linking that
information to the actual internal and external
financial statements and eventually issuing a
financial statement assembled by many parties,
including clients, CPAs and attorneys using a
wide variety of software tools.
But efficiency is not the only
consideration. Before the introduction of
electronic spreadsheets and automated workpaper
software, the high note on an audit engagement
was when the lead schedules footed and
cross-footed—automating this mechanical task
gave CPAs time to provide more valuable services.
So although CPAs first used the electronic
spreadsheet to reduce costs, they soon began
using it to improve and speed analysis.
JofA: Is the United States lagging behind
other nations in implementation?
Hoffman: XBRL is evolving at varying rates in
different countries. As I mentioned, U.S. banking
regulators will begin collecting XBRL-formatted
data from approximately 9,000 financial
institutions later this year. But given, for
example, that the national stock exchanges of
Germany and South Korea and the national banking
regulator of Australia implemented XBRL some time
ago, I think it’s fair to say the United
States has some catching up to do.
It’s important to
understand that global adoption of XBRL is driven
by market and regulatory forces that vary by
nation. For example, the European Union’s
standards convergence and adoption of
international financial reporting standards are
fostering acceptance. Although acceptance of XBRL
in the United States has been hampered by other
market forces, such as Sarbanes-Oxley compliance,
the world still views the SEC and FDIC projects
as models for XBRL use.
JofA: What are the stumbling blocks here?
Hoffman: One is that software vendors are
searching for signs of a reliable revenue stream
before they develop XBRL applications; so far
there are few such signs in the United States.
Fortunately XBRL use is growing around the world,
creating a global market for XBRL tools.
Adoption of XBRL will be based
on things such as value, effectiveness and
efficiency, which XBRL can provide. For example,
as the European Union develops its infrastructure
and countries convert from national to
international financial reporting standards, a
data-tagging language becomes increasingly
valuable.
JofA: How can obstacles in the United
States be overcome?
Hoffman: Primarily, we need more funding for
development of essential XBRL infrastructure
components, such as high-quality comprehensive
taxonomies, which are classifications of concepts
or data elements used in financial reporting. The
AICPA and other XBRL member organizations have
done much to help, but they cannot sustain their
efforts indefinitely. In addition, there simply
isn’t enough XBRL-related training and
education currently available for XBRL use to
take root and grow.
JofA: Are companies better off neglecting
XBRL for now and focusing more on Sarbanes-Oxley
compliance, or should they tackle both at the
same time?
Hoffman: XBRL can greatly facilitate
Sarbanes-Oxley compliance. In my view any
Sarbanes-Oxley compliance software that
doesn’t incorporate XBRL probably won’t
be around long. Many of the features necessary in
systems built to meet Sarbanes-Oxley requirements
exist in XBRL, which is an open standard. More
and more people are realizing the advantages of
using open standards instead of proprietary ones.
XBRL features such as business rules for
validating data reduce implementation costs and
increase compatibility among software
applications.
One important development is
the Public Company Accounting Oversight
Board’s (PCAOB) release of questions and
answers relating to attest engagements of
XBRL-formatted financial information. The PCAOB
said CPAs must have adequate knowledge of
XBRL-formatted financial information to
participate in related attestation engagements
(see News Digest).
JofA: What was CPAs’ role in the
introduction of XBRL?
Hoffman: CPAs should be proud of their part in
the creation of XBRL, whether through their
individual efforts, through firms that are
members of XBRL International or through the
AICPA. They’ve helped make XBRL available to
the global business world. But to sustain this
effort, others from the financial reporting
supply chain—who will benefit from
XBRL—should participate more actively than
they have. CPAs can encourage this by being XBRL
advocates.
JofA: How many different roles can CPAs
play in the XBRL world?
Hoffman: They can—and do—help create
the taxonomies and other infrastructure
components that make XBRL work. This enables CPAs
to add what they think should be in the standard,
to learn about XBRL early and to surpass their
competitors. CPAs also can get ready for the
coming market for XBRL software and services.
Most CPAs don’t use a new technology until
appropriate software is ready. That day has
arrived for XBRL tools, and CPAs should begin
experimenting with them. Some are available for
inspection at www.xbrl.org/productsandservices.
At a minimum CPAs can promote
XBRL if they understand it well enough to discuss
it knowledgeably with their clients and software
vendors, who will make their products
XBRL-compatible if customers express that need.
JofA: Are CPAs embracing XBRL yet?
Hoffman: Yes. Recently I met with a former
associate who now is a managing director in RSM
McGladrey’s Seattle office to bring him up
to date on XBRL developments. Instead, by the
time we met, RSM McGladrey already had begun
using off-the-shelf XBRL-compatible software to
develop a direct feed of financial information
from its business clients.
JofA: When will CPAs start using XBRL en
masse?
Hoffman: When two conditions are met. First, XBRL
software will have to become as user-friendly to
the average CPA as the electronic spreadsheet was
when it was introduced. Second, the software will
have to make mission-critical applications
better, faster or cheaper.
JofA: What skills that are necessary for
working with XBRL do CPAs most frequently lack?
Hoffman: Most important is their lack of general
XBRL knowledge. And unfortunately, it’s
still difficult to learn about XBRL because
educational materials are scarce. But some
resources do exist, such as those at www.xbrl.org/educationandtraining and at the AICPA Information Technology
Center (http://infotech.aicpa.org/resources/xbrl). XBRL International soon will issue
education materials, and the information
available at www.xbrl.org/us is updated on a regular basis.
JofA: How can CPAs develop XBRL-related
skills?
Hoffman: One good way is to join XBRL
International and participate in its activities.
Information on membership is available at www.xbrl.org/howtojoin. Long-time members are the best sources
of information. Gaining access to their
experience is one of the benefits of becoming a
member.
JofA: Whom should CPAs educate about XBRL?
Hoffman: Focus on clients who are likely to send
or receive financial information and would
benefit from using XBRL. Next, inform software
vendors why XBRL compatibility is important to
customers. CPAs are key players in information
systems planning and therefore can be influential
proponents of XBRL.
JofA: What is the government’s role?
Hoffman: The government receives a massive amount
of information from the private sector. For
example, the Netherlands ministries of justice
and finance are using XBRL to simplify the
preparation of reports and the exchange of
financial data with the private sector, with
projected savings of more than 350 million euros
for Dutch businesses. Such an achievement in the
United States would produce far greater savings.
Interested government entities
can start by building a prototype, which can be
created on a small budget that can be minimized
by studying an existing system. Two good sources
of practical information are the Web sites of the
FDIC (www.ffiec.gov/find) and the SEC (www.sec.gov). Both agencies have made substantial
commitments to using XBRL, and the FDIC is a
member of XBRL International. In fact, the
FDIC’s system is operational, and its staff
shares information about its experience in
choosing and implementing XBRL to fulfill its
objectives.
JofA: How about accounting educators?
Hoffman: Because they’re preparing the next
generation of CPAs, educators play a seminal role
in promoting XBRL development and adoption. I
can’t stress enough the importance of
thoroughly educating yourself with materials from
the best sources.
Furthermore, educators’
thorough, disciplined approach to research
uniquely qualifies them to write books and
research papers that would help spread awareness
and understanding of XBRL, and they are quite
capable of suggesting useful ways to improve it.
JofA: If you could speak to each CPA
one-on-one, what would you say?
Hoffman: We should use XBRL’s features to
change financial reporting methods slowly but
steadily. The European Union’s capital
market soon will equal that of the United States.
If we don’t constantly modernize our system,
our profession and our nation will pay the price.
XBRL can help us maintain our position as a top
provider of critical services to the world’s
foremost source of capital. But others also can
use XBRL to replace us as leaders in this arena. 
—Robert
Tie
A former Price Waterhouse
auditor, CHARLES HOFFMAN, CPA, is director of
innovative solutions at UBmatrix and author of Essentials
of XBRL (John Wiley & Sons Inc., 2003).
He received the AICPA’s Innovative User of
Technology award, was named by Accounting
Technology as one of the profession’s
100 most influential people and is a graduate of
Pacific Lutheran University.
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