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Communications of the ACM
Costs and Benefits of XBRL Adoption: Early Evidence
The ability to acquire, communicate, and disseminate business information is vital for investor and management decision making. Today's growing amount of information and diverse formats in reporting business and financial data makes collecting and publishing it all a major challenge for all organizations in all countries. Until recently, there was no standard format for communicating accounting information [8]. As a result, organizations had to manually assemble it from often-incompatible information systems to prepare financial reports [7].
The Extensible Markup Language (XML) was created to provide increased data accessibility to large numbers of users, especially in Web browser formatwithout having to re-key the information. XML and its derivatives have become increasingly important data formats for storing and exchanging business data among various systems on the Internet [2]. However, using XML to report accounting information is difficult due to a number of design issues. For example, writing an XML schema to suit a company's internal, inter-company, or external reporting is a tedious job involving a demanding mental workload for most systems engineers [3].
The eXtensible Business Reporting Language (XBRL) is a nonproprietary Web-based XML derivative used to tag both financial and nonfinancial data and give it context (www.xbrl.org). Data tags provide information about the facts in the tags. The tags map to a data dictionary defined in the appropriate taxonomy. XBRL means reuse of data, resulting in improved accessibility, interoperability, and efficiency, potentially yielding significant time and cost savings for the adopting organizations. Additionally, XBRL is viewed by many in the accounting profession as a way to address recent international legislation and regulations (such as the Sarbanes-Oxley Act of 2002) aimed at corporate accountability, financial reporting transparency, and earnings management [1]. Yet there has been a paucity of empirical research providing insight into XBRL adoption and implementation.
Even as XBRL adoption has progressed in the U.S. (such as the Federal Deposit Insurance Corporation's call-report requirement for banks and the Securities and Exchange Commission's voluntary filing program), such adoptions have affected only a small percentage of organizations and have occurred at a slower pace than in other countries. For example, Chinese and Japanese stock exchanges are beginning to require member companies to file their information in XBRL. For regulators, the benefits of increased efficiency (through reduced data re-entry and increased accessibility) are somewhat predictable. However, for companies (both public and private) operating in environments where XBRL is not required, the actual benefits and related costs are less apparent.
Here, we report the results of interviews (phone and email) with four business managers involved in XBRL adoption in Canada, Germany, South Africa, and the U.S.1Our aim in doing this research is to help business executives and financial information managers better understand the costs and benefits of XBRL adoption. The questions (see the table here) were created to gather critical information about the adoption process, impact of adoption, financial results, and any potential transparency of information gains as a result of adoption. Although interviewing only four companies is a small sample, the study helps identify important issues in XBRL adoption and provide an opportunity to learn from the experience of these early adopters.
Survey Results
Three of the four adoptions we studied involved publicly traded companies. All four adopted XBRL for financial-reporting purposes (as opposed to some internal focus). All four contracted a big-four CPA firm and software vendor to help with implementation issues involving compliance with generally accepted accounting principles and company-specific technical issues. All four can be viewed as "early adopters," given the few completed XBRL adoptions as of early 2005. Finally, all four indicated the adoption process was fairly easy while acknowledging that a thorough understanding of the XBRL framework was needed beforehand and that XBRL was not part of their existing enterprise resource planning systems.
Sources for the decision to adopt XBRL ranged from the IT department (in the German company) to several individuals in top management (the other three companies). This finding indicates XBRL adoption may reflect the diversity of international corporate cultures.
Survey respondents from the three non-U.S. companies said that both the anticipated adoption benefits and the actual benefits involved cost savings through a variety of sources. For example, one respondent identified the source of XBRL-related cost savings as increased processing capability and decreased data redundancy. Others identified cost savings through increased efficiency (less data redundancy) and decreased costs of bookkeeping. One respondent identified a reduction of 30% of bookkeeping staff; the affected employees, he said, were transferred to analysis positions and not terminated. The time needed to generate financial statements was reduced from five to six days per statement to 15 minutes or less.
The U.S. company was entirely concerned with improving its position within the public equity market, whereas its non-U.S. counterparts were more concerned with lowering operating costs andappearing less risky to capital providers.
There was a consensus among the non-U.S. companies that the efficiencies that resulted from adoption lowered operating costs. Their strong technology capabilities enabled them to quickly reduce the costs of adoption. The lower costs, in turn, were believed by the respondents to have lowered the perceived riskiness of the capital-provision decision for capital providers.
The perspective of the respondent from the U.S. company differed from her non-U.S. counterparts. Rather than focusing on operating costs, she considered XBRL adoption a key marketing tool for reaching the company's potential investors. Ahead of any regulation requiring XBRL adoption, she indicated the adoption would position her company as a "thought leader," or innovator in the equity market. She expected that more efficient marketing and a better position in the market would lead to a broader base of potential investors and a lower cost of capital. This perspective can be interpreted as an indirect link between XBRL adoption and reduced cost of capital.
The difference in perspectives between U.S. and non-U.S. survey respondents is anecdotal evidence of a U.S. focus on the equity market vs. a non-U.S. focus on internal efficiencies and capital providers. Related accounting literature generally reinforces this evidence, indicating U.S. companies undertake projects that would position them to be perceived as leaders in the equity market in order to raise capital at lower cost compared to non-U.S. companies' focus on the overall riskiness to their companies of debt [6].
Negative Factors
All four respondents also cited uncertainty in an unproven technologyXBRLand the taxonomy and coststime and moneyneeded for success as negative factors affecting their adoption decisions. However, post-adoption, the respondents viewed the risk and costs as low. This view reflects the fact that the respondents were all technically savvy early adopters. Less uncertainty (risk) eventually led to quick adoption of XBRL technology, despite it being an unproven technology. Thus, there was a post-adoption consensus that the adoption process was fairly easy. This finding may help dispel the commonly held notion among senior managers that every new technology adoption is risky and costly.
We included questions regarding company financial reporting transparency that reflected the accounting literature in the area, as well as the XBRL advocates' claim that XBRL use results in increased transparency (see www.xbrl.org). The increased accessibility to information provided by XBRL use has been conceptually linked in the literature to increased levels of reporting transparency [4]. Further, XBRL use as an investor search technology has been found to increase the transparency of the reported information in an experimental context [5].
The survey responses reflected a consensus of the importance of transparency of both financial and nonfinancial data (as a reason for adoption). The U.S. respondent went so far as to relate increased reporting transparency to an increased level of trust between management and potential investors. This finding can be considered positive news for U.S. investors in the wake of recent corporate accounting scandals, most notably at Enron and WorldCom.
Other Findings
The three respondents from publicly traded companies indicated that they believe XBRL adoption gave them a competitive advantage over their competitors without XBRL. They viewed XBRL as a key emerging financial-reporting technology and anticipated a "first-mover" advantage in the market due to adoption related to the cost of capital. The respondents apparently viewed XBRL as a technology that could help their companies differentiate themselves from their competition in the capital markets.
Finally, the South African company adopted XBRL to help it comply with impending domestic legislation and regulations (such as the Electronic Communications and Transactions Act of 2002). Although XBRL was not specifically required, the company adopted it (ahead of its competitors) due to its extensibility and compliance capabilities with international financial reporting standards. The respondent from the U.S. company noted that regulation would significantly stimulate adoption. This has yet to occur, but the U.S. Securities and Exchange Commission's voluntary XBRL filing program (www.sec.gov/xbrl) has stimulated corporate interest in XBRL.
Consistent Across Countries
Our survey results appear to be fairly consistent across countries, a result contrary to the generally heterogeneous corporate cultures in an international sample. Perhaps the two most notable insights we derived were the diverse reasons for adopting XBRL and the perceived low cost of adoption. They suggest there may not be a single right way to make the adoption decision. It may come from top management or from a company's IT managers, depending on corporate culture, technology savvy, and other factors. The implication for executives and IT managers is that a "best practice" may not exist for every company in all circumstances. Companies must find the most suitable reasons for themselves.
The low-cost perception concerning SBRL adoption may reflect the fact that managers and executives are more technology literate than they have ever been before. Thus, companies should not overestimate the cost and difficulty associated with XBRL adoption. Even though the result may be due to the technical savvy of the sample companies we surveyed, it does pave the way for other companies to realize that cost alone does not appear to be a prohibitive factor in adoption.
Another result from the survey was that all respondents believed XBRL adoption would increase the transparency of their data in the marketplace, with the three publicly traded companies indicating a perceived first-mover advantage. Lowering a company's cost of capital, whether its source is private or public, is an ongoing battle. By making company-reported information more transparent to current and potential capital providers, survey respondents believed such transparency would reduce the uncertainty and risk of providing capital to the company and thus lower its cost of capital. Similarly and consistent with prior accounting literature, the U.S. company was entirely concerned with improving its position within the public equity market, whereas its non-U.S. counterparts were more concerned with lowering operating costs and appearing less risky to capital providers. Even though these perspectives diverge, each represents an important factor in key strategic business decisions.
The findings also point to a paradox. XBRL International, an international consortium of CPA companies, software vendors, and regulators, supports XBRL adoption efforts. Furthermore, XBRL technology has been available since the late 1990s, yet there was a relative paucity of adoptions worldwide as of early 2005. This may be due to the lack of insight and guidance regarding the various adoption issues.
Conclusion
The survey results we've reported here provide XBRL adoption insight for IT practitioners. However, caution regarding them is also warranted due to the nature of the study (a qualitative survey based on a small number of interviews); one should not, for example, make statistical inferences. Still, the results are especially useful for two main reasons: an international sample and the survey being conducted in a very early stage of XBRL adoption. They represent timely information for companies embarking on or about to embark on the adoption process.
References
1. American Institute of Certified Public Accountants. The CPA Letter 82, 9 (2002), G1G2; www.theCPAletter.com.
2. Feng, L., Chang, E., and Dillon, T. A semantic network-based design methodology for XML documents. ACM Transactions on Information Systems 20, 4 (2002), 390421.
3. Guithes-Amrheim, D., Pinsker, R., and Farewell, S. REA and XBRL GL: Synergies for the 21st Century Business Reporting System. Working Paper, Old Dominion University, Norfolk, VA.
4. Hannon, N. XBRL enters a new phase. Strategic Finance 83, 10 (2002), 6162.
5. Hodge, F., Kennedy, J., and Maines, L. Does search-facilitating technology improve the transparency of financial reporting? The Accounting Review 79, 3 (2004), 687703.
6. Mueller, G., Gernon, H., and Meek, G. Accounting: An International Perspective. Business One Irwin, Burr Ridge, IL, 1994.
7. Pinsker, R., Gara, S., and Karim, K. XBRL usage: A socio-economic perspective. Review of Business Information Systems 9, 4 (2005), 5972.
8. PricewaterhouseCoopers. PwC Technology Forecast: 20032005. PwCglobal.com, 2003.
Footnotes
1We solicited potential interviewees through an XBRL listserve.
DOI: http://doi.acm.org/10.1145/1325555.1325565
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