LAWFUEL – The Law News Network – Modern technology – specifically, interactive data – has the potential to tap the awesome number crunching and analytical power of today’s computers to make SEC reports vastly more useful for investors, analysts, companies and, not least of all, the SEC – where our thousands of professionals could put interactive data to work instantly in preventing fraud, rather than discovering it after the fact.
I want to congratulate Adobe Systems for hosting this conference. Adobe likes to describe itself as “pushing the boundaries of the digital universe.” That’s certainly what we’re on the threshold of right here – nothing less than developing the new lingua franca of financial reporting.
Everyone in this room knows just what we’re talking about, and how profoundly it will affect the way the world exchanges financial information. But very few people outside this room have even an inkling of what’s going on here. Even fewer people understand fully the SEC’s interest in interactive data.
Of course, one reason we’re interested is that obtaining and crunching financial information faster and more easily will strengthen our ability to police wrongdoers, and prevent fraud. But that isn’t the whole story by a long shot.
Nor is it that the Chairman of the SEC is a technology buff and detail guy who simply enjoys rummaging around with stuff like XBRL taxonomies. If you think I enjoy going on at length about something called “taxonomy” you don’t appreciate what I learned as a Member of Congress long ago: People just don’t want to hear about anything that starts with the word “tax.”
No, the real basis of our interest in interactive data at the SEC is our fundamental mission: to protect investors. As Fed Chairman Alan Greenspan recently told me, the best investor protection is a growing economy and a rising market. The SEC performs its highest and best function when we contribute to general prosperity by ensuring that markets function the way they should.
And markets function best when all the information that market participants need is available to them when they want it, and in a form they can use it.
That’s why the Commission is so keen on interactive data for financial reporting. I’m not thinking years. I’m thinking months. And the SEC will play a leadership role.
Of course, leading — and cheerleading — are two different things. Leadership requires the hard work of finding a path around apparent obstacles to a clear destination. For my part, I want to share with you a vision of what we expect to achieve, and only a little bit about the rocks and snares in our path. Corey Booth, the SEC’s IT Director, will give you a more detailed insight into the challenges that lie ahead. But here is the view from 40,000 feet.
First, the development of taxonomies lacks resources. Believe it or not, the awesome global challenge of fashioning a new way for billions of people to exchange financial data is currently dependent on the success of one solitary man who labors in anonymity at XBRL-US: Brad Homer. Alone, except for volunteer help, he is writing the taxonomies upon which the entire interactive data enterprise will necessarily rely.
The truth is, Homer can’t do it alone. Taxonomy writing urgently needs project management and strong direction. The development of these taxonomies, just as in any other large scale software development process, requires careful planning, constant discipline, and sound management to ensure a quality product. Mr. Homer needs help, and I intend to do my part to help the taxonomy development effort.
Beyond getting this project the resources it needs to speed up taxonomy writing by orders of magnitude, there’s the not insignificant matter of agreeing on what financial statement concepts mean. Without agreement on these questions, we won’t be able to label the financial statement items, and so we won’t have a valid XBRL taxonomy.
Rather naturally, different companies report things differently. For example, when they’re reporting figures for Property, Plant, and Equipment on the balance sheet, some separate the value of buildings from the value of land. Others roll them up together in a single figure. Building a taxonomy that will work for everyone requires anticipating at least the reasonable permutations. Beyond that, a useful taxonomy has to provide a straightforward way for companies to express their idiosyncratic deviations from the standard.
Solving these questions in anything like real time will require that we all work together in an atmosphere of collegiality, in pursuit of shared goals. Sometimes the talk is too much about who will “own” the taxonomies. Well, I’m afraid if we don’t quicken the pace, in the end there may not be anything worth owning.
These are just some of the challenges we face. But in all of them, you can count on the SEC to help chart a course to clear the obstacles in our path. Far from causing us to despair, simply knowing what the problems are is the first step to solving them.
But I’m not here to talk about problems. Like all of you, I’m compelled by the opportunities.
Some of you in the audience may be financial analysts. Presumably, you got into your line of work because you enjoy analyzing information — not the brute labor of compiling it. Imagine with me, if you will, your life in a world of interactive financial data.
Think of it: No more re-keying of information. Even if currently you’re relying on the back office, or outsourcing to India, for help with that task, you’re still victimized by the huge error rate that’s built in to the task of manually re-entering financial information from SEC reports. You may not know it, but even the automated tools that are currently used to parse the data out of an SEC filing can have an error rate of 28%. And that already unacceptable level of mistakes and unreliable data rises for those of you who dig deep enough into the footnotes to seek information on pensions, stock options, or leases. It’s a hell of a way to run a capital market.
Think how much better life will be when you can not only rely on the accuracy of the numbers, but you can instantly slice ‘em and dice ‘em exactly as you please.
If you’re a software maker, and I know there are many here, the possibilities for you are endless. Let’s start with the basics: software that translates the computer gibberish of XBRL filings with the Commission into what any American investor sees today when he or she uses the Internet to look up a company’s forms on EDGAR.
Then you’d want to design software tools to help companies prepare at least their four main financial statements in XBRL, and then they’ll need to integrate those tools into the existing applications that they rely on for financial management and reporting. But that’s only the beginning.
The retail market is where the SEC also has high hopes, because we’re focused on the average investor. We’d like to see the democratization of financial information and analysis, and the empowerment of individual investors. Software that consumers can use to help make wise investment choices, designed either for their personal use or integrated into websites, will run the gamut from RSS feeds about companies and funds to analysis tools built into personal financial software.
Almost immediately, I expect to see interactive data play a leading role in helping consumers analyze and compare mutual funds. The taxonomy development that is needed to make this a reality is well within our reach. And because mutual funds are the investment of choice for the majority of Americans, millions of men and women, young adults and retirees, individuals and families, will benefit from having better information about their savings.
At the SEC, we are very serious about realizing this vision. Last week, I announced that Susan Wyderko, a 20-year veteran of the SEC who has most recently led our Office of Investor Education and Assistance – the part of the Commission focused on the individual investor – will be the new Acting Director of the Division of Investment Management, responsible for mutual fund regulation. She is committed to helping focus the efforts of this Division, and eventually the entire SEC, on the introduction of interactive data.
And as you may know, I have also just announced that the Commission is now offering significant new incentives for companies and funds to join our voluntary XBRL filer program.
Registrants who commit to filing in XBRL for a year, and to providing us feedback on their experiences, will get expedited reviews of their securities registrations. And they will be able to learn more quickly whether or not the staff will review their 10K annual reports. We’re looking forward to a significant new wave of participants from all industries who will join our test group. I hope you’ll encourage your own companies to contact our staff for more details. And for those of you who have already joined, I’d like to thank you for your very helpful feedback to the Commission during the course of your participation in our Voluntary Program. We need your continued support.
As we progress with the SEC’s own plans to broadly expand our use of interactive data, we’ll continue to work closely with all of you. It’s because of the leadership that you’ve shown over the past five years that we now stand on the threshold of some truly breathtaking changes in our global financial markets.
Above all, continue with your enthusiastic contributions to the global development of the XBRL standard. As I said at our last XBRL Conference in Tokyo: Have no doubt, you are changing the world for the better.