If there’s one wing of government policies that most organizations love to hate, it is most surely keeping abreast with compliance. And most of these organizations, you can be sure, relish their interactions with the regulator about as much as they look forward to a visit to the dentist.
The feeling is mutual. Regulators also seem quite convinced that some companies, when left to themselves, like nothing better than dreaming up creative ways to scam or inflate data to dupe investors. This atmosphere of mutual distrust has escalated after various rackets globally shook markets and have multiple security and compliance laws tightened. Sure, it’s like a sticky web of rules and regulations for the honest filer, and it is, but that doesn’t mean you get all caught up in it; awaiting your fate as an auditor’s mid-night snack.
Plugging the leak
Companies file Annual or Quarterly reports with the regulator in various unstructured formats such as PDF, HTML, etc. With these filings, may come a bundle of reporting mistakes or concealed fraud hidden under a pile of numbers. But before the regulator uses the stick approach to penalize the complicit, it is best to identify early signs of errors or malpractice.
For a filer, having the regulator screen its reports is really the bane of every organizations existence and PDF/HTML processes make it even worse for both parties alike. Instead of rummaging through emails and files to find the right information, why not do away with multiple pages of e-data but instead just run one earmarked standard to screen for errors?
The introduction of XBRL, a structured data format has been the biggest overhaul in the regulatory space in recent times. XBRL stands for eXtensible Business Reporting Language and is a globally accepted standard for exchanging business information. In simple terms, XBRL is an electronic information supply chain standard for moving financial and business reporting information into an interactive intelligent information format. The change from paper, PDF, and HTML-based reports to XBRL is akin to the change from film photography to digital photography.
With XBRL; the right preparation, review, and validations of Annual Reports can be done from the platform itself. This can then be easily filed with the regulator. The XBRL Specification is developed and published by XBRL International. Today, XBRL is being leveraged world-over by regulators and filers for reporting business and financial information.
But why is XBRL so important and what would a world without it look like?
1. Early signs of fraud would go undetected
Most of the time, financial fraud is carried out by white-collared professionals who have advanced knowledge of financial transactions. Some of the world’s most celebrated financial crimes like the Steinhoff Saga and Enron could have been possibly been identified had XBRL been adopted.
Enron inflated its stock and morphed itself as one of the largest American buyers/sellers of natural gas but soon fell to its knees after a whistleblower turned the company in. Its investors were then left with worthless company stock and the company filed for bankruptcy.
As for Steinhoff, the reputed home and furnishing company crumbled when the CEO Markus Jooste, resigned leaving many skeletons out of the closet. It was reported that the company’s off-balance-sheet entities were allegedly used to inflate earnings and obscure losses. It then didn’t take long for the share price to plummet- from investment-grade blue-chip to penny stock overnight.
Had structured data been adopted, both these crimes could have been detected if not completely avoided; their tracks could have been traced right from the beginning.
2. Data Quality Issues and Inefficiency
Before the advent of XBRL, data had to be reported in unstructured formats such as PDF and HTML. Not only was this time-consuming, involving a number of fit-for-purpose staff; but also highly iterative and prone to errors too. Sometimes, there was no way to even identify mistakes, if any. A simple example could be totaling errors which could be present in financial reports when numbers reported do not add up correctly. This is clearly, a nightmare for filers! They would then be faced with a shameful display of inefficiencies or warnings by the regulator after which they will have to file their reports again. These inadequacies can easily be solved with the widespread adoption of the XBRL reporting standard.
3. Unavailability of transparent, clean data
Regulators today stress the continuous need for operational transparency. Data transparency is no longer a by-product but the main objective of the exercise. To achieve data transparency, companies will have to change how data is managed and used. Needless to say, XBRL is the answer to this snag too!
Slaying the Dragon
South Africa mandated XBRL reporting from July 2018 onwards. The Companies and Intellectual Property Commission (CIPC), the business registry in South Africa, has close to 1.8 million registered entities and receives company reports averaging 165 pages at least. For the regulator to manually analyze e-data is time that can be saved with electronic forms that can be accessed from a centralized location with XBRL.
Apart from the above, XBRL offers major benefits at all stages of business reporting and analysis. The benefits are seen in automation, cost-saving, faster, more reliable, and more accurate handling of data, improved analysis, and a better quality of information and decision-making. XBRL submission portals also greatly reduce the administrative burden and cost on businesses when they report financial information for regulatory compliance.
Consider it as an aspirin for the inevitable compliance headache.