Be prepared for hard questions.
If Securities and Exchange Commission chairman Christopher Cox gets his wish and companies universally adopt XBRL to file their financial statements, investors and analysts will be asking CFOs tougher questions.
By using the XBRL programming language, which eliminates the need to rekey data into computer models and analysis tools, investors and analysts will be armed with real-time, easily digestible information about companies big and small. What’s more, the transition to XBRL will likely lead to more knowledgeable and inquisitive shareholders and analysts who will pepper earnings calls with hard-hitting questions, said Greg Adams, chief operating officer and CFO of EDGAR Online, who participated in the SEC’s Friday morning roundtable on interactive data and small companies.
During the roundtable, the panel — made up of corporate executives, investors, and analysts — promoted the benefits of XBRL, an Internet-language method of tagging financial data. They said it’s not as tough to use as it sounds, doesn’t cost as much as you’d think, and could lead to smaller companies gaining traction on Wall Street. At the same time, it could also encourage investors to want more.
“Use this opportunity to give investors something new,” said Deborah Allen Hewitt, a College of William & Mary professor and a member of the investment committee of the Virginia Retirement System (VRS). “Don’t just wrap the same type of data in a new technology. Use this as a chance to provide broader data about your company, and deeper data.” She asked that companies consider using XBRL to tag highly coveted, and closely held, data such as business-segment information, so investors get a better sense of how revenues and earnings are produced.
Hewitt thinks XBRL will help companies provide investors with more detailed, qualitative data — that’s the only way her medium-size pension fund, which manages a $50 billion portfolio, would start to pay more attention to small-cap companies. Currently, small caps make up only 8 percent of the VRS fund’s assets, and the pension managers are unlikely to look at companies that generate less than $50 million in revenue and trade less than 50,000 shares daily. To take on such liquidity risk, fund managers will want more detailed information about small-company fundamentals, noted Hewitt.
In addition, companies using XBRL will find that it is more difficult to hide, for example, restatements or other items typically buried “in the footnotes of a 500-page document,” said Richard Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics. Indeed, he agrees that XBRL will increase investor and analyst scrutiny.
Whalen reckons that once XBRL is adopted more broadly, financial-statement users will preset computer models to create financial highlight pages, peer and industry comparisons, or proprietary single-company metrics as soon as regulatory filings are released and the data is fed into their systems. Currently, for short-term analysis, users manually load highlight data from earnings releases into models, often ignoring EDGAR filings because it takes too long to sift through the static documents, explained Whalen.