January 22, 2006

Lifting the Lid: New Accounting Technology Gets Cold Shoulder

SAN JOSE, Calif -- A revolutionary technology that could standardize the way corporate results are reported and speed up trading decisions is facing a big problem -- few people are interested.

The technology, known as XBRL or Extensible Business Reporting Language, has been around for about eight years and is touted as a development as important for financial reporting as the bar code was for retail pricing. It works by labeling financial information with computer-readable tags so regulators, investors, managers and other stakeholders can make apples-to-apples comparisons in financial statements.

XBRL has the support of about 400 organizations, including some of the biggest players on Wall Street and in Silicon Valley, as well as a ringing endorsement from U.S. Securities and Exchange Commission chairman Christopher Cox.

But despite five years of marketing, few companies are using the technology and investors are not exactly clamoring for it. Only about 200 people showed up at an XBRL convention this week in San Jose, where it was clear much of the investment community and corporate America are giving the technology the cold shoulder.

The attitude among the business community is 'if it ain't broke, don't fix it', said Michelle Savage, vice president of investor relations services for PR Newswire and chairwoman of the XBRL-US Adoption Working Group.

Cox says the development of XBRL is one of his top priorities this year, but under a voluntary filing program, the commission has received only 22 XBRL filings from nine companies. With this in mind, the SEC said earlier this month it would expedite the review of registration statements and annual reports for companies that use XBRL. It will also alert companies when it plans a review.

But critics say the technology is too complicated and would require expensive consulting from the very companies that back it. It also lacks simple-to-use software that would make the difference for some.

"It's a concept that requires a bit of an investment of mental energy to understand what it is going to deliver back to you," said Dan Roberts of accounting firm Grant Thornton and chairman of the XBRL-US steering committee.

"Then you have to make a commitment to invest in either systems or people to be able to consume that data. If the data's not there to consume, you're probably not going to make a major investment."

To make matters worse, the accounting departments of U.S. companies have been tied up with the requirements of the Sarbanes-Oxley corporate reforms introduced in 2002 after a spate of corporate scandals, as well as new stock option expensing rules.

"Companies that are impacted and can see the immediate benefit of XBRL have been wrestling with higher priority things, such as Sarbanes-Oxley ... that was the fire closest to their feet," said Wayne Harding of Rivet Software, a company that provides software for XBRL.

But XBRL's backers, which include Microsoft Corp., Morgan Stanley and Reuters Group Plc, say the system would simplify accounting systems. And instead of sifting through mountains of information, investors would be able to search for data instantly, or set up automatic trades based on earnings or cash flow results.

United Technologies Corp., the maker of Otis elevators, jet engines and heating and air conditioner systems, said this week that XBRL helped it simplify some of its accounting and it only cost about $35,000 to implement.

According to Morgan Stanley, financial statements in XBRL can reduce the four or five hours it takes analysts to update financial models and copy information to as little as 45 minutes.

And The Federal Deposit Insurance Corp., the first government agency to require XBRL, said this week the technology reduced the delay between the end of a quarter and the time it received its first report from a bank from several weeks to 16 hours.

"It's kind of hard to believe it went as smooth as it did," Jerry Russomano, deputy chief information officer at the FDIC, said at the XBRL conference this week.

Russomano said XBRL reduced staff work and the data received by the agency was cleaner.

"At some level it's a chicken or egg problem. You can't assume that all the analysts are going to get interested until they actually start seeing the data," said Corey Booth, chief information officer at the SEC.

Booth said the SEC raised a lot of interest after it offered incentives to participate, but investor demand is really what will make XBRL a success.

(Additional reporting by Joel Rothstein in Washington)