XBRL and Auditing

“Call Report data transparency, quality and validation are top priorities for the FDIC,” Martin J. Gruenberg, FDIC Vice Chairman, explained at the 14th Annual XBRL International Conference in Philadelphia, Penn. in December 2006. Although the auditing of public companies differs from how the financial health of banks and similar financial institutions is examined, both confront many of the same issues regarding accuracy, data collection from multiple sources and a variety of end-users, including the public, relying on the information provided.

“Incorrect data can have significant safety and soundness implications. Incorrect data can provide a false view of the reporting institution and reflect poorly on management and internal controls, making the bank appear risky. Mistakes can distort aggregate statistics,” Gruenberg explained. “Before the FDIC adopted XBRL, the data collection and validation process was cumbersome and time-consuming. Multiple file formats and inefficient legacy systems required substantial manual effort and resulted in significant delays. For example, up to 30 percent of reporting institutions submitted data that were not mathematically consistent. FDIC analysts had to spend up to three weeks manually checking data quality following submission. The process for finding anomalies involved phoning, e-mailing and faxing bankers to ask them to clarify or resubmit their data.”

Eric Cohen, XBRL Global Technical Leader with PricewaterhouseCoopers (PwC) translated it this way for Enterprise Systems: “The goal [is] a seamless audit trail for financial reporting, tax reporting, statutory and statistical reporting, and management reporting. It’s not just about accounting and tax, but also about operational and business information.”

Christopher Cox, Chairman of the Securities and Exchange Commission (SEC) agrees, telling the audience in Philadelphia “From our vantage point at the SEC, it’s also clear that interactive data will significantly improve audit quality.”

The United States, however, appears caught between two significant movements. Not only are users calling for more useful and timely information, a call which would appear to be satisfied by the adoption of eXtesible Business Reporting Language (XBRL), they are also calling for less complex accounting rules. The convergence of these movements, and the increasingly international nature of both businesses and markets, is posing a special challenge to the development of XBRL taxonomies based on U.S. Generally Accepted Accounting Principles (GAAP). Fortunately, the efforts do not need to be conducted separately. In fact, conducting both simultaneously can yield significant benefits to both efforts.

“The job of completing the XBRL taxonomies for U.S. GAAP is already finished for many industries,” Chairman Cox told Conference attendees in Philadelphia. “And more that a year and a half ago, the staff of the Public Company Accounting Oversight Board recognized that the current U.S. GAAP taxonomies, because they were developed by a widely recognized group of experts using due process, meet the regulatory requirement of providing the ‘suitable and available criteria’ that auditors need to do their jobs.”

Indeed the role of auditing in the development of XBRL taxonomies and implementations is an international issue, not just an American one.

“XBRL and the credibility of financial reporting and auditing – is an issue that is directly related to one of the IFAC’s key goals: enhancing the credibility of financial reporting and auditing across all sectors of the economy – public and private, for profit and not-for-profit, listed and unlisted,” Ian Ball, Chief Executive of the International Federation of Accountants (IFAC) said.

It is Ball’s view that the international auditing community will experience several benefits from the widespread adoption and implementation of XBRL. These benefits include:

  • Enhanced credibility
  • Improved transparency
  • Streamlined supply chain
  • More accessible data mining

He also admits that XBRL poses challenges as well as offering benefits to auditors. The first challenge auditors face is education, their own and that of others along the financial information supply chain. The adoption and implementation of XBRL needs to be carefully managed and controlled with all stakeholders, including managers, regulators and auditors, needing to understand the potential risks of automating financial information and how these risks might be mitigated. Since the current assurance concept is based on a “paper trail” it is highly likely that interactive data will require a new assurance paradigm, possibly one consisting of multiple levels. The interaction of XBRL with various and multiple government entities also poses potential problems.

All of these challenges must be overcome if XBRL is to realize its promise as a financial reporting revolution. Or, as Ball concluded: “Ultimately, XBRL will underpin improvements across the spectrum of financial reporting. Users’ decisions will evolve gradually to depend on ready access to financial information in XBRL form. Initially, reporting entities providing data to capital markets in the format will stand out. Over time, use of XBRL will become and operational and financial reporting necessity. Together with all of you, and the accounting profession’s commitment to integrity in financial reporting, we can take further steps towards the important goal of enhancing the credibility of financial statements.”

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