In Part 1, we looked at how the massive accounting industry had created so much complexity. The conclusion was that complexity arose due to the creation of separate reports for 3 different stakeholders – management, investors and regulators.

In this post we look at innovation in each of those areas related to XBRL. The concept is “create once, report many”. Create one set of accounts that can be used internally and externally with different views for different stakeholders.

It is a neat concept. If it happens in the real world, it will transform the accounting industry and be a major boost to productivity.

Read on to find out the reality today.

In Part 1, we looked at how the massive accounting industry had created so much complexity. The conclusion was that complexity arose due to the creation of separate reports for 3 different stakeholders – management, investors and regulators.

In this post we look at innovation in each of those areas related to XBRL. The concept is “create once, report many”. Create one set of accounts that can be used internally and externally with different views for different stakeholders.

It is a neat concept. If it happens in the real world, it will transform the accounting industry and be a major boost to productivity.

Read on to find out the reality today.

Financial Reporting Supply Chain

You know that book you just bought on Amazon? You got the book via the physical supply chain. But that order and millions of others travels through a financial reporting supply chain that looks like this:

Ah, if only creating systems was as easy as drawing slides in PPT! The reality today is very different. At each hand-off point different specialists recreate the numbers in their own systems – massive duplication of effort and a lot of “error traps”.

Let’s look at a key hand-off – to external shareholders.

Play # 1: Investors

This is where the action is today because of the SEC XBRL Mandate. The story is simple. If you are a public company you have to report in XBRL format. (Some companies have to do it now, some will have to do it in future, the timeline is based on size of company).

There are two ways for companies to look at this:

1. Ugh, just another regulatory chore.

2. This is the prod we needed to do what was sensible anyway.

Some companies are taking the latter approach. They are seeing the triple play benefit. For a multinational company that has to report to regulators in multiple countries, standardization around XBRL is way more than keeping the SEC happy.

Play # 2: Regulators

Go to XBRLPlanet.org and you see a Google map with all the countries that are adopting XBRL at the regulatory level. Drill down to one, the UK. You will see:

- the tax man wants filings in XBRL

- Companies Registrar: every company has to file annually in – you guessed it – XBRL format

- Banking Supervisor: if your company is a Bank, the Bank of England wants to know what you are doing and their systems want it in XBRL format.

- Securities Regulator: Financial Services Authority UK is their version of SEC and they want it in XBRL.

You will see that same story in many other countries. Australia and Netherlands are two leading edge adopters. But most countries are doing something with XBRL at the regulatory level.

Now be a fly on the wall of meeting between the CFO of a multinational company and their ERP vendor. XBRL will be high on that agenda. It has to be. It is mandatory. That is what regulators do – they mandate.

Of course, you can still cobble together a system for each of these regulators in each of these countries. Each country has their own CFO and specialists in each of those regulatory domains. They can take data from their ERP systems and feed it into specialist XBRL centric reporting systems.

That is how the early systems will roll out.

But eventually the XBRL semantic standards have to flow back up the financial reporting supply chain. This is where XBRL meets the booming market for Business Intelligence.

Play # 3: Business Intelligence

We used to call the internal reporting MIS – Management Information Systems. That term seems a tad out of date now. We now call it Business Intelligence (BI). It is a booming market, growing healthily through the recession. IBM, which has its finger on the enterprise pulse, is investing heavily in Business Intelligence.

According to Gartner:

“The worldwide appetite for BI platforms, analytic applications and performance management software in 2008 increased 21.7% on the previous year, from $7.2 billion to $8.8 billion.”

That is big money. And key to it will be a little extension to XBRL called XBRL GL for Global Ledger.

According to XBRL.org:

“The Global Ledger Taxonomy is intended to enable the efficient handling of financial and business information contained within an organisation. Often this is scattered across disparate accounting systems. XBRL allows it to be brought together, analysed and used in a highly cost-effective way, overcoming the inefficiencies of different accounting systems or approaches.

The XBRL Global Ledger taxonomy allows the representation of anything that is found in a chart of accounts, journal entries or historical transactions, financial and non-financial. It does not require a standardised chart of accounts to gather information, but it can be used to tie legacy charts of accounts and accounting detail to a standardised chart of accounts to improve communications within a business.”

Like any standard, this is not necesarily good news for the incumbent enterprise software vendors. Standards make lock-in harder. This is the semantic glue that enables enterprise systems to talk to each other:

Once the data is in a common standard such as XBRL GL, commodity search engines can be used for Business Intelligence:

The big ERP vendors prefer to get all their clients to buy into suites where they supply all the pieces. So normally we could expect to see semantic standards such as XBRL GL “more honored in the breach than the observance“.

It is different this time, because the upstream reporting requirements are mandated by regulators. So the ERP vendors will have to build in the standards.

In Part 3, we will look at the vendors that are innovating around this opportunity.

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CONVERT BREAKS: __default__

Financial Reporting Supply Chain

You know that book you just bought on Amazon? You got the book via the physical supply chain. But that order and millions of others travels through a financial reporting supply chain that looks like this:

Ah, if only creating systems was as easy as drawing slides in PPT! The reality today is very different. At each hand-off point different specialists recreate the numbers in their own systems – massive duplication of effort and a lot of “error traps”.

Let’s look at a key hand-off – to external shareholders.

Play # 1: Investors

This is where the action is today because of the SEC XBRL Mandate. The story is simple. If you are a public company you have to report in XBRL format. (Some companies have to do it now, some will have to do it in future, the timeline is based on size of company).

There are two ways for companies to look at this:

1. Ugh, just another regulatory chore.

2. This is the prod we needed to do what was sensible anyway.

Some companies are taking the latter approach. They are seeing the triple play benefit. For a multinational company that has to report to regulators in multiple countries, standardization around XBRL is way more than keeping the SEC happy.

Play # 2: Regulators

Go to XBRLPlanet.org and you see a Google map with all the countries that are adopting XBRL at the regulatory level. Drill down to one, the UK. You will see:

- the tax man wants filings in XBRL

- Companies Registrar: every company has to file annually in – you guessed it – XBRL format

- Banking Supervisor: if your company is a Bank, the Bank of England wants to know what you are doing and their systems want it in XBRL format.

- Securities Regulator: Financial Services Authority UK is their version of SEC and they want it in XBRL.

You will see that same story in many other countries. Australia and Netherlands are two leading edge adopters. But most countries are doing something with XBRL at the regulatory level.

Now be a fly on the wall of meeting between the CFO of a multinational company and their ERP vendor. XBRL will be high on that agenda. It has to be. It is mandatory. That is what regulators do – they mandate.

Of course, you can still cobble together a system for each of these regulators in each of these countries. Each country has their own CFO and specialists in each of those regulatory domains. They can take data from their ERP systems and feed it into specialist XBRL centric reporting systems.

That is how the early systems will roll out.

But eventually the XBRL semantic standards have to flow back up the financial reporting supply chain. This is where XBRL meets the booming market for Business Intelligence.

Play # 3: Business Intelligence

We used to call the internal reporting MIS – Management Information Systems. That term seems a tad out of date now. We now call it Business Intelligence (BI). It is a booming market, growing healthily through the recession. IBM, which has its finger on the enterprise pulse, is investing heavily in Business Intelligence.

According to Gartner:

“The worldwide appetite for BI platforms, analytic applications and performance management software in 2008 increased 21.7% on the previous year, from $7.2 billion to $8.8 billion.”

That is big money. And key to it will be a little extension to XBRL called XBRL GL for Global Ledger.

According to XBRL.org:

“The Global Ledger Taxonomy is intended to enable the efficient handling of financial and business information contained within an organisation. Often this is scattered across disparate accounting systems. XBRL allows it to be brought together, analysed and used in a highly cost-effective way, overcoming the inefficiencies of different accounting systems or approaches.

The XBRL Global Ledger taxonomy allows the representation of anything that is found in a chart of accounts, journal entries or historical transactions, financial and non-financial. It does not require a standardised chart of accounts to gather information, but it can be used to tie legacy charts of accounts and accounting detail to a standardised chart of accounts to improve communications within a business.”

Like any standard, this is not necesarily good news for the incumbent enterprise software vendors. Standards make lock-in harder. This is the semantic glue that enables enterprise systems to talk to each other:

Once the data is in a common standard such as XBRL GL, commodity search engines can be used for Business Intelligence:

The big ERP vendors prefer to get all their clients to buy into suites where they supply all the pieces. So normally we could expect to see semantic standards such as XBRL GL “more honored in the breach than the observance“.

It is different this time, because the upstream reporting requirements are mandated by regulators. So the ERP vendors will have to build in the standards.

In Part 3, we will look at the vendors that are innovating around this opportunity.

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