Will Interactive Data Survive at SEC Without Chris Cox?

Question: If Securities and Exchange Commission Chairman Christopher Cox replaces Alberto Gonzales as Attorney General, what happens to the SEC's planned adoption of interactive data (aka "eXtensible Business Reporting Language or XBRL") for public company reporting in the US?

Last week, we asked several senior honchos in the XBRL community that question. The responses were revealing. "Please don't say that again," moaned one tagged-data evangelista, who just wrote a $1 million check to support the private sector effort behind the SEC project. Indeed, we hear that the "big five" global accounting firms, joined by some equally big names from the technology world, have anted up $1 million apiece for the next round of technology adoption roulette.

The loss of Cox at SEC, while good for the national interest, could be a significant setback for the XBRL adoption effort. The former prosecutor and member of Congress shares the vision of using new technology to benefit investors and other interested parties served by the SEC. Cox has been willing to put his considerable personal credibility on the line for the new and still unproven technology for making all SEC disclosures machine readable, arguably making him the key ingredient for seeing XBRL through to full adoption for public company reporting.

But in terms of Cox's political career, perhaps now is a good time to exit the SEC. He and other SEC commissioners are increasingly criticized for being overly pro-business in relation to the Enron scandal and other events, this as the wrangle over executive compensation shows no signs of abating. But just wait until the officers and shareholders of public companies begin to understand the full implications of the SEC's tagged data effort, at least as currently envisioned.

CFOs who are paying attention begin to understand that the adoption of XBRL is not just about financial reporting or "FR," as its known among the audit world cogniscienti. In addition to FR, XBRL also is expanding to define and structure non-public, general ledger or "GL" level financial reporting, effectively connecting the XBRL data tagging effort to the larger internal controls compliance requirements of Sarbanes-Oxley. Seemingly unaware of the political risks, SEC staff and members of the accounting community are pushing to turn XBRL into another tool to verify the adequacy of internal controls under Section 404 of SOX.

One key player involved with the SEC's XBRL development effort tells The IRA that the level of complexity being brought to the definition of footnotes to be used in XBRL extends deep into the world of non-public data. The veteran technologist points to the example of a single XBRL footnote for describing plant & equipment containing hundreds of elements, a level of detail that goes far beyond that needed to support SEC disclosure.

Another official involved with the effort worries that the level of complexity currently targeted by the SEC using XBRL will play into the hands of critics trying to kill the effort.

"The degree of difficulty in preparing a financial statement using the XBRL footnote definitions will force companies to seek outside help," the official laments. "Public companies will need to hire armies of consultants to prepare XBRL-tagged financials, at least initially, creating the potential for a serious political backlash in Washington."

The same insider worries that this fact will give all SEC filers and their allies in Washington a powerful "regulatory burden" argument to use against adoption of interactive data by the SEC.

Without the vision and political savvy of Chairman Cox to negotiate the divergent interests of filers, professional advisers and regulators, the XBRL effort may not be implemented as currently envisioned. No other SEC commissioner has shown interest in pursuing the adoption of interactive data at anything approaching the level of energy and commitment of Cox. Factor in the inevitable showdown between public company CFOs and the accounting profession regarding the extension of structured data definitions to the GL reporting layer and the need for a leader of Cox's stature at SEC becomes apparent.

Another large group of interested observers who would not be sad to see Cox leave for DOJ is the Wall Street data dissemination community, starting with big names such as Bloomberg, Reuters (NASDAQ:RTRSY), Standard & Poors, Thompson Corp (NYSE:TOC), FactSet (NYSE:FDS) and Dow Jones & Co (NYSE:DJ), and ranging down to smaller players such as EDGAR Online (NASDAQ:EDGR), 10-K Wizard and IPREO.

The SEC's interactive data initiative and the larger evolution of interactive data as the operative norm for financial markets generally threatens to take some big chunks out of of all of these business models. The disseminators of SEC data, for example, currently have a de facto monopoly on the commercial use of this public information. As we've noted in past comments, the SEC's antiquated data dissemination system gives big institutional investors a considerable advantage over individual investors in terms of accessing this information in real time.

By making SEC filings publicly available in machine readable form, free of limitations on use and redistribution, and available in real time to all investors, interactive data could significantly change the way US markets operate. A cynic might say that the big corporate interests behind the SEC's adoption of interactive data want access to company financial data without paying millions of dollars each year in data fees, but the business process and risk management benefits for large enterprises are actually more compelling. Trouble is, the greater value for end-users imparted by all of the flavors of XML comes at the expense of traditional intermediaries.

The proposed merger between RTRSY and TOC is just the latest act in a several decade-long process of consolidation in the financial data industry, a process that Cox's interactive data initiative and similar developments in other global markets could greatly accelerate. As exchanges, clearing houses and regulators slowly migrate to open source data gathering and dissemination technologies, the technical stranglehold of the traditional data aggregators is being broken, much to the advantage of end users and portals such as Yahoo! (NASDAQ: YHOO) and Google (NASDAQ:GOOG).

In an interactive data future, company financials and market prices essentially will be "free" in terms of direct costs, but will still carry a significant indirect cost in terms of hosting and distilling the data for end-use. Individuals will be able to access the data in real time via public portals like the SEC's EDGAR or private portals such as YHOO, while enterprise data users will aggregate and host such data internally, displacing the role of the large data providers. Is there anyone who doubts that YHOO and GOOG will make "as filed," machine readable financial data from the SEC available for free via the World Wide Web?

Large users of financial data may actually end up paying more to gather, distil and host data internally than they pay today to data vendors, but benefits like escaping restrictions on use and gaining the right to redistribute the data to clients will more than offset the additional cost, especially for large Sell and Buy Side firms. The strong and growing demand for access to "as filed" SEC data for forensic and due diligence tasks is one reason why IRA develops tools such as our SEC Catalog to read existing public company filings, including the footnotes.

If the SEC Chairman does get the call from the White House to move to the DOJ, the Bush Administration will need to make sure that it picks a similarly technology oriented replacement to continue the task of modernizing the SEC's internal and external data collection and dissemination systems. As we've noted before, the customer here is not just investors or public companies, but the US economy.

But we suspect that the momentum behind the adoption of XML-based languages for gathering and transporting all types of data -- enabling what we call machine-to-machine or "M2M" data transmission -- is ultimately irresistible, regardless of who runs the SEC. Indeed, we expect to see public companies in the US and in other global markets using various interactive data formats to meet their regulatory disclosure requirements well before Christopher Cox makes his own run for the White House. Stay tuned.

Comments

[Kris Tuttle:]

So 100,000 people are taking spreadsheet data and putting into documents to be filed and another 100,000 people are taking the documents and building spreadsheets with links back to the source. Reminds me of when every company had to hire data entry staff to input information from customer forms.

XBRL is a bear but there has to be some kind of solution. The current process is slow, expensive and prone to error.

2008 Jun 02 02:33 PM