Sunday, June 15, 2003

XBRL and Democracy. Seems like one of the wishes on my list has come true, thanks to the fine efforts of others.  I have long wished for an open accounting format, one that the government requires companies to use.  XBRL is an effort that's being developed by around 30 large companies.  I think it's something of a silver bullet for a lot of the problems that face the markets (and society) today.  Here's why. Easy access to raw information.  It's imperative that we bring more analytical viewpoints to bear on the market.  The best way to do this is to widely disseminate the information.  The problem is that the glossies available from companies don't tell you anything about that company's real finances...you need to get into the nitty-gritty to understand it. The reason you need to get into that kind of depth is that accountants lie.  It's as simple as that.  They're given a mission, told to accomplish it, and they'll bend or break whatever rule they have to, to make it happen.  Sad but true. The raw information needs to be available. Distributed Analysis.  We should require companies to disclose this information at a published web address.  If they do not have one of their own, the SEC will publish this information for them.  In fact, have the SEC keep the "signed" version of all this data.  Once it's available on the web, we enable thousands of armchair analysts to keep track of what's going on. Unification == Tools.  By unifying and simplifying the data format, we enable analysis tool writers to pull in much larger swaths of data.  This will lead directly to more clarity.  Trends and problems will be easier for investors to spot, and public analysis will become much more sophisticated. Bidirectional Verification. Once companies on both sides of a transaction are required to file XBRL, we can run automated verification of their statements, with relative ease.  Financial "cycles", where dishonest CFOs try to create hard-to-follow financing loops that hide losses or inflate profits, can much more easily be detected.  There's a lot of hard science out there in graph theory-land that can lend itself to this kind of processing. Beyond what it can do for private companies, the same standards can, I believe, work wonders for our public accounting as well.  All governments, at all levels, should be required by federal law (if not constitutional law) to provide complete and accurate information in an XBRL-style format.  All the same benefits of transparency are then applied to the public sector. The composite flow graph between the public and private sector can be analyzed to provide leading indicator information for the Fed.  It can also be analyzed to detect fraud.  Government finances will be the subject of substantially more discourse, as the real (signed) information will truly, finally be available. "He said, she said" is the real financial problem our private and public institutions are facing.  The unfortunate abdication of ethics by the top of the accounting profession has lead directly to this.  We have no choice but to route around them; they are a failure. We should pass laws for this kind of transparency and semantically complete accounting information.  It is NOT enough to simply publish english reports on the web.  The correct structuring of this information is key to achieving the benefits I've outlined above. 6:41:26 PM