Improving the technology of business reporting has been a priority during your tenure as chairman. One way you've focused on that is by simplifying disclosure and improving its delivery with interactive data in the form of XBRL (Extensible Business Reporting Language) -- an XML-based language. How is XBRL going to impact the average investor?
When you use the Internet, you're taking advantage of computer languages and codes such as HTML and XML, which operate in the background. You don't need to be a computer maven to shop online or to send an e-mail. With our emphasis on using XBRL for financial reporting, the SEC is working to bring the same level of interactivity and usefulness to investor reports that consumers are already experiencing across the Internet. Hopefully, you'll never hear of XBRL, but you'll soon take advantage of its enormous power.
There's no doubt that what we're planning will have a dramatic impact on how ordinary investors can obtain and use financial information.
Currently, there are essentially two choices if you wish to obtain financial information from public companies:
- You can pore over dense, complicated disclosure documents in their raw "as-filed" form, searching for whatever it is you need.
If you're lucky enough to find what you're looking for, you'll then need to re-type that information into a spreadsheet or other software in order to use it for even basic analysis or comparisons. This is a labor-intensive process that's burdensome when reviewing a single company's information, and even more difficult when comparing multiple companies.
- Instead of the do-it-yourself approach, you can use a third-party data feed.
Essentially, you pay a third party firm to scour the original disclosure documents and re-key the data into their own proprietary format. They sell you the results, which you can then use in your own computer software. Not surprisingly, very few retail customers bother with this expensive approach. What's more, this process is prone to error, because of the extensive re-keyboarding of data that is necessary. Many third parties also re-categorize the information in a manner that is not an exact representation of the original data disclosed by the company.
With XBRL, investors will have instant access to companies' disclosure data in a format that's very user-friendly. Within seconds of information being filed with the SEC, investors will be able to get the specific data they need, and organize it in almost any way they like for their own personalized analysis. What we're calling "interactive data" will make getting financial information about companies and funds fast, easy and flexible.
You've said before that complexity can be the enemy when it comes to investor protection. How does increased transparency in financial reporting and accounting procedures protect investors and prevent fraud?
When investors are buried in paper, they simply can't use the information that's being provided. They have a right not only to all the information they need to make financial decisions, but also to getting it in a form they can use. If a customer orders a steak, you don't give her a cow and a meat cleaver. The SEC wants to be sure investors have access to information that's clearly written, readily understandable and easily searchable.
Complexity in accounting and financial reporting has developed over decades, in part because the real world that it seeks to depict is growing increasingly complex. Putting things in simple terms, therefore, is not a simple exercise. It's hard work. But the effort is worthwhile, because it can save hundreds of thousands of hours for those who have to read financial disclosures and make sense of them. And it can also help prevent what happened in the notorious Enron case: Cleverly disguised fraud was hidden in a thicket of dense disclosure. Complexity is the enemy of transparency.
Insisting on plain English and understandable accounting will increase the overall usefulness of financial information reported to investors. That's why the SEC is working with the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, and others to develop less complex and more workable standards and rules.
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