Automating External and Internal Financial Reporting
October 31, 2011
The increasing interest in using software to automate financial reporting processes is largely the result of the "interactive data" mandate of the U.S. Securities and Exchange Commission, which requires companies to add eXtensible Business Reporting Language (XBRL) tags to their financial filings. Until the tagging mandate, almost all companies assembled their periodic filings manually from text files and spreadsheets stored on servers and/or passed around as e-mail attachments.
The SEC's mandate made it too time-consuming for companies to apply the full gamut of tags manually and still meet filing deadlines. Some companies have continued to assemble their periodic filings in the same way and use a third-party service to apply the appropriate XBRL tags to their financial statements. Others have purchased software that applies tags as part of an automated system for managing their close-to-file-and-report cycle (sometimes called "the extended close" or "the last mile of finance").
First and foremost, such software automates the XBRL tagging process. Equally important, it facilitates the assembly of the text and tables needed for these filings, manages this process more effectively, maintains an audit trail for control and all but eliminates the routine errors that can occur when there are multiple sources of data and data must be manually entered multiple times.
Automation reduces the considerable time and effort a company needs to spend preparing and reviewing these filings. And compared to using a third-party service for tagging, it gives a company greater control of the entire process and a more flexible schedule for preparing the filings (companies have to get the completed document to the tagging service by a deadline that is earlier than the SEC's).
XBRL Tagging Requirements Are Growing
Adding to the pressure on companies, a growing number of regulatory authorities also have adopted XBRL tagging requirements. Multinational companies (which have legal entities in more than one country) are finding that more of the jurisdictions in which they operate are requiring XBRL tagging. The SEC and other financial regulators (such as the FDIC in the U.S., the Bank of Japan, the UK's Her Majesty's Revenue and Customs) have XBRL tagging mandates because it facilitates their receipt and handling of data contained in the filings, reduces their cost of managing information and enables them to concentrate on achieving faster and more effective use of the data in the documents.
What's more, XBRL isn't just for financial market regulatory reporting. In July 2010 Australia adopted what it calls Standard Business Reporting, which is designed to reduce the reporting burden imposed on businesses by the country's federal and state governments by streamlining how companies submit business information. Essentially, the idea is to use XBRL tagging to enable a file-once/use-many approach. Rather than having to fill out and submit multiple paper forms to a variety of government entities, companies supply data using a single secure sign-on known as AUSkey. Although the data can be compiled manually, the objective is to have SBR-enabled software create and complete government forms directly from ERP or accounting software and other business systems. On the government side, federal, state and local governments are able to tap into a central database and get complete and up-to-the-minute information without employing legions of clerks to receive and process forms. Everyone benefits from the system.
Thus it's likely that XBRL will be adopted for many more uses where companies need to share information with government bodies and other corporations. As a standard, XBRL streamlines the process of acquiring the information without imposing rigid technology requirements. It makes it possible for one XBRL-enabled application to provide data that a completely different XBRL-enabled application can read and use. Better yet, people receiving the information can view it in whatever form they want. XBRL makes it possible for users to choose the method that's right for them, regardless of how the sender may have formatted it. XBRL works because each piece of data is tagged and the file that contains the data also provides the user's XBRL-enabled software with the information it needs to interpret it accurately.
Automation for Financial Report Production
Software that automates the close-to-file-and-report cycle is useful in many ways. Innovators that purchase software to automate their XBRL tagging process also find it useful for assembling any regularly produced corporate document that combines text and data, especially if the process is collaborative and draws on multiple data sources. Finance departments can save time, complete documents sooner and substantially reduce errors in the process.
There are several characteristics of the process of assembling these sorts of periodic external filings that make them challenging.
- The data that goes into filings comes from multiple systems. To be sure, a company's consolidation software provides the bulk of the financial information that goes into the tables (such as the income statement and balance sheet), but other tables may source data from other enterprise systems (such as ERP for fixed assets) or even desktop spreadsheets ("leased facilities" or "goodwill and intangibles").
- The text portion of the filing document is produced and reviewed by many people in multiple departments for various purposes.
- The sections and basic composition of the filing are highly structured and must be consistent from period to period. As well, the format and structure of each individual section is essentially the same. However, the numbers referenced (such as financial and operational results) change as does the commentary.
- When financial data is presented in a shortened form (in thousands or millions of currency units, for example), rounding must adhere to a specific convention.
- Numbers referenced in the text commentary must agree with what is in the tables, but these often change over the course of the drafting period, sometimes frequently and even late in the process.
A software application designed to automate and support the process of creating filing documents can help reduce the amount of time and effort necessary to produce the final result. It does so by establishing a repository of record for the text and data, automating the compilation of the document including the tabular data and individual text sections, using workflows to manage the process and applying controls and audit features. The software enables corporations to achieve substantially greater efficiency as well as tighter and more consistent control over the process. It reduces the risks inherent in spreadsheet-based processes through better control of data.
An integrated, automated process reduces the risk that mistakes will get past even the multiple levels of review. Applications that have an audit trail capability add another level of control and oversight. Compared to using a service provider, the integrated approach makes it far easier for a company to incorporate last minute changes to "the numbers," which are not uncommon. Moreover, automating the close-to-publish process provides members of the board of directors and other external parties with more time to review the documents before the mandated filing deadline. It gives time back to the finance and legal departments now spent preparing and checking the document that they can apply to more valuable efforts.
In addition to the benefits gained by using the automated XBRL tagging capabilities, software designed to automate the close-to-report cycle can support the creation of a range of documents that aren't tagged. Here are a few examples:
- external financial statements that are filed with regulatory agencies (financial market or otherwise) that do not require XBRL tagging, such as for insurance commissioners or to national authorities that compile a business census;
- external financial statements combining text narratives (a management discussion and analysis, for example) and numerical data provided to lenders or lien holders;
- nonfinancial regulatory filings (for safety, environmental and land use purposes, to name three)
- Board books, the detailed internal reports presented to the board of directors that combine data and text.
All of the uses listed above have some similar process and technology characteristics. These include one or more of the following:
- The document that is produced must be in a consistent format by convention or statute. This format includes the information contained in the document, its order, section headings, wording, paragraph styles and even typeface.
- The text portion is created and reviewed by multiple individuals.
- The document's tables are assembled from data from multiple source systems and/or desktop spreadsheets.
- There are references to tabular data in the text narratives, including footnotes.
- Considerable time is spent checking the document to ensure that it conforms to formatting requirements, includes all required data, that the data is consistent with the source systems, that references to data in the text portion are consistent and that rounding of totals follows the specified rules or conventions.
- XBRL tagging is required.
Applications that have process management capabilities also can cut the administrative workload for those that "own" the filing document and reduce the possibility of delayed hand-offs and missed deadlines. Software with document management features enable administrators to track the progress of the individual components, automate reminders to individuals as deadlines approach and generate alerts if they miss start or completion times.
The SEC's XBRL tagging mandate is forcing companies that have to file financial documents with the agency to find a way to meet this requirement. An increasing number of companies will find that tagging their own documents rather than using a third-party service makes the most sense for reasons related to schedule, cost and control. In so doing, they are going to find that using automation to manage the assembly of these and other structured periodic documents provides additional value to their company by enabling faster assembly of these documents and allowing the highly skilled people involved in the process to spend their time on more valuable tasks. XBRL tagging mandates are growing worldwide. Companies must find the most cost-effective means of dealing with these requirements. Software to automate the process will be an important part of the solution.
Robert Kugel is a senior vice president at Ventana Research, where heads up the Finance practice. He is a regular contributor to Business Finance.