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A few years from now, don't be surprised if some blogger in his boxer shorts brings down the next Enron.
That may seem far-fetched, but hold off on the laughter.
That's because individual investors in the U.S. will soon move another step closer to a brave new world of democratized financial information that will put powerful analytical tools on their desktops.
On May 14, the Securities and Exchange Commission will announce the next steps for making all companies report financials using a software programming language called XBRL.
XBRL will eventually put a far superior version of Wall Street's high-priced tools in the hands of regular investors for free and maybe even help them uncover the next accounting scandal.
XBRL will bring such a revolution to investment analysis that any Sherlock Holmes who X-rays financials for clues on a company's health needs to learn about it -- and push the SEC to make companies adopt it as soon as possible.
The basics
The idea behind XBRL, short for eXtensible Business Reporting Language, is simple: Instead of treating numbers in financial reports like dumb text on a page, it assigns a "bar code" tag to each number. So no matter what company you are looking at, the same tag will flag the figures for sales or gross margins in a master database at the SEC.Though the basics of XBRL are simple, the implications are profound -- and not only for investors and regulators. Police in Spain are using XBRL to track money laundering, and environmentalists can use it to rank companies based on their impact on climate change.
That's the good news.
The bad news is the U.S. is woefully behind in making companies report financials coded with XBRL, and Congress needs to goose regulators to make them catch up. China already requires XBRL for companies listed on its exchanges, and XBRL is widely used in Japan, Europe and elsewhere.
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The SEC should bring XBRL to all companies within two to three years. That's way too slow, given how cheap and easy it is to file financials using XBRL and how much it would help investors. Every day that XBRL is not fully implemented is another day in which Wall Street insider sand hedge funds have a big, unnecessary advantage over the little guy.
Here's how XBRL will revolutionize the world for investors.
Lord of the numbers
Free XBRL data streamed in real time to computer desktops -- or "interactive data," as the SEC calls it -- will let investors slice and dice numbers, create analytical ratios and perform cross-company comparisons like never before."For the first time, instantly, you'll be able to compare any item of financial information from thousands of companies around the world," SEC Chairman Christopher Cox said in a prepared statement to MSN Money. "The light that this will shed on stocks, bonds, and mutual funds will make investing choices far more understandable for every American. Interactive data is to financial reporting what Gutenberg's moveable type was to printing."
Suppose you wanted to know which airline is the most vulnerable to rising fuel costs because it is spending the highest amount on fuel per dollar earned in ticket sales. Using XBRL tags, you could create an analysis that looks across the airline industry in an instant.
That's how at least one client uses XBRL feeds provided by Edgar Online (EDGR, news, msgs), a company that already offers a private XBRL database for a fee of a few thousand dollars a year.
"It saves them the time of going to all the filings of all the airlines, so they can do those comparisons quickly," says Sue Childs, who heads up marketing for Edgar Online.
In another example, you could quickly compare inventory levels at a company against its competitors to see whether it looks vulnerable because goods are stacking up in warehouses -- even if sales growth appears rosy because of some accounting gimmickry.
"You can slice and dice numbers, move things around and do comparisons on a detailed level across industries or any group of companies that you set up," says Charles Hoffman, an accountant who also plays with software and who thought up the idea of XBRL a decade ago. "This is something that has been closed to individual investors because it cost so much money. But they will have the same access that any analyst has. Basically, XBRL levels the playing field," says Hoffman, who now works for UBmatrix, which helps companies implement XBRL.
"This is content that has been stuck on the page like a clay mark on tablet," agrees David Blaszkowsky, the SEC's head of interactive disclosure. "The idea is to liberate it from the page and make it usable in a way that you cannot today."
More numbers
Right now, investors with a budget can do much of this kind of analysis by subscribing to the financial-database services of companies such as Thomson Reuters (TRI, news, msgs) or Compustat, a division of McGraw-Hill (MHP, news, msgs). As good as these services are, they have several shortcomings compared with what will be available via XBRL feeds.First off, these services provide only 200 to 400 data points from corporate financials, estimates Mike Willis, a partner at PricewaterhouseCoopers and the founding chairman of XBRL International. In contrast, a typical annual report contains many more numbers and anywhere from 3,500 to 5,000 data points, concepts expressed through words and images, he says. All of them will be accessible through XBRL tags.
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