Challenges in Quantitative Management

At last, I got round to finishing Challenges in Quantitative Equity Management, a freely available CFA Institute Research Foundation monograph by Fabozzi, Focardi and Jonas. The book is based on surveys and conversations with practitioners of quant management, capturing the collapse in industry outperformance following the summer of 2007. I was particularly interested to find out whether there would be any attention paid to XBRL, which I suspect should be quite relevant to quant management, but it wasn't even mentioned throughout the book. That's not to say it is considered to be irrelevant: Too many people using similar models and the same data was considered to be one of the major challenges to the quant approach going forward. 

Nevertheless, it is a worth while read for a number of thoughts and discussions, such as the distinction between quantitative and judgmental investment processes, the style correlation of quant management (which tend to be value-driven), the negative correlation between fund capacity and alpha-generation and, last but not least, the adaptive markets hypothesis as opposed to the efficient markets hypothesis. 

Optimised reporting with XBRL

Together with Denis Füglistaler of Infinys, I wrote an article (abstract - in German) for IRZ. Thankfully, the editor has dedicated a friendly editorial to our article.

XBRL for Investment Professionals

The CFA Institute, EFFAS and the IASC Foundation are hosting the first XBRL conference for Investment Professionals in London on 26 September 2008. Thanks to the recent rule proposals of the US SEC applicable to corporate filers and mutual funds, there should be a lot of interest in that topic. Registration is now open!

XBRL in Plain English

A nicely done video on the benefits of XBRL - but it may promise a bit more than accounting standards can deliver. Worth watching nonetheless!

XBRL becomes mandatory in US

According to this CFO.com story, the long awaited US SEC decision has finally materialised today: XBRL disclosures are to become mandatory in the US for firms with a market capitalisation larger than USD 5 bio from the closing of the current fiscal year. All other firms will have to follow suit by 2010 (first XBRL filings). Non-US domiciled firms listed on US markets and reporting using IFRS will have to start disclosing in XBRL starting 2011. This is quite an ambitious time frame, indeed, but we don't complain as the use of interactive data by investors can only take off once the data is actually available.

Update: Here is the official press release.

Finance 2.0

I've had the great pleasure and privilege of presenting the CFA Institute Comprehensive Business Reporting Modell as well as its position on XBRL to the 17th XBRL Conference in Eindhoven. Needless to say that this was also a great opportunity to share & discuss some thoughts about the future path of financial research with participants. 

The slides of my presentation are available here, but I'm already in the process of reworking them, taking on board new ideas from the peer discussions. My thinking goes along the lines that XBRL will be a disruptive force in finance eventually, but not in the immediate future as data intermediaries are well positioned to leverage their incumbent interfaces with the cheaper and faster fundamental information. For them, XBRL will be sustaining - for a while. That also means that most professional investors - at least those on the sell side - will not care much about XBRL since they are receiving the goods indirectly via improved third party providers. Disruption will come to them by other means, however ... I am looking forward to this conference in the fall, which should firmly establish the debate among investment professionals.

No benefits to CFOs?

We've been talking about XBRL scepticism earlier, concluding that the instances referred to were not to be taken overly seriously.

This CFO.com story (again!) is different, though, even though it has its shortcomings. Where it is probably spot-on is in the statement that preparers presently have little to no benefits from the implementation of XBRL as there are no tested ERP applications that truly integrate XBRL at this point. So all (complex) XBRL preparation will be done in a bolt-on fashion.

This is probably true for the time being, until the SAPs and Oracles of this world actually integrate XBRL GL into their products fully. On the other hand, the integrated approach of XBRL adoption is usually referred to as the most expensive one, thus the intermediate bolt-on solution will result in little additional expenditures.

The story gets much more disputable where it goes into the benefits for analysts. It quotes the FEI as poking holes in the other purported benefits of XBRL by insinuating that "The organization predicts XBRL could instead lead to analysts receiving excess information." This is an undue truncation of an admittedly complex, yet valid point made in the FEI's comment letter:

We believe we may be creating a situation where preparers will be providing more information than the analysts want (versus key information/data), later than when they need it (to update their models), thereby missing the real window of opportunity which is likely when a company releases its earnings for the quarter. Strategically, the long-term direction of this project needs to be determined and communicated ? is it to upgrade the manner is which data is filed with the SEC or is it to provide (key) information to investors and analysts for their use?

Assurance cost and disclosure neutrality

Here is the cross-post of a short entry that I wrote for the Data Interactive Blog.

Skepticism about XBRL seems to abound lately, although most of it is easily soothed. One issue stands out that may raise the hackles of preparers particularly: If XBRL were to have the same costs as Sarbanes-Oxley Section 404 implementation because of independent assurance, as one Reuters story suggests, that would be a big No-No indeed.

However, looking at the Committee?s draft memo (page 75 and after), such dramatic headlines need to be taken with a ton of salt. Substantive assurance costs (if any) are likely to arise only if the production of XBRL formatted data were implemented in the least competent way imaginable, i.e., by means of what might be described as a parallel XBRL track of accounting. To assume that this is the default practice would not exactly reflect high expectations with regards to the professional competence of finance departments.

One of the basic tenets of XBRL disclosure is that it is in fact disclosure neutral, i.e., the numbers displayed in an XBRL instance document are identical to what is reported on (electronic) paper. For as long as XBRL filing is not the exclusively permitted way of filing, assurance of disclosure neutrality probably satisfies the needs of most users of financial statements. In a reasonably well structured accounting & auditing cycle, such assurance should come cheaply.

XBRL Skeptics (sic) Abound?

In evaluating the viability of any innovation, it is crucial to keep an open mind (some call it paranoia) about its limitations and critical issues. From that point of view, CFO.com's piece about XBRL sceptics is comforting reading. The doubts offered there are really quite immaterial: The luddite accountant's view that financial analysis is an art rather than a science, for the exercise of which he needs the entire statement is answered crisply: you can have that, too. The reason why XBRL will hardly take off without regulation is easy to explain: It will only become really useful once all preparers issue their information in that standard, and that will not happen spontaneously. Without it being useful, preparers have an easy case to make against going to the effort. Classic chicken and egg. The other points raised are transient in nature. 

What I am more concerned about is the need for a consistent evolution of XBRL taxonomies within a coherent architecture, and the restrained use of X, i.e. eXtensibility, by preparers, lest XBRL documents become too complex to be useful. That is where scepticism is appropriate and healthy - but whether it is justified we will only be able to see further down the road.

XBRL for dummies

Today, the first meeting of the XAC, the XBRL Advisory Council to the IASCF took place in London. It was a very interesting kick-off meeting, indeed! To use an IT metaphor, I like to think of Accounting Standard Setting as constructing the Operating System that the economy works on. A principles based system such as IFRS can rely on a certain degree of fuzziness and the human factor when preparers and auditors apply the standards. But when this fuzziness actually is being translated into code, then a lot of nitty-gritty stuff appears. 

During the meeting, I first got my hands on a copy of XBRL for dummies, and since the book kindly features this blog (so, it's got to be a really good book, right?), I thought I'd return the favour!

XBRL advisory council

The International Accounting Standards Committee Foundation (a.k.a. IASCF) today announced the formation of an XBRL advisory council, which I have the honour to say that I am a member of on behalf of the CFA Institute. I am looking forward to contributing my small share to the further establishment of XBRL as a major agent of change in the preparation, dissemination and use of financial reporting.

Getting to know XBRL

The following is the first guest contribution on this blog. Bob Schneider, its author, is the editor of Data Interactive, a blog sponsored by Hitachi to help financial professionals stay informed about developments in the world of XBRL (eXtensible Business Reporting Language).

In a recent survey by the CFA Institute, some 59% of respondents said they were ?not aware? of XBRL. Even if that understates CFA Charterholders' acquaintance with the data standard, it?s undoubtedly true that many financial professionals still have little knowledge of XBRL or ? as SEC chair Christopher Cox calls it ? ?interactive data.?
As recently as within the past few weeks, XBRL taxonomies have been completed and widespread XBRL adoption is coming into view. Analysts and accountants are eager to gain an understanding of what XBRL is and what it can do.
Where can they turn to for help? Here are five resources that go beyond mere definitions and give users true insight to what XBRL can be.
An excellent place to start is Cheaper, Smarter, Faster: Benefits to Analysts from XBRL written by Christian Dreyer, who writes this blog, and Mike Willis, partner at PwC and a leading XBRL authority. Specifically directed at financial analysts, the article clearly and imaginatively describes XBRL, discusses its progress in various countries, and describes interactive data's various benefits. Although it doesn't contain the latest XBRL developments ? it was published about a year ago ? it is still the single best article on XBRL for financial professionals who are new to interactive data.
One of my favorite XBRL speakers is Liv Watson, VP of Global Strategies at EDGAR Online. Liv is one of those rare speakers who makes the dull seem interesting, and the interesting, exhilarating. In her presentation at the Third Annual XBRL Canada Conference, she uses war stories and fun asides to describe the benefits of XBRL for both external and internal reporting.
For the past year or more the most notable proponent of XBRL has been SEC Chairman Christopher Cox. In March the Commission held an Interactive Data Roundtable that included many key XBRL players, including representatives from companies participating in the Voluntary Filing Program. Ably moderated by Chicago Sun-Times journalist Terry Savage, the webcast provides listeners with an understanding of what implementing XBRL may entail and describes key XBRL issues going forward.
Interactive data comprises both XBRL-FR (for financial reporting) and XBRL-GL (for global ledger). The latter is the subject of the webcasts at GaLaPaGoS (click XBRL GL Webcasts). Two that are especially noteworthy are XBRL and SOA, a superb presentation by Walter Hamscher on why companies will need to adopt XBRL to fulfill their compliance requirements, and Eric Cohen's self-explanatory What Is the Global Ledger Good For? Uses of XBRL GL.
Finally, one more resource I'd like you to be aware of is the recently created archive of XBRL conferences at XBRL.org. Listening or reading the speeches made at these gatherings is perhaps the best way for newcomers to the field to gain an appreciation of what XBRL has to offer, as well as the most important issues in interactive data adoption.

Swiss CFA supports XBRL

The Swiss CFA Society claims to be the world's first association of financial analysts to endorse XBRL by making its own financial reports available in that format. As there is still no XBRL jurisdiction in the Swiss market, such endorsement and awareness building is of the essence.

Analysts still unaware of XBRL

The CFA Centre has just given us a preliminary review of 2007 XBRL awareness survey results. From this preliminary review, it is not clear which subset of members have been sampled (yours truly cannot remember having been on it), or what the response ratio was, but a number of interesting points arise, especially in comparison with the results of the May 2006 quick survey.

The majority of analysts is still unaware of XBRL. The percentage reported is even greater than last year, but that's pretty certainly within the margin of error.

Analysts think the convergence of taxonomies - in line with the convergence of reporting standards, presumably - is very important.

Analysts value increasing information granularity, even of details included in footnotes. Just tagging the note will not do.

Analysts are wary of X, i.e. the eXtensibility in so far as they think that preparers' ability to extend the taxonomy ought to be limited and should follow a strict protocol.

As the number of XBRL-aware respondents to the survey (ca. 240) seems to have been quite small, the validity of the answers to the more specific questions may have to be taken with a grain of salt.

The quest for a global language

KPMG UK has an extensive new report about accounting out. It is a collection of essays from accounting dignitaries across the world and across different stakeholders, covering all relevant topics in accounting now that the first IFRS reporting period has been completed in the EU.

CFA Institute's XBRL page

The CFA Centre for Financial Market Integrity now has its very own XBRL page (no RSS feed, yet!) to watch. While it's great that the Institute endorses XBRL, one wonders why it is only actively involved with XBRL in one country (where the Institute happens to be domiciled) ...

CFA Institute ups the ante on XBRL

In his April letter to 80'000 Members of the CFA Institute worldwide, CEO Jeff Diermeyer gives another boost to analyst awareness of XBRL. Judge for yourself:

The Time Is Now to Look at XBRL
As I mentioned in my December letter, I am encouraged by the promise that XBRL ? an interactive data-based language that allows the tagging of financial (and potentially non-financial) information ? holds in enhancing the ability of investors to analyze companies. I believe XBRL can significantly improve the accessibility and accuracy of financial statements and, ultimately, the quality of our global capital markets.

Recently, the New York Society of Security Analysts (NYSSA) held a seminar on XBRL at Baruch College. I wish you could have joined me at the seminar where Tom Larsen, CFA, chair of our XBRL working group, delivered an informative presentation (PDF) and I provided an update (PDF) on our involvement in this area.

If you haven't already, it is now time for you to take a good look at this new technology. Fundamental analysts, portfolio managers, credit analysts, quants, risk modelers, and academics should all evaluate how XBRL may change their investment processes. XBRL has developed to a degree where it is worth your while to investigate. We will attempt to deliver this information to your doorstep or desktop, although seeing the live presentations would be most effective.

In addition, in order to accelerate adoption of XBRL by companies, I urge you to ask company management where they stand with XBRL implementation. A little nudge from many of you will pay dividends.

CFA Institute, through its Centre for Financial Market Integrity, has formed an XBRL working group of nine members from diverse investment professional backgrounds, which has been charged with three main tasks: 1) Draft a position paper on the use of XBRL-tagged data in financial reporting from the end-users' perspective; 2) Survey CFA Institute members about the key elements needed to develop and maintain a high-quality XBRL system for delivering information to investors and investment professionals; and 3) Provide detailed implementation feedback to the SEC and to XBRL US Inc., the primary organization for the development of the XBRL taxonomy for financial statements and note disclosures provided for SEC filings.

We will keep you posted of further developments.

We are certainly looking forward to that!

CFA Magazine finds

The CFA Magazine often is a good source of interesting material, written in a competent, yet conversational style. Cases in point are Stephen Brown's article about RIXML, an electronic data format similar to XBRL, but specialising on research information and therefore not quite as pervasive as XBRL, and John Rubino's excellent piece about global liquidity, providing insights into the global yield curve and failing monetary policy in the presence of free flows of capital and the carry trade.

Breakthrough Ideas for 2007

XBRL features as #10 (of 20) in the Harvard Business Review's List of Breakthrough Ideas for 2007. Other ideas we find particularly interesting are #4 (algorithms), #7 (partial attention), #13 (patriarchism) & #20 (accountabalism), of course.

Stability or transparency?

Here is the text of a short presentation I gave this morning on the occasion of the General Assembly of the European Federation of Accountants in Brussels. The general consensus emerged that there is no direct connection between financial reporting at the micro (firm) level and macroeconomic stability. This differentiation is crucial in the debate.

The subsequent Panel on the Internet - An opportunity to empower investors through accessibility or a risk for the reliability of financial information? with the US SEC's CIO Corey Booth among others made me doubt whether the European profession is really aware of the drastic impact that XBRL as a disruptive technology is going to have on the financial reporting value chain.

P.S. Other conference documents are available at the FEE's website.

FSA not to use XBRL [UK]

There have been a number of reports recently (example) that gave rise to the perception that the UK FSA "ditched XBRL" in the context of its new Mandatory Electronic Reporting (MER), and that this was new news. Given the FSA's weight as a leading European financial regulator, this would appear like a major setback to XBRL's global momentum.

However, this perception needs to be qualified. A recent FSA statement maintains that the stated position is a simple re?teration of a policy established earlier, hence the reports are repackaged old news. The FSA continues to develop its MER system using XML, which can be described as a related, but more generic file format version of XBRL. A later migration from XML to XBRL is thus by no means precluded, especially seeing the FSA's main concern that there is not "sufficient XBRL experience within the UK currently to develop this system without incurring additional cost and risk". This assessment is transient by nature.

That being said, it appears unfortunate that the FSA backtracks behind its 2004 committment to XBRL, namely to develop and publish an XBRL taxonomy. This would be a more appropriate way going forward, rather than deploying a mature technology in a newly implemented financial market infrastructure project, with which the FSA could play the rôle of an essential catalyst.

A user's view on XBRL & assurance

Please find attached the slides from a short presentation I gave at the World Congress of Accountants in Istanbul this morning.

Accounting changes

It doesn't happen often that the debate about changes in accounting rules makes the Financial Times' front page. Today is the exception to the rule. The CEOs of the global Big Four audit firms (KPMG, PwC, Deloitte, Ernst & Young) together with their colleagues from smaller siblings Grant Thornton and BDO, are calling for wide ranging changes to global accounting and auditing in a Paris Symposium. The discussion paper is available online.

While initial comments tend to be skeptical, I share the thrust of the self-proclaimed conversation starter. Comprehensive change, including efficient delivery via XBRL and fair value reporting in real time is on the agenda, but will be strongly opposed by forces opposed to change. Unfortunately, using utopian language along the lines of Huxley's Brave New World is playing right into their hands.

XBRL has been a recurring theme at today's meeting of the IASB's Analyst Representatives Group, for instance. This is no Utopia, it's just fast change. Have a look at the SEC's Chairman's comment to a blog post (via CFO.com).

XBRL article in CFA Magazine

After this week's important SEC announcement, there is no more doubt as to whether XBRL is an established standard for financial reporting. Following our article in Professional Investor, the CFA Centre for Financial Market Integrity is voicing its official support for XBRL in an article in the latest edition of the CFA Magazine.

SEC to Rebuild Public Disclosure System

Wow! The US SEC is rebuilding its public disclosure system entirely based on XBRL, thus "paving the way for universal XBRL filings by companies". This in effect is just short of announcing that once the three announced contracts have been completed, the SEC will introduce mandatory disclosure based via XBRL. More about this on CFO.com.

XBRL news

Professional Investor has printed a review article about XBRL, written by Mike Willis and myself. Feedback is very welcome!

Furthermore, here is a presentation I used recently. Thanks to XBRL Europe for sharing it!

XBRL top priority in CESR / SEC cooperation

The recently published work plan of the regulatory dialogue between the European CESR and the US SEC consists of three main topics:

implementation of IFRS and US GAAP by internationally active issuers,

modernisation of financial reporting and disclosure, and

discussion of risk management practices.

While the first and the third bullet point are evidently crucial and as such unsurprising topics, the middle one is noteworthy. The world's most influential regulators join forces to promote the use of interactive data in financial reporting. Interactive data is SEC parlance for XBRL.

Interactive financial data in Switzerland

The Chairman of the US SEC has dedicated a considerable portion of his testimony before the US House Committee on Financial Services to interactive financial information and XBRL. Personally I am convinced that XBRL in conjunction with the IASB's IFRS taxonomy is the next big thing in financial reporting, so I recommend to attend the Swiss CFA Society's forthcoming free seminar on the issue.