The Securities and Exchange Commission is creating a new financial "language" that is designed to give individual investors an advantage previously available only to securities analysts and huge firms.
Soon, all corporations will report their financial information in a format called
XBRL, which is an acronym for Extensible Business Reporting Language. And you don't have to understand the technology to reap the benefits.
This new format will make all data interactive, which means anyone can go online and easily find all the corporate data that's been filed, including financial reports, footnotes and management's take on the company's prospects -- the management's discussion and analysis, or MD&A, filing.
I got a close-up view of the format's potential benefits for investors last week, when I moderated a panel at SEC headquarters in Washington, D.C.
The project is being accelerated by SEC Chairman Christopher Cox, who says: "We are on a campaign to liberate business and financial information that is now filed at the SEC but is currently trapped inside dense documents." Cox believes that "liberation" will benefit both individual investors and the capital markets.
The data that companies are currently required to file are available on the agency's
Web site. The database for all that information is called Edgar -- Electronic Data Gathering, Analysis and Retrieval -- a system developed about 20 years ago when filings such as annual corporate 10K reports or quarterly 10Q reports first went online. But except for securities analysts, few individuals would dare wade through all the material posted there.
Soon, that old database will be replaced by the new XBRL system -- in which every piece of information will be "tagged," creating an easily searchable database. Numbers like "net income," "operating income" or "current liabilities" will pop up on demand -- for one company, or for many companies. Interactive data will be used globally, and the system is already being tested from Shanghai to Spain.
Creating the Dictionary
The first step has been to create a dictionary -- or "taxonomy" -- of the terms that will be used. In order to get the project finished in the coming months, the SEC has announced new funding for the consortium compiling this dictionary.
The process involves creating standard "categories" -- which are based on Generally Accepted Accounting Principles requirements, but are also flexible enough to include statistics reported by, for example, manufacturing or financial companies.
About a dozen companies --
R.R. Donnelley & Sons
-- are already filing their required reports in XBRL, in addition to the current formats.
PepsiCo CEO Indra Nooyi spoke to last week's SEC panel audience -- a group of accountants, lawyers, technology developers and corporate officers -- about the benefits of the new language.
She said PepsiCo volunteered for the test group because it is "fanatic for accurate, timely, transparent and effective financial reporting." She also noted that the process has been "intuitive, painless and inexpensive," costing the company an extra $5,000 to complete the XBRL coding in the first year and a few hundred dollars in the most recent quarter.
Once the dictionary of terms is ready -- some time in the coming months -- the SEC is expected to require all companies to report in this new, searchable format. When that time arrives, the traditional "forms" that companies use to submit their data may be greatly simplified -- and much repetition eliminated.
One big advantage: People searching for information won't first need to know which form was used to report it; the information will stand on its own.
The Software Opportunity
Because of the special coding format of the new language, users will need special "reader" software to view the data. The SEC will have two of those readers on its site -- and other companies will provide reader access and specific uses for the data.
Panelists demonstrated some of the uses of the new technology, which is based on an "open software standard" format, meaning that companies who want to make and market software for analyzing XBRL data won't have to pay anyone a royalty.
For example, Rob Blake of Rivet Software, demonstrated four products made by his company and other firms that will literally "lift" the data from the SEC site into Excel spreadsheets, allowing investors to easily make all kinds of comparisons.
Alfred Berkeley, the former president of
-- where the use of interactive data was first tested in 2002 in partnership with semiconductor companies that volunteered to put their financials into this format -- demonstrated the importance of this new reporting system for companies, as well as investors.
No longer will smaller companies have to hope for (or pay for) research. Says Berkeley: "Interactive data democratizes companies' access to investors."
There have been some watershed events in the history of the securities industry. The Securities Exchange Act of 1934 created the SEC, as well as reporting requirements. "May Day" in 1976 deregulated commissions and changed the brokerage business, and the switch to decimals in 2001 narrowed spreads and enhanced the incentive to use electronic trading.
The XBRL interactive-data system has the potential be another one of those dramatic, landscape-changing events for the securities industry and investors. That's The Savage Truth.
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book,
The Savage Number: How Much Money Do You Need?
in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.