Implications of e-filing

By Gerald Trites

Growth in Electronic filing and reporting has brought about a need for improving systems

Most Canadians are familiar with e-filing from filing their income tax returns. Electronic filing of information with regulators is something most large companies do regularly. Public companies need to file with EDGAR in the US and SEDAR in Canada. In addition, financial institutions have their own regulators, such as Office of the Superintendent of Financial Institutions and Canada Deposit Insurance Corporation. E-filing with other agencies, such as Statistics Canada and other government agencies and departments, is becoming more common.

Because of their many constituencies, companies often need to file with a number of regulators, agencies and departments, most of which require different systems. Supporting all those systems can be expensive. Moreover, it is difficult to support e-filing systems that are not used on a daily basis. The result is a situation that is inefficient and costly for filers — and one where improvements are badly needed.

There is also improvement needed from the viewpoint of the regulators, departments and agencies at the receiving end of the filings. As they continue to require more frequent filings, they have increased the need for resources to review and process the higher volume of filings. This has happened with the Securities and Exchange Commission and its increased filing requirements thanks to the Sarbanes-Oxley Act. The filings required under SOX are expected to dramatically increase the need for resources to review the filings. While the SEC has been hiring staff, it is also looking to technology as an answer. Indeed, better filing technology may be the answer for both the filers and those who receive the filings.

Companies have increased financial reporting on their websites. This process has raised a need for electronic systems of some type. Generally they are not as sophisticated as the e-filing systems, but they are expected to become more sophisticated in future. Again, the requirements for Web reporting are growing because of the need for timeliness, which can mean reporting on certain signif-icant events in a time frame as short as 24 hours.

Electronic filing and reportingsystems are the focus of a researchstudy, Electronic Filing and Report-ing — Emerging Technologies and Their Implications, published in December 2004 by the CICA. The purposes of the study, as stated in its terms of reference, were:

• to discuss the process of electronic filing and reporting of information with regulators, including securities commissions and other government departments and agencies; identify the attendant risks to management; and examine the security, control and audit issues raised;
• to discuss other related electronic means of communicating audited business information to stakeholders, including use of company and noncompany websites, filing with nonregulatory agencies such as StatsCan, and to examine the security, control and audit issues raised;
• to explore the use of Extensible Business Reporting Language (XBRL) for electronic filing and reporting in both of the areas referred to above and examine the security, control and audit implications.

During the discussions with regulators as required in the terms of reference, it was found that there is a variety of technologies being used in e-filing systems.

Most of them make use of systems that rely on old-style ASCII type files. Files in ASCII format have been a standard of computer systems for decades and suffer from rigidity of form and lack of speed in development and execution. Such systems tend to be proprietary, which means they are developed by the particular agencies or departments and are unique to them. As a result, they cannot be used for other purposes, and the file formats, being unique to one of the particular applications, cannot be shared with other applications. ASCII systems contribute directly to the problem of companies having to support many different systems and to the problem of availability of information to the regulators.

Other file formats are used, although less frequently. These include common spreadsheets, which can overcome some of the problems but tend to be bulky in size for transmission. They also include EDI, XML, PDF and more recently XBRL.

EDI, or electronic document interchange, is an internationally recognized set of standards originally intended for transmitting business documents, such as purchase requisitions and sales orders, in conducting business transactions. It was never intended for e-filing and is cumbersome for this purpose, so it is not used much.

XML is an internationally recognized set of standards for “tagging” data in such a way that the nature of the data can be recognized by the name of the tag, such as phonenum. However, it was not designed specifically for the presentation of financial information. Instead, XML can best be viewed as a framework within which applications can be developed for specific purposes. This was the origin of XBRL, which is an XML application developed by an international consortium consisting of the major accounting firms, accounting institutes and organizations and certain key industry leaders, such as Microsoft.

PDF, which was intended for use in preserving the format of documents, is a widely used file format. Accordingly, it is widely used for electronic reporting of companies’ annual reports, because companies put a lot of time and effort into designing them and want the formats preserved. However, PDF files have been criticized for the difficulty they can pose in finding particular information within them. Also, they can be large to transmit and download from websites.

In July 2004, the SEC announced a voluntary program allowing companies to file regulatory information using tagged data. Afterward, the SEC launched a program of obtaining feedback from various groups about the issues involved with the use of XBRL in this program. Companies began filing under the voluntary program in March 2005, and several have filed XBRL information with the SEC on EDGAR since then.

In addition, the US Federal Deposit Insurance Corporation had previously announced the adoption of XBRL for its filings from US banks. Its program is now operational.

In Canada, StatsCan has been testing XBRL for some filings. Initial tests proceeded well and further ones are under way. The Toronto Stock Exchange has published its financial statements on the Web in XBRL format. Canadian securities commissions are monitoring the efforts of the SEC with the use of XBRL and recently issued a survey on XBRL, which is indicative of their interest in this technology.

In other parts of the world, particularly Europe, XBRL use has been growing rapidly. A multimillion-euro program of the European Commission was launched in 2004 to support and encourage its use. Now, XBRL is widely used throughout European financial institutions as a means to conform to the requirements of Basel II and the move of the European Union to the use of International Financial Reporting Standards. Similar growth in the use of XBRL has occurred in Asia, notably in China, Japan and Korea.

XBRL is an XML application specifically designed for the presentation of financial data. This is accomplished through the use of “taxonomies,” which are specifically designed to tag data so it can be identified within the requirements of particular accounting standards, such as international GAAP, or US or Canadian GAAP. With this capability, the data from any of the filers’ systems can be tagged and transmitted to the agency or department in relatively small files, and the recipient can then process the data without the need for human intervention.

It has become common for companies to publish annual reports and other financial information on their websites, normally in the investor relations section of their sites. In addition to conventional financial information, most companies include information such as the MD&A, interim financial information, press reports, presentations and speeches by executives, conference calls (sometimes in live session), governance information, sustainability information and performance reporting metrics. This list is not complete.

Each year, the CICA co-sponsors a corporate reporting contest, which increasing-ly focuses on the content of websites. Recent winners include BCE and MDS Inc.

The most common format used by the companies surveyed is PDF. Some use basic website technologies, such as HTML, which allow the navigation of information. PDF files are great for formatting the information for human consumption and are easy for companies to use. However, they are sometimes very large, meaning users need to download them, and in slower modem speeds this can be a problem. Some companies have compensated for this by breaking the information down into smaller files.

Most of the users of electronic information are analysts who like to take the information into their spreadsheets for analysis purposes. Some companies present their financial information in spreadsheets in recognition of this need. Otherwise, analysts must find ways to extract the data or manually input the information into their spreadsheets and analysis tools.

Microsoft, Reuters and the TSX have taken the use of technology a step further by presenting their financial information in XBRL format. This information can be machine read and imported directly into the spreadsheets of the analysts and other users, provided these tools are XBRL enabled. This is an application with considerable potential.

XBRL is designed for computer recognition of data, so much of the handling of filed information can be automated in this standard and internationally recognized format. This is a major reason why the CICA study recommended the use of XBRL in e-filing and reporting systems. To be sure, there are other advantages of XBRL and some disadvantages as well. However, it does constitute a way to address the difficulties presently experienced by organizations that must e-file information, those that present their information on their websites and those that must receive the filings and process them in a timely fashion.

The growth in the use of XBRL is encouraging. If and when the use of this technology reaches a critical mass, it will mean much more accessible financial and business information for the users of that information.

Gerald Trites, FCA, CA•CISA/IT, is an information systems consultant and researcher living in Heatherton, NS. He is a member of and technical consultant for ITAC

Deryck Williams, CMC, FCA, is Technical editor for Technology