The Security and Exchange Commission’s (SEC) mission statement is to protect investors, maintain fair, orderly and efficient markets and to facilitate capital formation. To meet this objective, the SEC requires that any company with more than $10 million in assets and 500 or more shareholders, or which is listed on an American stock exchange must file official documents for public viewing.

Since 1993, companies falling under the criteria above have been required to file registration statements, periodic reports and other forms electronically through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. EDGAR is what enables this information to be easily accessible to the general public through the Internet.

The EDGAR system was developed primarily to increase the efficiency and fairness of the securities markets for the benefit of investors, corporations and the economy. How? By accelerating the receipt, acceptance, dissemination and analysis of time-sensitive corporate information filed with the EDGAR System.

Today these electronic documents are filed in either Plain Text or HTML data format. However, that is about to change to an emerging global open source market drive information standard called eXtensible Business Reporting Language (XBRL).

XBRL: It’s All About Accounting

Despite the technical discussion behind XBRL, it’s really all about the accounting. Correctly applying U.S. generally accepted accounting principles (GAAP) taxonomies to audited financial data is a challenge that marries correct accounting with a language made expressly for transmitting financial and other business reporting data. If the underlying accounting is incorrect or the tags are wrongly applied, the SEC filing will also be wrong.

As a CPA, can you afford not to know how to work with XBRL?

One of the biggest supporters of XBRL is Christopher Cox, Chairman of the U.S. Securities and Exchange Commission (SEC) who was the subject of a recent cover story in the AICPA’s Journal of Accountancy (JoA). As JoA readers know, Cox, believes the name “XBRL” does not do justice to the power of this emerging global open-source driven information standard. In fact he has coined the term “interactive data” for XBRL. He believes the real reason behind the SEC’s interest in “interactive data” is “to protect investors.”

A CPA’s interest in XBRL is getting the accounting correct for a company that is filing statements with the SEC. When XBRL becomes a required format, CPAs will need to know how to use the US GAAP taxonomy properly.

Chairman Cox clearly understands the potential of intelligent “interactive data” — tapping into the number crunching and analytical power of today’s computers to make the reports of U.S. regulated companies more useful for investors, analysts and corporations. His commitment to communicating this message consistently and publicly, not to mention approving over $55 million to modernize the SEC’s e-filing systems in 2006, could catalyze worldwide adoption of XBRL.

Of this contract, $5.5 million was awarded to XBRL US Inc, to develop XBRL Taxonomies for the US capital marketplace. In an earlier column, I discussed XBRL taxonomies and how they would become an integrated part of the professional accounting dictionaries. View more information about XBRL taxonomies on the XBRL Web site.

When it comes to XBRL, here are some facts and opinions, CPAs should be aware of:

Facts:

• SEC is investing $55 million in EDGAR system upgrades including US GAAP taxonomies.

• SEC officials such as chief accountant Conrad Hewitt and Chairman Christopher Cox have recently dropped very strong hints that XBRL will be mandatory in the near future. Check out the SEC Web site and look for recent speeches from the Chairman and the chief accountant.

• Major accounting firms are participating in the improvement of US GAAP taxonomies and have committed major amounts of resources to insure the effort is a success.

• Worldwide momentum for XBRL is creating global opportunities, which, in turn, are driving improvements in XBRL software.

• International companies reporting in IFRS will soon be using XBRL as the preferred method to report their business results. This will open up opportunities all over the globe for firms with international connections.

Opinion:

• SEC reports filed with the SEC in XBRL format will require audit assurance on the numbers reaching the SEC. Audit firms that understand XBRL will have a huge advantage over those who don’t.

• Consulting opportunities will soon explode for firms with specialized skills in XBRL, especially in the coding of notes and disclosures. The early word on XBRL is that the effort is not all that costly or demanding. This could change when companies begin to code there footnotes in XBRL.

• Additional government agencies will soon adapt XBRL for internal and external use. Firms with governmental accounts take note. Interactive data is not just for the SEC.

XBRL: What Is Your Role?

So what are the consequences of avoiding XBRL? If you choose to ignore XBRL, chances are you would do so at the risk of losing your competitive edge. Any of your clients with more than $10 million dollars in assets and 500 shareholders or is listed on an American exchange will be impacted by XBRL sooner rather than later. If your client is insured by the FDIC, they are already required to report their regulatory reporting requirements in XBRL to the FDIC. The marketplace could drive some type of need for assurance on XBRLized financial statements. Misapplication of XBRL tags can occur for example, by mapping data to inappropriate XBRL tags.

Your better option is to roll up your sleeves and stay informed about the emerging information standard that is about to impact your profession.

XBRL US Inc. is already working hard on the taxonomy improvement project and will develop US GAAP compliant taxonomies in a market driven, open framework. They will ask for input from the US financial community later this summer. As practicing CPAs, you will be able to comment on the taxonomies and how they can affect the companies you represent. Nuances to look out for include matching the taxonomy with client information to determine if the taxonomy is complete enough to cover your reporting requirements and if the filings comply with the requirements of US GAAP.

If you belong to an organization who is a member of XBRL US Inc., you can participate in the XBRL US domain working group chaired by Campbell Pride, of Morgan Stanley. If your company is not a member, you can become an individual member or participate in the open during the public review period to be scheduled later this summer.

The XBRL Web site is a great resource to learn more about XBRL taxonomy. If you would like to learn more about taxonomies, please join me, industry leaders and engaged academics at Kansas University on May 11 and 12, 2007 for the “2007 International Conference on XBRL: Taxonomies and Assurance.”

What did you think of this article? Rank it 5 (excellent) to 1 (poor). Send your responses here.

Liv Watson is an accountant and Vice President of Global Strategy for Norwalk, Connecticut-based EDGAR Online Inc. (NASDAQ: EDGR ) — a provider of global business and financial information.