XBRL: it's Unstoppable: a conversation with the father of the digital language of business.

If you thought Lotus 1-2-3 revolutionized spreadsheets, get a good grip on your mouse because XBRL will do even more for financial reporting and analysis. Here's the breakthrough: XBRL (extensible business reporting language), a new global open standard for formatting financial information, makes reporting and analysis faster, cheaper and significantly easier to automate. It also improves access to information that often has been difficult to locate in financial datasets. In addition, XBRL reduces inconsistencies--such as ambiguous business terminology and myriad data formats--that often necessitate manual intervention and slow financial reporting. Recently the JofA spoke with the father of XBRL, Charles Hoffman, CPA, who currently is director of innovative solutions for UBmatrix, a software development firm in Kirkland, Wash. In this interview he credits the AICPA for initial and ongoing support of the concept he originated as a member of a small CPA firm, and he shares his thoughts on how all CPAs can help their employers and clients--indeed the entire business community and the public--benefit from the power of XBRL.

JofA: Are there any CPAs who don't need to learn about XBRL?

Hoffman: No. XBRL is fundamental to the communication of business information and is changing how we report and analyze it. All CPAs owe it to themselves, their clients and employers to develop a basic competency in XBRL, which soon will be embedded in literally every aspect of internal and external business reporting. As [AICPA President and CEO] Barry Melancon said, "XBRL fundamentally transforms and improves the way companies, investors, lenders, analysts and regulators exchange, aggregate and analyze business information."

XBRL will significantly improve the ability of CPA financial managers to distribute information to stakeholders precisely as reported, rather than as condensed or otherwise modified by third-party data aggregators to facilitate distribution. CPAs in public practice will need to know XBRL when working with CEOs and CFOs, who will use it to issue financial reports and to obtain credit from lenders. Members in industry, with corporate management and boards of directors, will use it as a common frame of reference, as will independent auditors working with audit committees. CPA/PFSs will employ XBRL to assess investments for their clients, and accounting educators will prepare students to use XBRL in the marketplace.

CPAs in government and those dealing with regulators will be the first groups to use XBRL to make basic decisions. Federal banking regulators require financial institutions, beginning in October 2005, to file quarterly summaries of their financial condition in XBRL format over the Internet (www.ffiec.gov/find). And the SEC launched a voluntary program under which public companies can file required documents online (www.sec.gov/spotlight/xbrl.htm).

JofA: How did the AICPA react when you approached it about XBRL?

Hoffman: The AICPA's early support helped launch this open standard, and its ongoing nurturing greatly contributed to the building of XBRL's infrastructure and to global acceptance. In 1998 I informed the Institute's High Tech Task Force of the need to create a global open-standard data-tagging protocol for financial information. An open standard typically is developed by many parties and is available royalty-free to all software developers for use with any application. Conversely, proprietary standards usually are developed by one company and are available to others only if they pay royalties, which inhibits creation of software for those who need it. Soon we had a plan, and the AICPA funded the creation of a prototype. Knight Vale & Gregory, which now is part of RSM McGladrey, Inc., absorbed some of the costs and gave me time to work on the prototype. Once it was complete, the AICPA created and promoted XBRL International, a not-for-profit global consortium of companies and agencies working to develop the computer-readable XBRL open standard and support its adoption. The consortium now has more than 300 members, and XBRL use is growing around the world. In the United States, the Federal Deposit Insurance Corp. (FDIC) and the SEC have established XBRL programs.

JofA: What did that tell you about the Institute's support for small firms and individual CPAs?

Hoffman: At the time, it amazed me how one CPA from a relatively small firm could get the AICPA's attention. I couldn't have done this without the Institute and its dedicated staff members.

JofA: Are you satisfied with the progress toward widespread XBRL adoption?

Hoffman: Very much. We have a proven and stable specification (version 2.1; www.xbrl.org/specifications). Around the world, government and private groups agree that XBRL implementation is a goal worth pursuing. We have software--although still in the early stages of its evolution--that makes it possible to use XBRL, and there are several major implementations that demonstrate XBRL's practical benefits (www.xbrl.org/showcase).

JofA: What is your vision for XBRL?

Hoffman: My vision is one of financial reporting and auditing that is "friction-free" in the sense that it involves minimal unnecessary manual intervention. By that I mean turning unstructured clusters of text into structured data that computers can process to facilitate their re-use. In such an environment, intelligent software tools driven by XBRL metadata would integrate the various work flow components that contribute to financial reporting, reduce rekeying of data, automate disclosure checklists and automatically validate the complex information contained in financial statements and the supporting audit schedules. Metadata are computer-readable descriptions of financial data in a document, and intelligent software tools use metadata to understand the relationships between different pieces of data and thus help computers to process them.

There is untold inefficiency embedded in the process of collecting financial data from various corporate systems, moving them into internal and external audit schedules, connecting them to lead schedules that summarize the details of audit documentation, linking that information to the actual internal and external financial statements and eventually issuing a financial statement assembled by many parties, including clients, CPAs and attorneys using a wide variety of software tools.

But efficiency is not the only consideration. Before the introduction of electronic spreadsheets and automated workpaper software, the high note on an audit engagement was when the lead schedules footed and cross-footed--automating this mechanical task gave CPAs time to provide more valuable services. So although CPAs first used the electronic spreadsheet to reduce costs, they soon began using it to improve and speed analysis.

JofA: Is the United States lagging behind other nations in implementation?

Hoffman: XBRL is evolving at varying rates in different countries. As I mentioned, U.S. banking regulators will begin collecting XBRL-formatted data from approximately 9,000 financial institutions later this year. But given, for example, that the national stock exchanges of Germany and South Korea and the national banking regulator of Australia implemented XBRL some time ago, I think it's fair to say the United States has some catching up to do.

It's important to understand that global adoption of XBRL is driven by market and regulatory forces that vary by nation. For example, the European Union's standards convergence and adoption of international financial reporting standards are fostering acceptance. Although acceptance of XBRL in the United States has been hampered by other market forces, such as Sarbanes-Oxley compliance, the world still views the SEC and FDIC projects as models for XBRL use.

JofA: What are the stumbling blocks here?

Hoffman: One is that software vendors are searching for signs of a reliable revenue stream before they develop XBRL applications; so far there are few such signs in the United States. Fortunately XBRL use is growing around the world, creating a global market for XBRL tools.

Adoption of XBRL will be based on things such as value, effectiveness and efficiency, which XBRL can provide. For example, as the European Union develops its infrastructure and countries convert from national to international financial reporting standards, a data-tagging language becomes increasingly valuable.

JofA: How can obstacles in the United States be overcome?

Hoffman: Primarily, we need more funding for development of essential XBRL infrastructure components, such as high-quality comprehensive taxonomies, which are classifications of concepts or data elements used in financial reporting. The AICPA and other XBRL member organizations have done much to help, but they cannot sustain their efforts indefinitely. In addition, there simply isn't enough XBRL-related training and education currently available for XBRL use to take root and grow.

JofA: Are companies better off neglecting XBRL for now and focusing more on Sarbanes-Oxley compliance, or should they tackle both at the same time?

Hoffman: XBRL can greatly facilitate Sarbanes-Oxley compliance. In my view any Sarbanes-Oxley compliance software that doesn't incorporate XBRL probably won't be around long. Many of the features necessary in systems built to meet Sarbanes-Oxley requirements exist in XBRL, which is an open standard. More and more people are realizing the advantages of using open standards instead of proprietary ones. XBRL features such as business rules for validating data reduce implementation costs and increase compatibility among software applications.

One important development is the Public Company Accounting Oversight Board's (PCAOB) release of questions and answers relating to attest engagements of XBRL-formatted financial information. The PCAOB said CPAs must have adequate knowledge of XBRL-formatted financial information to participate in related attestation engagements (see News Digest, page 21).

JofA: What was CPAs' role in the introduction of XBRL?

Hoffman: CPAs should be proud of their part in the creation of XBRL, whether through their individual efforts, through firms that are members of XBRL International or through the AICPA. They've helped make XBRL available to the global business world. But to sustain this effort, others from the financial reporting supply chain--who will benefit from XBRL--should participate more actively than they have. CPAs can encourage this by being XBRL advocates.

JofA: How many different roles can CPAs play in the XBRL world?

Hoffman: They can--and do--help create the taxonomies and other infrastructure components that make XBRL work. This enables CPAs to add what they think should be in the standard, to learn about XBRL early and to surpass their competitors. CPAs also can get ready for the coming market for XBRL software and services. Most CPAs don't use a new technology until appropriate software is ready. That day has arrived for XBRL tools, and CPAs should begin experimenting with them. Some are available for inspection at www.xbrl.org/productsandservices.

At a minimum CPAs can promote XBRL if they understand it well enough to discuss it knowledgeably with their clients and software vendors, who will make their products XBRL-compatible if customers express that need.

JofA: Are CPAs embracing XBRL yet?

Hoffman: Yes. Recently I met with a former associate who now is a managing director in RSM McGladrey's Seattle office to bring him up to date on XBRL developments. Instead, by the time we met, RSM McGladrey already had begun using off-the-shelf XBRL-compatible software to develop a direct feed of financial information from its business clients.

JofA: When will CPAs start using XBRL en masse?

Hoffman: When two conditions are met. First, XBRL software will have to become as user-friendly to the average CPA as the electronic spreadsheet was when it was introduced. Second, the software will have to make mission-critical applications better, faster or cheaper.

JofA: What skills that are necessary for working with XBRL do CPAs most frequently lack?

Hoffman: Most important is their lack of general XBRL knowledge. And unfortunately, it's still difficult to learn about XBRL because educational materials are scarce. But some resources do exist, such as those at www.xbrl.org/educationandtraining and at the AICPA Information Technology Center (http://infotech.aicpa.org/ resources/xbrl). XBRL International soon will issue education materials, and the information available at www.xbrl. org/us is updated on a regular basis.

JofA: How can CPAs develop XBRL-related skills?

Hoffman: One good way is to join XBRL International and participate in its activities. Information on membership is available at www.xbrl.org/howtojoin. Long-time members are the best sources of information. Gaining access to their experience is one of the benefits of becoming a member.

JofA: Whom should CPAs educate about XBRL?

Hoffman: Focus on clients who are likely to send or receive financial information and would benefit from using XBRL. Next, inform software vendors why XBRL compatibility is important to customers. CPAs are key players in information systems planning and therefore can be influential proponents of XBRL.

JofA: What is the government's role?

Hoffman: The government receives a massive amount of information from the private sector. For example, the Netherlands ministries of justice and finance are using XBRL to simplify the preparation of reports and the exchange of financial data with the private sector, with projected savings of more than 350 million euros for Dutch businesses. Such an achievement in the United States would produce far greater savings.

Interested government entities can start by building a prototype, which can be created on a small budget that can be minimized by studying an existing system. Two good sources of practical information are the Web sites of the FDIC (www.ffiec.gov/find) and the SEC (www.sec.gov). Both agencies have made substantial commitments to using XBRL, and the FDIC is a member of XBRL International. In fact, the FDIC's system is operational, and its staff shares information about its experience in choosing and implementing XBRL to fulfill its objectives.

JofA: How about accounting educators?

Hoffman: Because they're preparing the next generation of CPAs, educators play a seminal role in promoting XBRL development and adoption. I can't stress enough the importance of thoroughly educating yourself with materials from the best sources.

Furthermore, educators' thorough, disciplined approach to research uniquely qualifies them to write books and research papers that would help spread awareness and understanding of XBRL, and they are quite capable of suggesting useful ways to improve it.

JofA: If you could speak to each CPA one-on-one, what would you say?

Hoffman: We should use XBRL's features to change financial reporting methods slowly but steadily. The European Union's capital market soon will equal that of the United States. If we don't constantly modernize our system, our profession and our nation will pay the price. XBRL can help us maintain our position as a top provider of critical services to the world's foremost source of capital. But others also can use XBRL to replace us as leaders in this arena.

What's Your (XBRL) Line?

User and advocate. Learn about XBRL. Educate your clients and company management and explain to software vendors why it's important for their products to have XBRL capabilities.

User only. Develop a basic understanding of XBRL and discuss it with software vendors. For example, tell them how XBRL could help exchange trial balance information with write-up software or aggregate information across different software applications. Stay abreast of XBRL developments.

XBRL service provider. Learn about XBRL, share your knowledge with clients and keep them in the know. To encourage their involvement, ask whether they're considering using XBRL in their internal systems and whether their software is XBRL-compatible. Build an XBRL prototype to improve an internal data exchange process. Join XBRL International and attend an XBRL event, such as the 12th XBRL International Conference in Tokyo November 7-10, 2005. Information is available at www.xbrl.org/upcomingevents.

An early adopter of XBRI., Join XBRL International, the best source of information. Participate in or lead a working group--an investment that will earn dividends--or help a client build a prototype.

A former Price Waterhouse auditor, CHARLES HOFFMAN, CPA, is director of innovative solutions at UBmatrix and author of Essentials of XBRL (John Wiley & Sons Inc., 2003). He received the AICPA's Innovative User of Technology award, was named by Accounting Technology as one of the profession's 100 most influential people and is a graduate of Pacific Lutheran University.