An institutional approach to explain the adoption of

technical innovations

E. Bonsón-Ponte, V. Cortijo-Gallego [*, T. Escobar-Rodriguez ]

Research Group: New Technologies in Accounting and Business Administration,

University of Huelva, Plaza de la Merced, 11, 21002 Huelva, Spain

Abstract

The objective of this paper is to identify the role that institutional factors can play in the process of diffusion of a particular technical innovation: XBRL (eXtensible Business and Reporting Language). The motivation that led us to carry out this analysis is the significant increase in the number of companies that, in USA, decided to use XBRL for disclosing their financial information after the firm position of the SEC in favour of XBRL.

Keywords: XBRL (eXtensible Business Reporting Language); SEC (Securities and Exchange Commission); XBRL Voluntary Filing Program; Institutional Theory; adoption; innovation.

1

Introduction

XBRL (eXtensible Business Reporting Language) is a language based on XML for the electronic communication of business information. It is designed to improve the exchange, aggregation and analysis of corporate data requiring disclosure, through a unique tagging structure that provides interoperability.

XBRL is an adaptation of XML to the special needs of business and, consequently, there are many advantages and tools developed for this metalanguage that companies can exploit. A metalanguage represents metadata, which essentially are data about other data. These metadata play a fundamental role in facilitating the search for information on the Internet. On this latter point, according to Alimohammadi (2003), the Internet still lacks the necessary structure to enable users to find rapidly the information that they need, and metadata could be a possible solution for organizing digital information. Therefore, since XBRL is the adaptation of XML to business needs, it offers the prospect of allowing financial information to be managed effectively and efficiently.

Furthermore, XBRL presents an additional advantage over XML in that the implementation of this new language is structured by means of the creation of taxonomies. In addition to the files of plain text and .xml extension that contain and constitute the real information to be transmitted, there also exists a global reference, a taxonomy, written in the same meta-data language and placed on the Internet, that contains the dictionary of elements and the set of rules against which each XBRL file created and transmitted can be validated in respect of origin and/or destination. The taxonomy is thus a dictionary of XML labels that includes precise definitions of how the data is calculated and should be used, the logical inter-relationships between data, expressed in multilingual natural language, and relationships of sequence and visual presentation. Therefore, it can be concluded that XBRL represents a significant technological innovation in respect of its predecessor, XML.

Currently, it is being promoted by the consortium XBRL International, created in July 2000, which groups around 450 major companies, organisations and government agencies committed to extending this standard to the entire world. Throughout 2000 there were a succession of adhesions to the project: Microsoft announced the inclusion of XML utilities in all its products and the SEC (Securities and Exchange Commission) encouraged the AICPA (American Institute of Certified Public Accountants) to continue with the development of XBRL and recommended its adoption to quoted companies.

In February 2001, the first international conference on XBRL was held in London, with representatives of 10 countries attending; by that date, 85 entities were already members of the XBRL consortium. During 2001, various American public bodies joined the consortium, among them the FDIC (Federal Deposit Insurance Corporation), and local jurisdictions were constituted, whose mission is to promote the adoption of the standard and develop taxonomies adapted to each particular set of accounting regulations. Through these regional jurisdictions, more companies and bodies in several different countries have been incorporated into the project, and by the end of that year, there were 130 members of the consortium.

During the following years and up to the year 2004, companies and bodies continued to join the consortium, and at the same time, local jurisdictions were being established in several more countries.

During this first stage of the expansion of XBRL (2000-2004) a great deal of efforts was directed towards demonstrating the many benefits of the standard. From the perspectives of both professionals and academics, many benefits were attributed to XBRL, including increased interchangeability within and between organizations, reduced time required to perform business reporting tasks, improved controls environment, reduced data manipulation, improved decision making, … (Cohen et al., 2005, Hannon, 2005, Thomson, 2005). However, despite the advantages of technological character attributed to the standard, and despite the increased number of companies in the consortium, there were very few companies in the USA that were decisive about actually applying the standard themselves.

To boost the process of adoption of XBRL and, as part of its continuing efforts to improve the quality of information available to investors and the marketplace, the SEC, announced, on 3rd February 2004, a Voluntary Program for Reporting Financial Information on EDGAR using XBRL. As William H. Donaldson (former SEC Chairman) stated: “By working to enhance the Commission’s filing and disclosure process through the use of new data formats, including tagged data, the Commission can improve how content is organized and analyzed – improvements that will benefit everyone who utilizes the SEC´s public disclosure process”.

Following this, in September 2004, the SEC published the Proposed Rule 33-8496 by means of which it was intended to promote the use of the standard. In this same document, an invitation was issued to any persons who might wish to submit written comments on any aspect of the proposed rule, as well as on other issues that might have an impact on the consideration of the use of tagged data in Commission filings. Once these comments had been analysed, in February 2005, the XBRL Voluntary Financial Reporting Program on the EDGAR System was published as a Final Rule.

Under the XBRL Voluntary Financial Reporting Program, which started on 4th April 2005, registrants are enabled to submit, on a voluntary basis, tagged financial information using the XBRL format, as supplementary exhibits to specified EDGAR filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940. As previously stated, the XBRL-related documents submitted in the voluntary program are supplemental submissions and, therefore, volunteers are required to continue to file their financial information in HTML or ASCII format, as currently.

Although the primary goal of the pilot program is to help the SEC evaluate the usefulness of data tagging and XBRL to registrants, investors, the Commission and the marketplace, it will also allow the participant companies to determine the benefits for themselves from using interactive data. Moreover, the Voluntary Filing Program will allow investors and analysts to assess new techniques for analyzing interactive data reports submitted to the SEC in the XBRL format.

Such is the importance that the SEC attaches to the improvement of the filing and reporting processes by means of new data formats, that, on 25th September, 2006, it awarded three separate contracts totalling $54 million to modernize and maintain the EDGAR database to use interactive data, to complete XBRL code writing for US GAAP financial statements, and to provide a new generation of interactive investor tools.

In order to encourage participation, the Commission staff offer expedited reviews of registration statements and annual reports to those companies that volunteer for a test group as part of the Commission’s interactive initiative. Along these lines, the XBRL-US jurisdiction has made significant educational and training resources freely available to help those companies interested in learning about and participating in the XBRL Voluntary Financial Reporting Program, to understand the current problems associated with today’s manual reporting supply chain, and how to realize the benefits of XBRL.

In this context, the Commission strongly believes that the primary benefit of tagged financial information is that it would allow more efficient and effective retrieval, research and analysis of financial information through automated means. Other benefits attributed to XBRL (SEC, 2005) are:

  • XBRL will lower the cost of producing and accessing financial information.
  • Tagged information has the potential to increase analyst coverage and investor interest in a registrant’s securities; this could increase liquidity in the market and lower the cost of capital.
  • XBRL will free resources from manual reporting to do work that really adds value to the company.
  • XBRL-tagged data will encourage companies to provide comparable information.
  • Registrants that use XBRL internally will benefit from improved internal reporting processes.
  • Tagged data may assist auditors.
  • XBRL may make the tagging process more accurate.

In spite of these benefits, by February 2007, only 36 companies had agreed to participate in the XBRL Voluntary Financial Reporting Program. What may be happening is that these advantages put forward by the SEC are not perceived by companies as sufficient reason to take the decision to adopt the standard. In the light of this situation, it can be asked if it would be appropriate for the SEC to promote another series of benefits, based not so much on the technological performance but on incentives of an institutional character, in order to encourage more companies to subscribe to the XBRL Voluntary Financial Reporting Program.

The object of this paper is to identify the role that these factors can play in the process of diffusion of XBRL and in the adhesion of companies to the XBRL Voluntary Financial Reporting Program of the SEC. To this end, a Delphi study has been conducted in which experts in XBRL were asked what are the reasons, in their opinion, that would motivate organisations voluntarily to submit supplemental tagged financial information using the XBRL format, and in this way to contribute to the diffusion of the innovation. From the results obtained, it can be stated that institutional and organisational motivations, such as to acquire a company image as a pioneer in technology, and to improve the company's image in the financial markets, are more important than the motivations associated with technological performance.

Background

An innovation may be viewed as the introduction of new ideas, products, technologies or programs into an organization or the adoption of an old idea in a new context (Firth, 1996: 630; Burns and Stalker, 1961). XBRL represents a technological innovation over its predecessor, XML, since the implementation of this new language is structured by means of the creation of what are denoted taxonomies. This means that, in addition to the files of plain text and .xml extension that contain the real information to be transmitted, there exists a global reference, the taxonomy, that contains the dictionary of elements and the set of rules against which each XBRL file that is created and transmitted can be validated in respect of its authenticity, origin and/or destination,

Damanpour and Evan (1984) differentiate between technical and administrative innovations. Technical innovations are focused on improving the technological performance of the organization whereas administrative innovations are those that occur in the social system of an organization . . . An administrative innovation can be the implementation of a new way to recruit personnel, to allocate resources, or to structure tasks, authority and rewards. It comprises innovation in organizational structure and in the management of people” (p. 394).

XBRL is an innovation that meets both conditions. From a technical perspective, it enables an improvement of the technological performance of the company because, among other aspects, it may allow more efficient and effective retrieval, research and analysis of financial information through automated means (SEC, 2005). It also has effects from an organisational perspective. In this context, the SEC (2005: 57-63) establishes a series of steps necessary for an initial XBRL implementation that has an impact both on the organisational structure and on the role of various individuals in the organisation:

  • Step 1: Identify a project team with two sets of functional skills: Accountant and XML Developer. Accountants must be proficient in supporting technical accounting requirements, and XML developers must have good understanding of XML.
  • Step 2: Assess the scope of reporting and determine the taxonomy: The project team must decide with which SEC form to initiate their participation in the filing program (10-Q, 10-K, …) and determine the level of detail to tag and furnish with filed financial statements.
  • Step 3: Compare and map the form to XBRL taxonomies: The project team will review the original filing item-by-item, starting with the financial statements and then working through notes and management’s discussion and analysis. Assessing, mapping and identifying gaps are prerequisite activities to extending the primary XBRL taxonomies.
  • Step 4: Extend the taxonomy as necessary: The project team must choose a software program to extend the taxonomies, if it is necessary.
  • Step 5: Create an instance document and validate calculations: The project team must use a tool that allows the company either to associate relevant data to the specific taxonomy elements used in the company’s financial statements, or one that allows them to mark-up or tag another file format.
  • Step 6: Review and validate instance documents: The project team must conduct a process of validation, followed by quality assurance review prior to publishing.
  • Step 7: Publish the instance documents and taxonomy.

In the process of diffusion of innovations, it is possible to identify various factors that may condition its success or failure. These factors can originate from outside or inside the company. Sisaye (2003: 253) states that organizations respond to innovations in several ways depending on the source of uncertainty. The impetus for environmental change is either internally or externally induced. External environmental influences include changes in customer demands, governmental regulatory organization requirements, market competitive forces, or stockholders' desire for better leadership and management styles. Internally, an organization’s desire to improve current performance can necessitate innovations in order to meet or exceed the industry standards for excellent performance.

In the XBRL Voluntary Financial Reporting Program of the SEC, the initiative for extending the diffusion of the innovation comes from a governmental regulatory organization, which has introduced a series of requirements with the object of improving the process of diffusion of information by listed companies. Given this impetus for environmental change, the institutional approach to organizational change provides the context for at least two types of organizational change strategies: gradual-incremental and revolutionary-radical. An incremental change is a transactional change that is usually carried out at the discretion of the organization's management, and the change that results thus generally ensures continued overall system maintenance and stability (Sisaye, 2003: 253, 259).

The intention of the SEC is to promote organizational gradual-incremental change strategies in the listed companies, which should have the final result of increasing the diffusion of XBRL. To achieve this, the SEC leaves in the hands of the organisations the possibility of adopting the standard by means of a voluntary program, at the same time as it seeks broader adoption of XBRL with a step-by-step approach. (SEC, 2005: 47).

Cavalluzo and Ittner (2004) identify that both the organizational factors and the technical issues influence the process of implementation of innovations in performance measurement. Among these factors that can affect the diffusion of innovations, the potential influence of institutional factors would have to be considered (Efferin and Hopper, 2007). Organisations operate in a particular historical and cultural context, characterised by the existence of systems of shared beliefs, symbols and normative requirements (Scott and Meyer, 1985); this means that organisations tend to reflect particular models or forms originating in their own environment, by means of a process of institutionalization.

In addition to their search for economic efficiency, organisations seek to legitimize themselves and their activities, according to the conventions and standards of the institutional agents that are important in their environment. This implies that those organisations that have incorporated in their organisational structure the key cultural elements of their environment acquire more legitimacy than the rest (DiMaggio and Powell, 1983; Meyer and Rowan, 1977; Zucker, 1977). In this context, Firth (1996) indicates the importance of institutional factors in explaining the diffusion of accounting innovations.

As we previously commented, the XBRL Voluntary Financial Reporting Program is an initiative of the SEC with the object of securing the diffusion of the XBRL standard for the transmission of financial information for purposes of internal and external financial reporting, through voluntary participation and input from finance executives in every part of the financial reporting chain and in every industry. However, in this program, the SEC is only taking into consideration the technical factors that could motivate companies to take the decision to use XBRL for disclosing their financial information; the SEC has not considered the importance that organisational or institutional factors could have. The object of this paper is to identify the role that these factors can play in the process of diffusion of XBRL and in the adhesion of companies to the XBRL Voluntary Financial Reporting Program of the SEC.

Methodology and results

With the object of identifying the role that organisational or institutional factors play in the process of diffusion of XBRL and specifically in the adhesion of companies to the XBRL Voluntary Financial Reporting Program of the SEC, a Delphi study was conducted, in which a number of experts in XBRL, from the academic and professional areas, were asked their opinions as to the factors that would motivate companies voluntarily to submit tagged financial information, of a supplementary nature, using the XBRL format, under the SEC's XBRL Voluntary Filing Program. The ultimate goal sought with this study is to identify additional reasons that might be incorporated by the SEC into its arguments aimed at securing greater participation in the Voluntary Filing Program and, in this way, contribute to expanding the use of the XBRL standard.