Continuous AuditingPurpose
IsXBRL an accelerator for CA in practice
in TheNetherlands?
Erasmus School of Economics
K.B.Khargi
Master Thesis Economics & Informatics
Economics & ICT programme
StudentID 275859
EUR Supervisor
Prof. Dr. G.J. van der Pijl
2nd Supervisor
Ing. A.A.C. de Visser
18May 2011 /
The Internal Use of XBRL for Continuous Auditing Purpose
Master Thesis Economics & ICT
The Internal Use of XBRLfor Continuous Auditing Purpose
Is XBRL an accelerator for CA in practice in The Netherlands?
Acknowledgement
I thank my parents for stimulating me during my education and giving me space to succeed in everything I was doing.
This thesis would not have been possible without the interviewees. I thank them for their precious time, and for sharing their experience with XBRL with me: Willem Geijtenbeek, HuubLucassen, Jan Pasmooij, Paul Snijders, Hans Verkruijsse, and Jacques Urlus.
I thank my supervisor of the EUR Ad de Visserfor guiding me throughout the whole process, and for asking how I really was (and listen to the whole story). I thank WimPijls for an orienting dialogue about XBRL.
When I was down-hearted and had absolutely no hope for my study I turned to the ESSC. I really appreciate the help I got from Wendy Pelkmans, SachlanApil and Mr. B. den Boogert.
Furthermore I thank my friends and family for being patience when I was rude and moody sometimes during the time I wrote this thesis.
KavitaKhargi
Abstract
The motivation for this study has been the many papers on continuous auditing proclaiming that XBRL would enable continuous auditing and accelerate its adoption.
In the Netherlands this seem to be not the case; XBRL is not even implemented within internal processes of companies.
Therefore this research question was formulated:
What is needed in order to shift XBRL towards the front of the business reporting supply chain for the purpose of continuous auditing in The Netherlands?
After a literature study and several interviews with experts the following was the result for the conditions:
- First a change in perspective of the way we look at accounting is needed.
- Steps that companies have to take before implementing XBRL internally:
- Bear in mind what the stakeholders want; find out to whom the report is important, the target group, and what information they are interested in.
With the focus on sustainability they want a dialogue, with an annual report not.
- Map the internal information need for all levels in the company
- Make a corporate data model with all databases that are used and clean pollution in these databases; harmonize and synchronize all the different definitions from several systems for one same concept.
- Map the lack of knowledge within the firm knowledge management. This also includes what information exactly is given away to other parties with XBRL and what are the consequences.
- Software suppliers should take a more active role and not wait for what customers want.
Table of Contents
1.Introduction
1.1Background
1.2Motivation
1.3Research Objective
1.3.1Scientific Relevance
1.3.2Business Relevance
1.4Research Question
1.5Research Methodology
1.6Thesis Construction
2.XBRL
2.1The purpose of XBRL
2.2Two tiered design of XBRL
2.3Technical definition of XBRL
2.4 Barriers for adopting XBRL
2.5 Benefits of XBRL
2.6Adoption of XBRL in different countries
2.6.1 XBRL adoption around the world
2.6.2XBRL in The Netherlands
2.7XBRL Tooling
3Continuous Auditing
3.1What is Continuous Auditing?
3.2History of Continuous Auditing
3.3 Benefits and issues of continuous auditing
3.4Continuous auditing in The Netherlands
3.5 Requirements for Continuous Auditing
3.6Tools for Continuous Auditing
4XBRL and CA in the Business Reporting Supply Chain
4.1 Business Reporting Supply Chain
4.2 XBRL-GL: an enabler for CA?
4.3 What features XBRL to be an enabling factor for CA?
5Standard Business Reporting in The Netherlands
5.1What is SBR?
5.1.1 The SBR standards
5.1.2 The SBR components
5.1.3 The SBR facilities
5.1.4 Filing reports with SBR
5.2 Benefits of SBR to business
6Empirical data
6.1Top level interviews: chairpersons XBRL Netherlands
6.1.1 Interviewee1
6.1.2 Interviewee2
6.1.3 Interviewee3
6.2 Middle level interviews: IT auditors
6.2.1 Interviewee4
6.2.2 Interviewee5
6.2.3 Interviewee6
6.3Bottom Level: Case studies
6.3.1 Wacoal
6.3.2 Project Basic-life
6.3.3 Microfinance Information eXchange (MIX)
7Analysis
7.1Internal use of XBRL
7.2 Reluctance of firms
7.3Benefits of the internal use of XBRL
7.4Conditions
7.5Successes and failures
7.6Continuous auditing and XBRL
7.7Tools
7.8Adoption of XBRL
7.9Current situation of XBRL in The Netherlands
7.10Future
8Conclusion
8.1Main Findings
8.2Research Limitations
8.3Recommendations for further research
8.4 Lessons Learnt
Bibliography
Appendix: Questionnaire
1.Introduction
In this chapter the motivation of this research is presented. Then the research objective is given. The research question and sub questions are described in section 1.3. The methodology is presented in section 1.4. Finally, the construction of this thesis and its further chapters are briefly mentioned.
1.1Background
Auditing has experienced a major shift in automation over de last past decades. Traditionally, internal audit has been performed on a retrospective and cyclical basis, most often months or longer terms. The procedures of testing controls were often based on sampling and included activities such as reviews of policies, procedures, approvals and reconciliations. But, this approach gives internal auditors a narrow scope of evaluation that is often too late to be of real value to the business performance or regulatory compliance (Coderre, 2005). But nowadays pressured by new regulations and using new technologies, auditing has become almost a continuous process.The focus has shifted from only financial information to information of risk and control systems (Van Kuijck 2008)
In the early 1990s the business environment went through a series of substantial changes, among which “electronization” was one of. Ever more auditors could no longer review source documents in paper form(Bierstaker2001).The trend which caused the disappearance of the traditional audit trail continued and online systems and the Internet created an easier and cheaper way for data to be exchanged between systems, using the HTML protocol(Alles 2004).But HTML documents were not suitable to be extracted and compared. Therefore a language like XML, which adds information about the document’s content to its tags, was introduced.
In April 1998 Charles Hoffman applied XML to financial statements, in order to make financial data machine readable (O’Rourke 2001; Plumlee2008). The prototype was called XFRML (Extensible Financial Reporting Markup Language). This was initially designed for external reporting. Eventually, this evolved to version 1.0 of XBRL in July 2000.In 2005 XBRL International published the XBRL-GL (Global Ledger) specification, this is for internal auditing. The most recent version is XBRL Specification 2.1 (Bizarro & Garcia 2010).
XBRL is useful for preparing, publishing, exchanging, acquiring and analyzing accounting and business data, and provides a standardized method for transferring financial reporting information between software applications (Alles 2004). XBRL enables continuous auditing by placing financial data in a format which is not proprietary to any specific software application, allowing any future continuous auditing system access to data on any software platform, running any software (which uses XBRL), in any country (Flowerday 2006).
Today XBRL has been adopted in countries worldwide. In some countries the adoption of XBRL has made great progress and they have required reporting in XBRL by law. Some countries are lagging behind and have reporting in XBRL enabled instead of required.
- US SEC, reporting in XBRL is required
- Belgium `Balanscentrale' (Chamber of Commerce) reporting in XBRL is required
- China, Korea, Japan, XBRL is required
- In almost any country of Western Europe, reporting in XBRL is enabled
- Netherlands: Belastingdienst (Tax Services), Kamervan Koophandel (Chamber of Commerce) and CentraalBureau voorStatistiek (Central Bureau for Statistics) are XBRL enabled.
(Pijls 2010)
1.2Motivation
The motivation for this research was a result from a previous study about continuous auditing and continuous monitoring. During the literature study of that research the term XBRL was mentioned in some papers about continuous auditing. After following a course where XBRL was treated in one lesson, the interest arose to conduct further research.
In various papers XBRL is mentioned to be an enabler, a facilitator for continuous auditing, and accelerator for the adoption of CA. But is that actually the case in practice?Which financial data is covered by XBRL? Is that only data for the purpose of the financial report (in the end of the process)? Or is XBRL actually used in the CA processes, through CM and control processes? Or are these processes not taken into consideration by XBRL software makers in times were risk and control are so important?
1.3Research Objective
For this study the focus is on CA and XBRL adoption in The Netherlands.The objective of the research is to deliver a description on how XBRL is applied in CA processes in practice, in which business process this is best applied and which processes less.
This research contributes to the scientific field of CA and XBRL in The Netherlands.
1.3.1Scientific Relevance
As is shown in the figure of the hype cycle for GRC technologies on the next page, controls automation and monitoring was still in the technology trigger phase in 2008. For this thesis, the assumption is made that controls automation and monitoring includes continuous auditing. The fact that it was in the technology trigger phase in 2008 means that a breakthrough, public demonstration, product launch or other event catches the attention of significant press and industry. Due to the lack of more recent (free) information about the phase controls automation and monitoring is now in, the assumption is made that it is still in the same phase.
Figure 1: Hype Cycle for GRC Technologies
Source : Gartner 2008
For financial reporting with XBRL it was found that it is also in the technology trigger phase for 2009 an it is on the rise. As for XBRL as it is, in 2005 it was placed on Gartner’s hype cycle for emerging technologies in the middle of the phase Through of Disillusionment.
1.3.2Business Relevance
The result of this study is a description of what measures need to be taken before financial information tagged with XBRL is utilized in risk and control systems. The researchcan be beneficial for businesses, because it illustrates how CA could use XBRL. And although it is not the purpose of this research, it can show where improvements are possible.
There are already different parties involved in the expansion of XBRL in The Netherlands. But the majority of these parties are governmental institutions.
1.4Research Question
For this research the assumption was made that for the use of XBRL in continuous monitoring/ auditing processes is the same as using XBRL within internal business processes, i.e. the front of the business reporting supply chain (section 4.1).
During the gathering of empirical data in the form of interviews with experts it became clear that XBRL in The Netherlands is not used for internal processes.
The research question then changed into:
Sub questions to answer the research question are:
- What is XBRL?
- What is continuous auditing?
- Why is XBRL an accelerator for continuous auditing according literature?
- Why is XBRL not yet used for internal process in The Netherlands?
- What are the conditions to implement XBRL for internal processes and continuous monitoring/ auditing?
1.5Research Methodology
In order to gain the answers to the research question and the sub questions a literature studyas well asempirical data were needed.
The literature study was conducted in order to gain knowledge on the background of the topic and supportthe motivation for the research. Furthermore, literature study served as a tool to find answers to some of the sub questions.
In order to gather empirical data for this research interviews, because the topic is relatively new. Although both CA and XBRL have been developed for over a decade now, we see in publications of previous research (Khargi 2010) that implementation in the Netherlands goes with struggle (SBR). Therefore qualitative research is required for this study. Interviews were held in order to match the results of the literature study with the practice.
Figure 2: Scheme of Methodology and Thesis Construction
1.6Thesis Construction
In chapter 2 of this thesis the background of XBRL is presented. A short explanation of what XBRL from technical and accounting point of view is given. Something about the history and development is mentioned. And a brief overview of the adoption in various countries is set out.
Chapter 3 is about continuous auditing and its background. There are several descriptions found in literature. Some of them are presented. The development of continuous auditing through time is given.
In chapter 4an overview is presented of XBRL in the operating and continuous auditing processes. This is done by first explaining the concept of the business reporting supply chain and the place of XBRL and CA in this supply chain. In literature many times is stated that XBRL will enable CA.
Chapter 5 is about the SBR, Standard Business Reporting initiative developed in The Netherlands.
In chapter 6 the elaboration of the interviews held is presented. These are structured in a top-down approach. The top level interviews have been held with the chairman, vice chairman, and ex-chairman of XBRL Netherlands. Three IT auditors have been interviewed, for the middle level point of view. Because of the lack of implementation of XBRL for internal purposes, a summary of two case studies was used for the bottom level.
In chapter 7 the analysisis presented and the sub questions and research question are answered by means of the empirical data and the information found in literature,
Chapter 8contains the conclusion of this thesis, with the main findings and the lessons learned and recommendations for future research.
2.XBRL
In this chapter the background of XBRL is presented. In order to explain XBRL different approaches are presented. The accountants’ point of view is set out and on the other hand there is an approach from a technical point of view.
2.1The purpose of XBRL
XBRL is a language for the electronic communication of business and financial data which is revolutionising business reporting around the world. It provides major benefits in the preparation, analysis and communication of business information. It offers cost savings, greater efficiency and improved accuracy and reliability to all those involved in supplying or using financial data.
XBRL stands for eXtensible Business Reporting Language. It is based on XML and is therefore a markup language that codes financial information into a machine readable format compatible with most technological formats (Rezaee & Turner 2002). XBRL is a text-based language like HTML, and any text editor can be used to create code or “tags”. This XML-derivative language is aimed at enhancing and facilitating the business reporting and analysis process at accounting level (Bovee et al. 2005).
Figure 3: Change in business reporting
Source
2.2Two tiered design of XBRL
In order to accommodate significantly diverging financial reporting practices among different countries and various industries, XBRL uses a two-tiered design consisting of the XBRL specification and XBRL taxonomies (Bovee et al. 2005). The XBRL specification provides a set of generic tags for expressing various facts, and as such, this is not tied to any particular set of accounting standards or practices, or even to accounting in general. To provide concrete tags for marking an actual financial report, the XBRL specification has to be complemented with an XBRL taxonomy. It is an XBRL taxonomy that defines the markup of various accounting concepts as well as the hierarchical and numerical relationships among these concepts. While one single XBRL specification suffices, numerous taxonomies must be developed to accommodate the needs of different countries or industries.
Figure 4: XBRL chain of dependence
Source
2.3Technical definition of XBRL
According to a recent survey by the Institute for Internal Auditors (IIA), 51% of internal auditors confess that they lack a good understanding of XBRL technology (Bizarro & Garcia 2010). For those and others who are interested a technical definition is presented beneath.
At first, the start of the financial reporting process is at the transaction level data. XBRL can be used to store these data system-independently. This can be used to automate the aggregation process, as consolidation or summarizing to the financial statements. XBRL can do this automatically for multiple reporting formats (US GAAP or IFRS).
The data structure is defined by the XBRL Specification 2.1 and is composed of a series of taxonomies that define financial reporting concepts and their relationships. An XBRL taxonomy is equivalent to a stack of XML schema files, which define the structure, content and semanticsof XML instance documents.A taxonomy can be compared to a dictionary which includes the data elements and their meaning. An XBRLschema is usually a long list of items (more formal: a list of elements where each element belongs to the substitutionGroup `xbrli:item'). The accounting concepts are arranged in a hierarchical structure using a parent-child relationship.
An instance (=xbrl data file) consists usually of some units (currencies), some contexts (periods of instants), and a long list of items (with a unit and a context as attributes)(Pijls 2010).
Figure 5:process XBRL FR
Source: Bizarro & Garcia 2010
The picture shown on the previous page illustrates the typical process of using XBRL FR (for Financial Reporting) to generate and distribute financial information. This can be explained in several steps:
- The first step for a company is mapping the financial statements to the standard taxonomy following the company’s chosen reporting framework (e.g., GAAP).
- Next, a taxonomy entity-specific extension is created to address the company’s own accounting concepts and adjusted taxonomy relationships.
- This collection of taxonomies is called a discoverable taxonomy set (DTS).
- An XBRL instance document is created based on the financial data stored in the reporting system.
- The DTS is used to validate the instance document whether XML is well-formed and whether the data is consistent with the XBRL Specification.
- Finally, instance documents can be imported to an application for analysis or audit, or combined with XSL style sheets and transformations documents according to the user’s specification can be formed.
2.4 Barriers for adopting XBRL
Although the development of XBRL shows great promise, there are barriers to wide acceptance of XBRL. These include the high cost associated with adopting XBRL and (in 2005) the lack of requirement to file financial statements in XBRL. Though, the SEC has mandated that all U.S. publicly traded companies file their financial statements using XBRL by the year 2011 (Bizarro & Garcia, 2010). And, large accelerated filers using U.S. GAAP were required to begin reporting in XBRL in 2009.