ACCT 332 Week 5 Discussion Board Forum 3 Example

Discussion Board Forum 3: Data Analytics, Reporting Processes and XBRL

ACCT 332 Accounting and Control, Discussion Board Forum 3

Thread by [Student Name]

The valve manufacturer and the three classmates are composites; the textbook, Scripture and the peer-reviewed sources cited are real.

The controller of a composite valve manufacturer with about $90 million in annual sales has just paid an outside vendor to tag the company's first full 10-K in XBRL. Her view is blunt: tagging costs money and time, and no one at the company reads the tags. She asks whether anyone outside does.

Richardson et al. (2018) explain that XBRL attaches a tag to each item in the financial statements, drawn from a standard taxonomy that defines elements such as revenue or accounts receivable, so that computers can read and compare the data without retyping. Once tagged, the statements become a structured data set, which is exactly what the data analytics tools in chapter 9 need.

Who benefits? The evidence suggests the answer changed over time. Blankespoor et al. (2014) studied smaller companies in their first year of tagging and found that abnormal bid-ask spreads around their 10-K filings widened and liquidity fell, a sign that information asymmetry increased. Their explanation is that sophisticated investors with tools to process tagged data gained an advantage over everyone else. Later evidence is more encouraging. Dong et al. (2016) found that XBRL adoption reduced stock return synchronicity, meaning prices reflected more firm-specific information, especially for opaque and complex firms, and that prices absorbed news with less delay. Machine-readable data help markets most once many people can read them; at first, they help those who already had the machines. So the controller is right that her company does not use the tags, but the market increasingly does, and a more informative stock price lowers the cost of being misunderstood.

The prophet Habakkuk was told to write the vision on tablets plainly, so that whoever reads it can run with it (English Standard Version Bible, 2001/2016, Habakkuk 2:2). XBRL is a modern way of making a report plain to every reader, human or machine. Tagging accurately is part of making that plainness real. For the valve maker, that means reviewing the vendor's tag choices as carefully as the numbers themselves.

Reply to Nathan

Nathan, your Benford's law test on the expense report data was a good example of chapter 9's analytics, since the distribution of first digits flagged the employee whose claims clustered just under the approval limit. I would add that XBRL makes the same kind of test possible across companies. Appelbaum et al. (2017) note that auditors and analysts increasingly work with large structured data sets, and tagged financial statements are one of them. A regulator could run your test on revenue figures from thousands of filers in an afternoon. The same structure would let a small audit firm compare a client's ratios with an entire industry before fieldwork begins, which used to require buying a costly database.

Reply to Grace

Grace, you raised a fair concern that companies create custom tags, called extensions, when the standard taxonomy lacks an element, and that extensions make comparisons harder. Richardson et al. (2018) describe the taxonomy as the shared dictionary that gives tags their meaning, so every extension is a word outside that dictionary. That supports your point. I think the answer is for preparers to search the taxonomy carefully before creating an extension, and for auditors to review tag choices, since a mistagged revenue figure is wrong in every database that reads it. One check is simple: run the tagged filing through a free viewer and compare a few totals with the printed statements before filing.

Reply to Isaac

Isaac, you doubted that XBRL changes anything, since professional analysts already had the numbers. Evidence from Japan suggests otherwise. Bai et al. (2014) studied Japan's mandate, which required thousands of listed companies to adopt XBRL at once, and found reductions in the volatility of returns around filings and in abnormal bid-ask spreads, consistent with an improved information environment. Japan's all-at-once adoption avoids some of the early-adopter effects seen in U.S. studies, so it is a useful check on your doubt. It suggests the benefit is real, even if it takes time to appear. Professional analysts may gain least, as you say, but the smaller investors who could never afford to retype statements gain the most.

References

Appelbaum, D., Kogan, A., & Vasarhelyi, M. A. (2017). Big data and analytics in the modern audit engagement: Research needs. Auditing: A Journal of Practice & Theory, 36(4), 1-27. https://doi.org/10.2308/ajpt-51684

Bai, Z., Sakaue, M., & Takeda, F. (2014). The impact of XBRL adoption on the information environment: Evidence from Japan. The Japanese Accounting Review, 4, 49-74. https://doi.org/10.11640/tjar.4.2014.03

Blankespoor, E., Miller, B. P., & White, H. D. (2014). Initial evidence on the market impact of the XBRL mandate. Review of Accounting Studies, 19(4), 1468-1503. https://doi.org/10.1007/s11142-013-9273-4

Dong, Y., Li, O. Z., Lin, Y., & Ni, C. (2016). Does information-processing cost affect firm-specific information acquisition? Evidence from XBRL adoption. Journal of Financial and Quantitative Analysis, 51(2), 435-462. https://doi.org/10.1017/S0022109016000235

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Richardson, V. J., Chang, C. J., & Smith, R. (2018). Accounting information systems (2nd ed.). McGraw-Hill Education.