SECURITY

XBRL and Risk Reporting: Part 2

John Jainschigg | Date: 07-01-11 | Comments

The backstory on XBRL is that its adoption is due to a multi-year development and testing effort by several groups.

A previous Smarter Technology article, discussed the growing use of XBRL, the eXtended Business Reporting Language, for risk reporting. That article noted that, similar to other SGML/XML variants, the dual purpose of XBRL is to make complex financial statements machine-readable, while also providing a transparent, public and standardized framework-of-frameworks for encoding their semantics.

The backstory on XBRL is that its adoption is due to a multi-year effort by several groups.

Back in 2009, IBM�s Data Governance Council, a group of more than 50 global companies formed in 2006, initiated (in collaboration with the Enterprise Data Management Council, the Financial Services Technology Consortium, XBRL International and the SEC) a dialogue aimed at formulating an extension taxonomy for using XBRL to report risk associated with financial instruments. As with XBRL per se, the idea was to use XBRL to standardize risk-reporting semantics, facilitate the creation of machine-mediated markets for trading, and implicitly, by back-propagation through the integrated XBRL-aware reporting systems used to generate these risk statements from auditable data sources in real time, to cause the emergence of firm global standards, principles and best-practice for measuring risk on the supply side.

This would, in turn, help regulators and central banks maintain large databases of loss history, perform reliable trend analysis, and as necessary, verify statements of risk by tracing back upstream to internal data sources. This would potentially aid in evaluating "toxic" assets, reduce the potential for risk and fraud, and provide a framework for banks to externalize risk to institutional insurers, rather than self-insure against loss.

In my opinion (and that of other analysts) this is a mind-blowing good idea. But as analysts have noted, XBRL risk management has miles to go before it becomes standardized and universally implemented. Unlike Securities and Exchange Commission reporting, there�s no single regulatory agency governing risk, no generally accepted principles for talking about it, and deep, de facto conflicts between existing representational regimes. Additionally, despite the financial meltdown of '08, entities transacting in risk have incentives to cloak aspects of the process.

Hopefully, however, the expected success of 2011 SEC filings and the broader use of XBRL by the insurance industry, among other dynamics, will gradually move the idea of XBRL risk reporting forward. And meanwhile, the integration of XBRL with business-intelligence systems is creating a de facto framework within companies for more-astute risk analysis based on machine-readable source documents.