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Accounting measures the business and records the measurement. Firm's financial reporting is the way to communicate their information with capital markets. XBRL Financial Reporting is a revolutionary way to disclose company's information to external stakeholders, including the regulation part and the market part. As the new internet based business reporting language, XBRL Financial Reporting offers many benefits in the preparation, analysis, and communication of business information. (XBRL International) To find out the positive impact of XBRL Financial Reporting, prior researches about the benefits of XBRL adoption are reviewed. Researches about the impact of XBRL reporting on the capital market show that the adoption of XBRL reporting has negative relation with information asymmetry and convey incremental information to capital markets. Also, researches about the impact of XBRL reporting adoption to investors reported that XBRL-based financial information increased investors' ability to acquire and integrate financial information in their investment decision procedure.
Also, as XBRL Financial Reporting is expected to replace traditional financial reporting, it is important to research how to give assurance on XBRL Financial Reporting. This is because the assurance on XBRL reporting strengthens the role of XBRL Financial Reporting as an information source. Prior researches about the issues in assurance on XBRL instance document and the conceptual framework for the assurance on XBRL reporting are reviewed in this paper.
In the last section, the prospective research about the impact of XBRL Financial Reporting on the management accounting decision procedure is presented. The research suggestion illustrates the expected positive effect of XBRL Financial Reporting on management reducing the real earnings management.
What is XBRL?
In this section, the XBRL (eXtensible Business Reporting Language) is a standard XML (eXtensible Markup Language) reporting language for communicating financial information through the internet. XBRL aims to enhance the efficiency, accuracy, and reliability of financial reporting. XBRL offers financial and non-financial data contexts. Data in XBRL format does not need be converted from one application to another because data are independent of applications by using standard tags for data items (Farewell, 2006). Standard tags in XBRL documents enable specific identification, convenient analysis, automatic exchange and storing, and reliable presentation of financial information in across different software applications. XBRL significantly increases the speed of financial data treatment, reduces the likelihood of error and permits automatic checking of information. Consumers of financial information, including investors, analysts, financial institutions and regulators, can receive, find, compare and analyze data much more rapidly and efficiently if it is in XBRL format (XBRL International).
Figure 1 XBRL Instance Document Generating Procedure.
Figure 1 illustrates the XBRL instance document generating procedure. The procedure starts with selecting the XBRL technical specification. By selecting and maintaining the XBRL specification, the comparability and consistency of XBRL taxonomies are valid. XBRL framework consists of XBRL taxonomy and XBRL instance documents.
2.1 XBRL Taxonomy
In XBRL, all of the elements are grouped together into a collection of financial and business reporting terms, taxonomy. XBRL Taxonomies function as the dictionaries of elements. XBRL Taxonomies are the categorization schemes which define the particular tags for individual items of data, such as "net profit" (XBRL International). By tagging the business information using XBRL taxonomy, the business information can be more efficiently and effectively processed, analyzed, and distributed. Also, XBRL is easily extensible. Taxonomy terms can be customized, so that firms using XBRL can generate their own elements, Extensions, to express their unique reporting situation. By using the extensions companies and organizations can meet various special requirements. In addition to each company's own extensions, Industry Specific Taxonomies exists. The purpose of Industry Specific Taxonomies is to provide standard taxonomies that describe the industry featured items, such as "Jet-way Landing Rights". The Jet-way Landing Rights is an asset element for the airline companies and it addresses the unique item of airline industry.
2.2 XBRL Instance Document
The XBRL instance document is the business facts expressed in the XBRL format. The main purpose of the instance document is to accumulate financial data tagged with elements from a referenced taxonomy for reporting and decision making intensions. In addition to presenting business "facts," the instance document presents some further information that is used to express the facts, such as the name of the organization, period, measurement unit, accuracy in terms of number decimal points, and whether the financial statement being reported is real or predicted. In addition, the instance document gives reference to other files on definition of business concepts, relationships with other concepts, GAAP, professional publications, footnotes, human readable labels of business concepts, and presentation styles. An instance document includes a unit for each type of measured data tagged. Currencies and shares are the most frequent examples of units of measure in financial reporting. (Srivastava 2009)
Researches in investigating the impact of XBRL-formatted financial statements in capital market
Benefits from XBRL adoption has been researched for many perspectives. XBRL allows information to be easily accessible to all users irrespective of whether they are professional users or novice users. This increases transparency of the business information. Thus, XBRL will make it easy for businesses to conform to the regulatory reporting mandatory, such as Fair Disclosure Regulation. Also, XBRL increases the relevance of accounting information in timeliness perspective. Ettredge(2002) pointed out that there exists time lag between official filing of financial statement and web-posting of the statement. However, XBRL provides the capability of quick disclosure, so the lag between official filing and web site posting is not applied to XBRL format reporting. In this research review section, papers about realized benefit of the adoption of XBRL reporting, rather than conceptual benefits, are presented.
3.1 Does XBRL adoption reduce information asymmetry?
Yoon H, et al (2010) examined whether XBRL adoption reduces the level of information asymmetry in South Korean stock market. Also, they investigated whether the impact of XBRL adoption on reducing information asymmetry is bigger for large firms than for small firms. They selected South Korean stock market as the sample for the study. In South Korea, the policy of filing financial statements in XBRL format has been mandatory since October 1, 2007. The companies, listed in the Korea Composite Stock Price Index (KOSPI) and the Korean Securities Dealers Automated Quotations (KOSDAQ), have to file their financial reports to the Data Analysis, Retrieval and Transfer (DART) system using XBRL format.
The information asymmetry was measure by using bid-ask spread. The bid-ask spread is the difference between the prices that quoted by buyers and sellers for a given security. Information asymmetry and the bid-ask spread have positive relationship. By separating the sample into two groups, pre-XBRL adoption period and post-XBRL adoption period, the authors tested the effect of XBRL adoption on the information asymmetry in South Korean stock market. The indicator variable was used for the XBRL adoption.
Yoon H, et al (2010) reported that XBRL adoption lessened the information asymmetry of the South Korean stock market. Authors interpreted the result as "XBRL adoption reduces the time and cost to circulate corporate information in stock markets as well as enhances the compatibility of this information for integration among different information systems. XBRL adoption also increases the transparency and quality of corporate information in the capital market, which improves the search capability of XBRL and the circulation of corporate information. Finally, XBRL adoption facilitates corporate disclosure, which reduces the information asymmetry of the capital market (p. 6)." Also, they found that the impact of XBRL adoption on diminishing information asymmetry is stronger for large firms than small firms. Based on the results, this research provides supports for the mandatory XBRL adoption by showing the positive effect of XBRL filing on the capital market.
3.2 Does search-facilitating technology improve the transparency of financial reporting?
Hodge, et al (2004) examined whether employing an XBRL-enhanced search engine aids nonprofessional financial statement users in acquiring and integrating associated financial information when in their investment decision making procedure by performing an experiment with 96 MBA students as substitutes for non-professional financial statement users.
Specifically, authors concentrated on the stock option compensation disclosure and non-professional users' recognition ability for the disclosure. Managers are permitted to either recognize the fair value of stock option compensation in the income statement as an expense or disclose this information in the footnotes (Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation (FASB 1995)). In the case that the stock option compensation is disclosed in the footnote, the reported income become higher than the income of the case that the compensation is included in the income statement. On the other hand, if an investor integrates the information in the footnote with the information in the income statement, then the investor should make same conclusion about the level of income in both cases.
Hodge, et al (2004) reported that many of participants do not access the technology, but participants who use search-facilitating technology are more probable to acquire footnote information, and are more likely to integrate the footnote information with related information on the countenance of the income statement when making judgments and decisions than participants who do not use search-facilitating technology. Also, they suggested that the benefits of employing search facilitating technology should be publicly acknowledged to encourage financial statement users to use the technology. They pointed out that training investors on how to use thins technology may be necessary.
This research showed that search-facilitating technology can help non-professional users properly find and use the financial information in their investment decision procedure, however the fact that the technology exists do not improve the user's decision making procedure. It is important to encourage information users to employ the technology.
3.3 Does XBRL reporting have incremental information content?
Efendi et al (2010) investigated whether XBRL reporting format has incremental information content beyond the Securities and Exchange Commission (SEC) quarterly and annual reports submitted to the legacy EDGAR (Electronic Data Gathering and Retrieval) system which uses HTML or ASCII format (henceforth EDGAR filings). This information content emerges from the smaller investors' ability to use XBRL information and to analyze the information more efficiently in their investment decision procedure, although there may be no supplementary information beyond EDGAR filings.
The sample consists of 342 observations from the SEC XBRL Voluntary Filing Program in 2005 to June 30, 2008. The voluntary filing program yields a natural experimental setting for the test whether XBRL format itself provides incremental information to the market. This is because the Voluntary Filing Program allows participating firms to experiment with XBRL and resubmit their 10Q and 10K financial statement in XBRL format on the later day after their EDGAR filing. Based on the allowance, there is expectation for new information in XBRL format financial statement.
In identifying the existence of incremental information, authors apply the non-directional Patell (1976) procedure to detect market reactions by investigating the occurrence of squared standardized excess returns on the day the XBRL format reports are filed. They found that the price variance on the filing day is 1.58 times higher compared to benchmark period (a period of 250days prior to the filing day). Detecting significant price movements on the filing date shows that XBRL format financial reporting conveys incremental information to capital markets. Market reactions to the XBRL filling would propose that investors are using the information from XBRL filing for trading purposes.
Assurance on XBRL Instance Document
Although the SEC (2008) mandates top 500 public companies in the USA to submit XBRL formatted reports, starting from June 2009, along with the traditional filing, it is not mandatory that those XBRL based reports be audited by a third party. It is only required that these XBRL-based reports should reflect the same information in the financial statement in traditional format (official EDGAR filing) (SEC 2005). SEC does not require a third party assurance of XBRL-based report to encourage filers to conform to the SEC requirement without any incremental costs.
4.1Assurance on XBRL for financial reporting (Plumlee and Plumlee 2008)
Plumlee and Plumlee (2008) describe the process of how an XBRL instance document is created and discuss the issues involved in providing assurance on XBRL instance documents. Authors concentrate on the shift from a paper-centric to a data-centric focus. "Paper-centric" view assumes users focus on the printed form of financial information. On the other hand, "Data-centric" view focuses on the appropriateness and the accuracy of the individual tags.
Authors point out that, since XBRL documents are produced by tagging financial reporting information with the XBRL taxonomies to make the information computer-readable and searchable, the possibility of material misstatements exists because of possible problems in "tagging". Based on this concern, authors raise several potential assurance issues for XBRL documents. First, it is important to make sufficient precision for what constitutes an "error" in providing assurance on XBRL instance documents. Second, the guidance about the sampling method for the tags should be clarified. Lastly, it is unclear how the "risk" and "materiality" translate into the audit procedure of XBRL tags. On the other hand, authors do not present any conceptual structure for performing an audit of the XBRL instance document. Srivastava and Kogan (2008) build up "a conceptual framework" for providing assurance on XBRL instance document.
4.2 Assurance on XBRL instance document: "A conceptual framework of assertions"
Srivastava and Kogan (2008) suggest a conceptual framework of assertions for providing assurance on XBRL instance document that is created based on the SEC interactive data filing requirements. Authors contend that, in the era that the XBRL-based reports become the main and only format of the SEC filings, this conceptual framework will must be revisited to be combined into the statutory audit methodology.
Authors propose three sets of assertions. Violating these assertions will result in composing errors in the XBRL instance documents. According to authors, the structure of XBRL instance documents makes it reasonable to divide the "risk of deficiencies analysis" into the "data deficiency" and "meta-data deficiency" parts. The former part directs to the probable deficiencies of the facts that are marked up in the XBRL instance document, and the latter part refers to the probable deficiencies of the mark-up itself, including both the mark-up deficiencies in the instance document and the XBRL taxonomies deficiencies.
Below is from Srivastava and Kogan (2008, p 13)
The first set of assertion is based on the probable data deficiencies in the XBRL instance document: Completeness, Existence, and Accuracy.
Completeness: All of relevant facts/data that are reported in the traditional format document
are included in the XBRL instance document.
Existence: There is no tagged fact/data in the XBRL instance document that does not exist in the
traditional format document.
Accuracy: The values of all elements and attributes in the XBRL instance document accurately
represent the facts in the traditional format document.
Therefore, this assertion includes two sub-assertions: Element Accuracy, and Attribute Accuracy.
The second set of assertion is derived from the possible deficiencies of the mark-up in the XBRL instance document.
Well-formedness: The XBRL instance document is well-formed- the document conforms to all XML
Validity: The XBRL instance document is valid - the document conforms to all of rules of XBRL
and referenced XBRL taxonomies.
Proper Representation: The tagged business fact in the XBRL instance document properly describes the
facts in the traditional format document
The third set of assertion is derived from the probable deficiencies of XBRL taxonomies used by the filer.
Proper Taxonomies: The facts/data tagged in the XBRL instance document uses proper general and
industry-specific XBRL taxonomies.
Valid Taxonomy Extensions: The XBRL taxonomy extensions referenced by the XBRL instance document are valid - the extensions conform to all rules of XML and XBRL.
Proper Extension Elements: The new elements in the XBRL taxonomy extensions referenced by the
XBRL instance document are introduced properly - the extension tag, with its appropriate attributes, is formulated only when available standard tag does not exist.
Proper Linkbases: The linkbases in the XBRL taxonomy extensions referenced by the XBRL instance
documents are suitable.
The assurance provider can collect applicable items as the evidence to determine the overall confidence whether all the assertions are true. Regarding the level of support for each assertion, the assurance provider may determine to obtain more evidence, suggest correction to the instance document, qualify the opinion, or present a clean opinion. By suggesting a conceptual framework for the assurance on XBRL instance document, Srivastava and Kogan (2008) establish the benchmark procedure that assists auditors in planning and assessing an assurance engagement for XBRL instance document.
Prior researches found out that XBRL formatted financial reporting have positive impact on capital markets. Investors in capital market can increase their ability to acquire and integrate the financial information by using the XBRL format reporting. (Hodge et al, 2004) Based on the comparability of XBRL based information, investors are expected to detect abnormal value in reported information. The abnormality can be found by comparing the each company's performance in different periods or by comparing with industry benchmark.
In earnings management literature, management's accounting choice and their decision is important factor with consideration on their incentive for the earnings management decision. Zhang 2006 found that managers consider accruals management and real manipulation interchangeable. They treat the accruals management and real manipulation as substitutes and choose one of them based on situations they face. Also, Cohen and Zarowin (2010) reported that, because of auditor's and regulator's scrutiny, along with past earnings management activities, managers have more propensities to use real management. Gunny (2005) found that companies engage in real earnings management by implementing following activities: (1) shortsightedly investing in Research and Development (R&D) to increase income (2) shortsightedly investing in selling, general and administrative (SG&A) to increase income (3) timing of earnings recognition from the disposal of long-standing assets and investments (4) cutting prices to increase sales in the current period and/or overproducing to decrease COGS expense. These activities are not easily found from the analysis of financial statement, and this is the important incentive to management choose real earnings management rather than accruals management.
However, investors, who use the XBRL formatted financial reports and analyze firm's information, may find those earnings management activities. Also, as Hodge et al (2004) pointed out, the recognition of management's accounting choices to disguise investors raise information user's concern about the financial reporting reliability of the firm. In this environment, management's incentives to conduct real earnings management activities will be decreased. So the hypothesis for the research is that
H1. The adoption of XBRL formatted financial statement has negative association with real earnings management activities.
Regarding this hypothesis, several related researches will be conducted.
A research about changes in manager's earnings management decisions based on the XBRL reporting, in experimental setting
By using archival data, the relation of XBRL reporting and the real earnings management occurrences can be investigated.
Based on the research about the mechanism of XBRL reporting and the realized benefits of XBRL reporting, it is evident that the adoption of XBRL positively influenced on capital markets. Specifically, the XBRL format financial reports increased the investor's ability to evaluate the financial information and apply to their investment decision. Also, researches show that the adoption of XBRL reporting has negative relation with information asymmetry and convey incremental information to capital markets.
Researches about assurance on XBRL instance document raised important issues. It is important to treat the assurance on XBRL instance reporting based on the data-level perspective. Tagging procedure is the main unit for the assurance. By disentangle the factors of tagging procedure in three parts, element, mark-up, and taxonomies, the conceptual framework gives meaningful foundation for the assurance on XBRL instance document.
By conducting the suggested research, it is expected to show that the positive impact of XBRL financial reporting on the management also exists. Regarding investors' improved ability to use the financial information, management's incentives to conduct real earnings management are expected to be reduced. Then XBRL Financial Reporting is expected to have positive impact on capital market by reducing the real earnings management behavior and improving the earnings information quality.