Coping with a new language

It is said in a lighter vein that if one finds fault in others' work, it is normally labelled criticism but in the world of software, it is christened software testing. Test engineers are a critical resource as they are the ones who detect bugs in the bytes of code that the software engineers configure.

eXtensible Business Reporting Language ( XBRL) is the latest kid on the block in terms of software languages. Listed companies in India and their foreign and local subsidiaries and all companies having a paid-up capital in excess of Rs 5 crore or a turnover in excess of Rs 100 crore have less than 90 days to file their statutory returns for the year 2010-11 in XBRL, which is a language that computers can comprehend.

The Ministry of Corporate Affairs (MCA), in partnership with the Institute of Chartered Accountants of India (ICAI), has done all the spade work for XBRL, filing having published a taxonomy and business rules. The XBRL validation tool, which performs the role of a translator between the pdf/excel/word documents and XBRL, is expected to be available soon.

Validating XBRL

In the midst of all this activity, the MCA has indicated that it would specify that the XBRL statements are validated by the statutory auditor. The ostensible explanation given is that the personnel at MCA are not technically proficient to understand statements that a computer can. Auditors could reply in the same breath that they too are sailing in the same boat. It is universally accepted that the financial statements are the responsibility of the management and it is the duty of the auditor to express an opinion on these statements.

His responsibility ceases once he has issued his report and signed on the dotted line on the financial statements. It is debatable whether inconsistencies in filing these documents with the regulatory authorities can be traced back to the auditor. Even the statutory audit report is issued with a safe-harbour statement “according to the information and explanations given to us”. A parallel can be found in the unaudited financial statements of companies that are filed with the regulators and published in public domain with a remark that these have been reviewed by the statutory auditors (in case they have). A review has much lesser scope than a full-blown audit validation.

At best, the auditors can take a stand that they have reviewed the XBRL reports. One of the reasons that companies could protest against a validation by the auditors is the additional cost that would be involved. Companies have to invest on XBRL-compliant software, consulting and training. While it would be best left to the management to certify the correctness of the XBRL financials, the management could probably obtain pass-down certifications from the software vendor.

While the initial costs of transitioning to XBRL cannot be avoided, costs would stabilise once a larger population of entities move over to XBRL. XBRL offers an excellent opportunity for software vendors to build the application on the Cloud and offer it as Software as a Service (SaaS). There do not seem to be too many instances globally too of the statutory auditor vouching for the authenticity of XBRL statements.

Errors in XBRL

The possibilities of errors arising in a XBRL filing are rare but possible. The business rules provide some validation checks to ensure that stark differences are not thrown up. For instance, one of the business rules is that net current assets is a mandatory field and hence cannot be blanked. The XBRL taxonomy may not have a line item that is unique to a particular entity. Tagging this could pose an issue. In such instances, the entity has to use the best-fit option and tag it to an item in the taxonomy that closely resembles the nature of the item. The MCA has made it clear that there would be extensions of the present taxonomy for the present.

Most XBRL-software products have reverse engineering tools wherein XBRL-filed documents are translated into commonly-used and familiar documents. Companies could probably consider using XBRL for their internal reporting initially in order that all the possible snags are ironed out prior to the regulatory filing. On its part, the MCA can probably consider a dry run of XBRL filing prior to the due date to test for digressions. In case there are too many snafus, it could permit parallel filing for the current year and move over to XBRL from the next year — a commonly used practice when moving over to enterprise accounting systems from accounting packages.

The author is a Bangalore-based chartered accountant

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