1 An Integrated Approach to Assurance on XBRL Instance Document: A Conceptual Framework Rajendra P. Srivastava Ernst & Young Professor and Director E&Y.

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An Integrated Approach to Assurance on XBRL Instance Document: A Conceptual

FrameworkRajendra P. Srivastava

Ernst & Young Professor and DirectorE&Y CARAT, The University of Kansas

[email protected]

Prepared for Presentation at

The 15th World Continuous Auditing And Reporting Symposium

&The 5th International Conference On Enterprise

Systems, Accounting and Logistics

July 7-8, 2008, Crete, Greece

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Outline Definition of Assurance on XBRL Instance Document Background SEC Proposal: Interactive Data to Improve Reporting Current Approaches to Assurance on XBRL Instance

Documents Objectives for the assurance services on XBRL

instance documents Materiality concepts Control Test versus Substantive Procedures Conclusions

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Assurance on XBRL Instance Document

General Definition (Srivastava, 2008)

“The XBRL instance document is a true representation of the electronic document (ASCII or HTML) filed with the SEC”

Definition under SEC Proposal

“The tagged financial statements are accurate and consistent with the information the company presents in its traditional format filings”

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Background SEC Proposal: Interactive Data to Improve Reporting (2008) Plumlee, D. and M. Plumlee. 2008. Assurance on XBRL for

Financial Reporting. Working paper, University of Utah. AICPA Assurance Services Executive Committee. 2008. The

Shifting Paradigm in Business Reporting and Assurance.1. XBRL Assurance Task Force, 2. Data Integrity Task Force

Boritz, J. E. and W. G. No. 2007. Auditing an XBRL Instance Document: The Case of United Technologies Corporation. Working paper, University of Waterloo.

Assurance Working Group (AWG) of XBRL International (2006)

Public Company Accounting Oversight Board (PCAOB). 2005. Staff Q&A Regarding XBRL Financial Reporting.

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XBRL Instance Document Preparation Process

XBRL Specification 2.1An XML Schema that provides the rules for

valid XBRL instance documents and taxonomies

US GAAP Taxonomies• Standard elements• Standard labels• Standard calculations• Standard references• Standard presentations

Instance Document

Corporate Financial Facts

Corporate Extension Taxonomies• Unique elements• Unique labels• Unique calculations• Unique references• Unique presentation

Presentation Tools/Style Sheets

Final Output

“tagging”

Taken fromPlumlee & Plumlee 2008

SEC ProvidedViewer

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SEC Proposal: Interactive Data to Improve Reporting (May 2008)

Proposal to mandate the filing of corporate financial data in interactive data (XBRL) format as exhibits along with human readable traditional filings and posting of the XBRL instance document on the company’s website.

Companies with a worldwide public float over $5 billion will be required to submit their primary FS, footnotes and FS schedules in XBRL format for fiscal periods ending in late 2008.

Accelerated filers will be required to comply with the new rules starting the following year

The remaining public companies would comply the year after that.

The comment period will end on August 1, 2008.

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General Requirements under SEC Proposal (Rule 405 Regulation S-T)

Information in interactive data format should not be more or less than the information in the ASCII or HTML part of the report

Use of the most recent and appropriate list of tags released by XBRL U.S. or the IASCF as required by EDGAR Filer Manual.

Viewable interactive data as displayed through software available on the Commission’s Web site, and to the extent identical in all material respect to the corresponding portion of the traditional format filing

Data in the interactive data file submitted to SEC would be protected from liability for failure to comply with the proposed tagging and related requirements if the interactive data file either

Met the requirements; or Failed to meet those requirements, but failure occurred despite the

issuer’s good faith and reasonable effort, and the issuer corrected the failure as soon as reasonably practical after becoming aware of it.

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Legal Liability under SEC Proposal

The financial statements and other disclosures in the traditional format part of the related official filing with which the interactive data appear as an exhibit would continue to be subject to the usual liability provisions of the federal securities laws.

The usual liability provisions of the federal securities laws also would apply to human-readable interactive data that is identical in all material respects to the corresponding data in the traditional format filing* as displayed by a viewer that the Commission provides.

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Validation Software: SEC Proposal Expectation

Check if required conventions (such as the use of angle brackets to separate data) are applied properly for standard and, in particular, non-standard special labels and tags;

Identify, count, and provide the staff with easy access to non-standard special labels and tags*

Identify the use of practices, including some the XBRL U.S. Preparers Guide contains, that enhance usability**

Facilitate comparison of interactive data with disclosure in the corresponding traditional format filing

Check for mathematical errors; and analyze the way that companies explain how particular financial facts relate to one another***

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SEC Perspective on Assurance of XBRL Instance Document

No requirement to involve third parties for preparing or providing assurance (Based on the following consideration) Comprehensive list of tags User-friendly software to create instance document Multi-year phase-in for each filer Interactive data technology specifications Advances in rendering/presentation software and

validation tools Expectation that filers will take the initiative to

develop sufficient internal review procedures to promote accurate and consistent tagging; and

The filer’s and preparer’s liability for the accuracy of the traditional format version

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Current Approaches to Conducting Assurance Service

PWC – Actual audit of United Technologies Corporation Financial statements

Boritz and No (2007) – A mock audit performed to explore the process

AICPA Assurance Services Executive Committee. 2008. The Shifting Paradigm in Business Reporting and Assurance

Public Company Accounting Oversight Board (PCAOB). 2005. Staff Q&A Regarding XBRL Financial Reporting.

Assurance Working Group (AWG) of XBRL International (2006)

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Concerns about the Current Approaches

In general, there is a lack of conceptual framework

It is similar to what the audit process used to be some 50 years back; a bunch of procedures to be

performed specific to each balance sheet account

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Table 3 Comparison between AWG and PCAOB (Boritz and No, 2007)

AWG PCAOB

Acceptance

Q4: Auditors’ sufficient knowledge of the applicable SEC Regulations and XBRL taxonomies and specifications to perform the examination.

Q6: Auditor’s independence in order to perform an attest engagement regarding XBRL-Related Documents

Terms of engagement

Planning the engagement – Understanding the subject matter

Assessing the appropriateness of the subject matter

Q5: The attributes of suitable and available criteria for examination engagements regarding XBRL-Related Documents

Assessing the suitability of the criteria

Q5: The attributes of suitable and available criteria for examination engagements regarding XBRL-Related Documents

Risk and materiality

Obtaining evidence Q7: Objectives and examination procedures regarding the XBRL-Related Documents

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Table 3 Comparison between AWG and PCAOB (Boritz and No, 2007, continued)

AWG PCAOB

Using the work of an expert

Management representations

Q7: Objectives and examination procedures regarding the XBRL-Related Documents

Reporting Q8: Reporting requirements for examination engagements regarding XBRL-Related Documents

Q1: General information about XBRL

Q2: Information about the XBRL Voluntary Financial Reporting Program on the EDGAR System

Q3: Primary engagement standards regarding XBRL-Related Documents

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Accounting Model: FASB, 1993

Benefit > Cost; Materiality

Usefulness

Relevance

Prediction

Timeliness

Consistency &Comparability

Reliability

Verifiable FaithfullyRepresented

User

Neutral

Feedback

Understandability

“Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information”, Original Pronouncements, Accounting Standards as of June 1, 1993, Volume II (AICPA Pronouncements, FASB Interpretations, FASB Concepts Statements, FASB Technical Bulletins), Financial Accounting Standards Board, CN, USA, 1993

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IQ Model (Bovee, Srivastava & Mak, IJIS

2003)

Information Quality

Accuracy

Completeness

Consistency

Non-Fictitiousness

RelevanceInterpretabilityAccessibilityIntegrity

Timeliness Criterion n

Criterion1

VolatilityAge

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A Quality Model for XBRL Instance Document (Srivastava 2008)

Quality of XBRL Instance Document

ReliabilityAccuracyCompletenessExistence (Validity)

Proper Linkbases

Appropriate UnitsProper Contexts

Calculation

It faithfully represents the Electronic Filings of FS

Proper XMLRepresentation

Valid XBRLSchema

Definition Presentation

ReferenceLabel

OtherAppropriate Attributes

Proper XBRLSchema

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Assertions Related to XBRL Assurance Document (Srivastava 2008)

Existence (Validity): All XBRL tags used to tag business facts are appropriate tags All non-standard tags used to tag business facts do not have

standard tags Completeness: All business facts including disclosures and

footnotes are tagged Accuracy: All tagged business facts accurately represent the

facts on the filed document Reliability

Valid XBRL Schema (Proper XML Representation & XBRL Schema)

Proper Contexts Proper Linkbases (Label, Calculation, Definition, Reference,

Presentation) Appropriate Units Other Appropriate Attributes (e.g., Debit/Credit Bal, Monetary,

…)

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Materiality and Risk Two kinds of materiality

Materiality for the entire FS Materiality for each line item in the instance document

Since the materiality concept used in the FS audit is at the aggregate level, the implied materiality in the instance document is also at the aggregate level.

However, since users are going to use each line item separately in their decisions, they will perceive each line item to be accurate in isolation. This would lead to erroneous decisions

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Audit Approach: Control Test versus Substantive Test

Control tests on the effectiveness of the software that produces XBRL instance document

Control tests on the effectiveness of the validation software

Substantive procedures All major line items need to be traced and

compared No Statistical Sampling

Each line item is a separate test unit; not appropriate for statistical sampling

However, on certain attribute one would be tempted to perform sampling but the size of the population is too small to use sampling

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Use of Technology for Assurance - FRAANK

Compare the two XBRL Instance Documents: one prepared by FRAANK and the other filed with the SEC for the following

Existence (Validity): All XBRL tags used to tag business facts are appropriate tags All non-standard tags used to tag business facts do not have

standard tags Completeness: All business facts including disclosures and

footnotes are tagged Accuracy: All tagged business facts accurately represent the

facts on the filed document Reliability

Valid XBRL Schema (Proper XML Representation & XBRL Schema)

Proper Contexts Proper Linkbases (Label, Calculation, Definition, Reference,

Presentation) Appropriate Units Other Appropriate Attributes (e.g., Debit/Credit Bal, Monetary,

…)

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An Example: FRAANK Output of unmatched tags

Original Label Tag Parent Tag

Accrued aircraft rent

KU_AccruedAircraftRent CurrentLiabilities

Advance ticket salesKU_AdvanceTicketSale

s CurrentLiabilities

Advances on flight equipment

KU_AdvancesOnFlightEquipment

PropertyPlantEquipmentGross

Air traffic liability KU_AirTrafficLiability CurrentLiabilitiesAircraft and traffic servicing

KU_AircraftAndTrafficServicing

OperatingExpenses

Aircraft fuel KU_AircraftFuelOperatingExpens

es

Aircraft fuel and related taxes

KU_AircraftFuelAndRelatedTaxes

OperatingExpenses

Aircraft fuel and taxes

KU_AircraftFuelAndTaxes

OperatingExpenses

Aircraft lease KU_AircraftLeaseOperatingExpens

es

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Conclusion For effective and efficient assurance process

of XBRL instance documents, we need assurance objectives (assertions) as a set of criteria against which evidence could be gathered and evaluated to make a decision whether the assurance objectives have been met or not in order to give an opinion

We need software like FRAANK

The present discussion is the first such attempt