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

1. An Integrated Approach to Assurance on XBRL Instance Document: A Conceptual Framework Rajendra P. Srivastava Ernst & Young Professor and Director E&Y CARAT, The University of Kansas rsrivastava@ku.edu 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

2. 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

3. 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”

4. 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.

5. XBRL Instance Document Preparation Process XBRL Specification 2.1 An 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 • Corporate Extension Taxonomies • Unique elements • Unique labels • Unique calculations • Unique references • Unique presentation “tagging” Corporate Financial Facts Instance Document Taken from Plumlee & Plumlee 2008 SEC Provided Viewer Presentation Tools/Style Sheets Final Output

6. 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.

7. 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.

8. 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.

9. 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***

10. 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

11. 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)

12. 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

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

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

15. User Understandability Usefulness Relevance Reliability Timeliness Verifiable Feedback Faithfully Represented Consistency & Comparability Prediction Neutral Benefit > Cost; Materiality Accounting Model: FASB, 1993 “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

16. IQ Model (Bovee, Srivastava & Mak, IJIS 2003) Information Quality Integrity Relevance Interpretability Accessibility Criterion 1 Timeliness Criterion n Consistency Accuracy Non-Fictitiousness Completeness Age Volatility

17. A Quality Model for XBRL Instance Document (Srivastava 2008) Quality of XBRL Instance Document It faithfully represents the Electronic Filings of FS Existence (Validity) Reliability Completeness Accuracy Proper Contexts Appropriate Units Valid XBRL Schema Other Appropriate Attributes Proper Linkbases Proper XML Representation Calculation Reference Label Proper XBRL Schema Definition Presentation

18. 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, …)

19. 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

20. 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

21. 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, …)

22. An Example: FRAANK Output of unmatched tags

26. 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