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XBRL Audit Issues. eXtensible Audits Presenter John Ryan Available at http://www.ryannetworks.com. Topic Outline. XBRL Overview Easing Financial Reporting Red Flags for Accountants and Investors Auditor’s New Roles Sarbanes-Oxley 404 issues. XBRL Overview. History Goals Outlook

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Xbrl audit issues

XBRL Audit Issues

eXtensible Audits

Presenter John Ryan

Available at http://www.ryannetworks.com


Topic outline

Topic Outline

  • XBRL Overview

  • Easing Financial Reporting

  • Red Flags for Accountants and Investors

  • Auditor’s New Roles

  • Sarbanes-Oxley 404 issues


Xbrl overview

XBRL Overview

  • History

  • Goals

  • Outlook

  • Looking Deeper

  • Examples


History

History

  • Started as AICPA project

  • Adopted by w3c

  • Creation of XBRL.org

  • Accepted by Microsoft, SEC


Goals

Goals

  • Common Language

  • To reduce filing burdens

  • Napster for accountants

  • Lower the cost of finance depts.


The xbrl gl was created to meet these goals

The XBRL GL was created to meet these goals:

  • Multi-GAAP, drill-up to multi-XBRL reporting taxonomies.

  • Standard format for 3rd-party software to create journal entries to pull into client GL system.

  • Standard format to move unposted and posted GL information back and forth from branch offices to consolidating systems, budgeting and forecasting tools, reporting tools.


Goals cont

Goals Cont.

  • Standard format to upload general ledger information as well as payables and receivables master files and open balances in migrating from one system to another or moving information to or from an Internet Application Service Provider (ASP).

  • Standard format to move information from client systems to CPA/CA.

  • Standard format to move information from one CPA/CA system (e.g., write-up) to another (e.g., tax) in an international context.


Goals cont1

Goals Cont…

  • Standard format to represent open receivables, open payables, inventory balances, and other asset-based measures for sharing with banks.

  • Tool for representing detail drill-down for performance measurement reporting items.

  • Extensible for any type of mandatory audit trail.

  • Extensible for meeting any "sub-ledger" need.

  • Designed as XBRL spec-compliant but for easy translation to other uses; cannot assume that XBRL period, entity, unit and other context (numeric, nonnumeric) will automatically be there.


Outlook

Outlook

  • Adoption by Microsoft, and the SEC (Edgar Online)

  • Adoption by 100% of major accounting packages, Oracle, Peoplesoft, SAS…

  • Still Immature (SEC XBRL filings are hidden inside .gif files to avoid rejection)

  • Thousands of Dollars problem


Instance document creation

Instance Document Creation

  • Blast Radius (XMetal)

  • CaseWare International

  • Creative Solutions

  • Fujitsu

  • Hitachi Systems and Services

  • Microsoft Business Solutions

  • Semansys Technologies

  • Ubmatrix


Taxonomy creation

Taxonomy Creation

  • Fujitsu

  • Hitachi Systems and Services

  • Semansys

  • Ubmatrix


Xbrl validation

XBRL Validation

  • DecisionSoft

  • J2R

  • Fujitsu

  • Semansys Technologies

  • UBmatrix


Easing financial reporting

Easing Financial Reporting

  • Agreement on Terms

  • Create One Data Set

    • Distribute multiple forms


Agreeing on terms context

Agreeing On Terms – Context


Xbrl is xml the absolute beginners guide to xml

XBRL is XML – The Absolute Beginners Guide to XML

<!-- The original html recipe -->

<HTML>

<HEAD>

<TITLE>Lime Jello Marshmallow Cottage Cheese Surprise</TITLE>

</HEAD>

<BODY>

<H3>Lime Jello Marshmallow Cottage Cheese Surprise</H3>

My grandma's favorite (may she rest in peace).

<H4>Ingredients</H4>

<TABLE BORDER="1">

<TR BGCOLOR="#308030"><TH>Qty</TH><TH>Units</TH><TH>Item</TH></TR>

<TR><TD>1</TD><TD>box</TD><TD>lime gelatin</TD></TR>

<TR><TD>500</TD><TD>g</TD><TD>multicolored tiny marshmallows</TD></TR>

<TR><TD>500</TD><TD>ml</TD><TD>cottage cheese</TD></TR>

<TR><TD></TD><TD>dash</TD><TD>Tabasco sauce (optional)</TD></TR>

</TABLE>

<P>

<H4>Instructions</H4>

<OL>

<LI>Prepare lime gelatin according to package instructions...</LI>

<!-- and so on -->

</BODY>

</HTML>


Now in xml

Now in XML

<Ingredient>

<Qty unit="ml">500</Qty>

<Item>Cottage cheese</Item>

</Ingredient>

<Ingredient>

<Qty unit="dash"/>

<Item optional="1">Tabasco sauce</Item>

</Ingredient>

</Ingredients>

<Instructions>

<Step>

Prepare lime gelatin according to package instructions

</Step>

<!-- And so on... -->

</Instructions>

</Recipe>

<?xml version="1.0"?>

<Recipe>

<Name>Lime Jello Marshmallow Cottage Cheese Surprise</Name>

<Description>

My grandma's favorite (may she rest in peace).

</Description>

<Ingredients>

<Ingredient>

<Qty unit="box">1</Qty>

<Item>lime gelatin</Item>

</Ingredient>

<Ingredient>

<Qty unit="g">500</Qty>

<Item>multicolored tiny marshmallows</Item>

</Ingredient>


A markup

A Markup

<!ELEMENT Ingredients (Ingredient)*>

<!ELEMENT Ingredient (Qty, Item)>

<!ELEMENT Qty (#PCDATA)>

<!ATTLIST Qty unit CDATA #REQUIRED>

<!ELEMENT Item (#PCDATA)>

<!ATTLIST Item optional CDATA "0"

isVegetarian CDATA "true">

<!ELEMENT Instructions (Step)+>

<!-- This is the example DTD for the example XML -->

<!ELEMENT Recipe (Name, Description?, Ingredients?, Instructions?)>

<!ELEMENT Name (#PCDATA)>

<!ELEMENT Description (#PCDATA)>


Xbrl audit issues

<BODY>

<H3>

<xsl:value-of select="Name"/>

</H3>

<STRONG>

<xsl:value-of select="Description"/>

</STRONG>

<xsl:apply-templates/>

</BODY>

</HTML>

</xsl:template>

XSL

<?xml version="1.0"?>

<xsl:stylesheet xmlns:xsl="http://www.w3.org/TR/WD-xsl">

<xsl:template match="/Recipe">

<HTML>

<HEAD>

<TITLE>

<xsl:value-of select="Name"/>

</TITLE>

</HEAD>


Xbrl concept

XBRL Concept

There are two components that we can consider: an XBRL instance and its associated taxonomy set. While the XBRL instance contains the concrete facts (e.g., the value of the business concept "sales_per_share") being reported, the

taxonomy contains descriptions of the business concepts (e.g., the description of the business concept "sales_per_ share", what its syntax is, how it is calculated, etc.) that are being reported.


Example xbrl

Example XBRL

<ifrs-gp:AssetsHeldSale contextRef=“Current_AsOf”

unitRef=“U-Euros” Decimals=“0”> 100000 </ifrs-gp:AssetsHeldSale>


Taxonomies

Taxonomies

  • Approved Taxonomies comply with official guidelines for the taxonomy and with the XBRL Specification

  • Acknowledged Taxonomies meet the XBRL Specification only

  • Private Taxonomies have no requirements


Link base five links in three categories

Link Base – Five Links in Three Categories

  • Label links (labelLink)

  • Reference links (referenceLink)

  • Relation links (calculationLink, definitionLink, presentationLink)


Label and ref links

Label And Ref Links

Label and reference links relate business concepts to metadata. For instance, label links can associate concepts with text strings that can be used to label (or otherwise document) the concept in a report

(e.g., the label "Revenues in most recent quarter" for the item revenueMRQ defined in the taxonomy). Multiple labels can be defined for a single business concept in different languages. The XBRL instance author can decide which labels to use for that particular instance.


Labels used for authority

Labels used for Authority

Similarly, reference links can associate references to authoritative literature in the business domain. The mechanism used is similar to the label links in that you define a reference link with a locator for the business concept, one or more references to documentation, and a referenceArc defining the association between the locator and the reference(s).


Links for calculations

Links For Calculations

In contrast to label and reference links that relate business concepts to metadata, relation links relate business concepts to other business concepts. For example, calculation links define how a given concept figures in the calculation of another business concept. For example, the concept "profitAfterTax" is calculated from the concepts "profitBeforeTax" and "taxPaid" by subtracting one from the other.

profitAfterTax = weight(1) * profitBeforeTax + weight(-1)*taxPaid


More about links

More About Links

The relationship between these three business concepts is captured in the calculationLink in Figure 3.

Definition links describe several types of relationships among business concepts, such as generalization-specialization

relationships (e.g., "postalCode" is a generalization of "zipCode") among others. Presentation links, as the name implies, define the relationships between concepts from a presentation perspective (e.g., in the presentation of the report, a parent/child relationship should be shown between "sales" and "printerSales").


Sample xbrl application

Sample XBRL Application


Index of taxonomies

Index of Taxonomies


Red flags

Red Flags

  • Easy shifting of data between accounting models

  • Quick and Dirty Ratio Testing

  • Non-Audit Fees and Bond Rating


Effects of financial leverage on roe

Effects of Financial Leverage on ROE

  • Assume cost of debt is 8% and total assets = $100

  • EBIT = earnings before interest and taxes

  • EBT = earnings before taxesROE = return on equity

  • Tax Rate = 50%. Assume losses result in tax credit


Panel a 0 leverage

Rates of return on assets

0%

4%

8%

12%

16%

EBIT

$0.00

$4.00

$8.00

$12.00

$16.00

Interest Expense

0

0

0

0

0

EBT

$0.00

$4.00

$8.00

$12.00

$16.00

Taxes

0

2

4

6

8

Earnings avail com eq

$0.00

$2.00

$4.00

$6.00

$8.00

ROE

0.00%

2.00%

4.00%

6.00%

8.00%

Panel A 0% Leverage


Panel b 25 leverage

ROA

0%

4%

8%

12%

16%

EBIT

$0.00

$4.00

$8.00

$12.00

$16.00

Interest Expense

-2

-2

-2

-2

-2

EBT

($2.00)

$2.00

$6.00

$10.00

$14.00

Taxes

-1

1

3

5

7

Earnings avail com eq

($1.00)

$1.00

$3.00

$5.00

$7.00

ROE

-1.30%

1.30%

4.00%

6.70%

9.30%

Panel B 25% Leverage


Panel c 50 leverage

ROA

0%

4%

8%

12%

16%

EBIT

$0.00

$4.00

$8.00

$12.00

$16.00

Interest Expense

-4

-4

4

4

4

EBT

($4.00)

$0.00

$12.00

$16.00

$20.00

Taxes

-2

0

6

8

10

Earnings avail com eq

($2.00)

$0.00

$6.00

$8.00

$10.00

ROE

-2.00%

0.00%

4.00%

8.00%

12.00%

Panel C 50% Leverage


Panel d 75 leverage

ROA

0%

4%

8%

12%

16%

EBIT

$0.00

$4.00

$8.00

$12.00

$16.00

Interest Expense

-6

-6

-6

-6

-6

EBT

($6.00)

($2.00)

$2.00

$6.00

$10.00

Taxes

-3

-1

1

3

5

Earnings avail com eq

($3.00)

($1.00)

$1.00

$3.00

$5.00

ROE

-12.00%

-4.00%

4.00%

12.00%

20.00%

Panel D 75% Leverage


Xbrl audit issues

Capital Markets

Expected Returns

E(Risk)

Ris(free)

Sigma

Risk

Security Markets

Expected Returns

E(Risk)

Ris(free)

Beta


Horrigan bond rating model

Horrigan Bond Rating Model

  • Z=(1.197 x X0) + (.034 x X1) + (.272 x X2) – (.501 x X3) + (4.519 x X4) – (.203 x X5)

  • X0 1 or (0) if the bond is un-subordinated (subordinated)

  • X1 = Total Assets

  • X2 = Common equities / total debt

  • X3 = Working capital /sales

  • X4 = Operating profit / sales

  • X5 = Sales / stockholders’ equity


Ratings

Ratings

  • AAA2.855 < Z

  • AA2.094 < Z < 2.855

  • A1.062 < Z < 2.094

  • BBB0.838 < Z < 1.062

  • BB0.360 < Z < 0.838

  • B or Lower Z < 0.360


Non audit fees and bond rating aaroncrabtreepresentation at www bus lsu edu

Non-Audit Fees and Bond Rating –AaronCrabtreePresentation at www.bus.lsu.edu

Recent accounting scandals and perceived audit failures have resulted in excessive criticism of the accounting and auditing professions. […] Our research investigates one aspect of this situation by exploring the effects that non-audit services performed by a firm s external auditors have on perceived auditor independence in the bond market. Specifically, we analyze the effects that the magnitude and relative degree of non-audit services have on the bond rating process. Regression results indicate that the amount of non-audit services provided by a firm s external auditors is negatively associated with that client s bond rating. […] provide empirical evidence regarding the role that audit and non-audit service fees play in establishing a firm s bond rating.


Trouncing the dow pension fund by kenneth lee

Trouncing the DOW Pension Fund (by Kenneth Lee)

  • Uses Ratios do determine Buy and Sell Points

  • Good Track Record based on ROE vs price movements (28% avg annual return from 1973-1996.)

  • In 2001 Buys Coca-Cola because ROE is up 50% but price is not


Coke misbehaves

Coke Misbehaves

Stephen Taub, CFO.com - January 16, 2004

The Coca-Cola Co. announced that the Securities and Exchange Commission has launched a formal investigation of the soft-drink giant.

The probe stems from allegations made by former finance manager and whistle-blower Matthew Whitley, who sought a $44.4 million settlement from the company on the grounds that he had been fired in retaliation for raising concerns about accounting fraud….


Coke admits misbehavior

Coke Admits Misbehavior

Atlanta Journal 6/18/03

Coca-Cola admitted Tuesday that a high-level employee faked […] a written apology from Coke's president and chief operating officer.

The extraordinary exchange highlighted a day in which Coke admitted to some -- but not all -- of the allegations raised by a former employee, Matthew Whitley. […] wasn't told about the deception when Coke discovered it in 2001. Fisher was fined, but he kept his job and even was promoted. He no longer works for Coke.


The cause

The Cause ?

Coke's largest shareholder, Warren Buffett, has argued that the existence of stock options has induced many executives to doctor financial reports in order to inflate the price of company shares. Enron executives, for example, received tens of millions of dollars by cashing in stock options while their company's financial statements showed false information.

"I think accounting generally, in recent years, has deteriorated and it's done so with the help of management," said Mr. Buffett, who is a member of the boards of directors of Coca-Cola and The Washington Post.


My investment went ouch the cure

My Investment went Ouch! – The Cure

  • Sarbanes-Oxley

  • Continuous, timely auditing

  • Transparency

  • Separation of Auditors & Consultants

  • XBRL

  • Could XBRL help predict this?


Mini minority interest net income

MINI – Minority Interest Net Income

MINI is computed as the shareholders interest in the subsidiary’s income. All other Items are simply added. Note that the Parent Income and the consolidated income are equal. Note that while Coke (parent) is bigger CCE’s interest expense is greater. Suggesting Coke is parking liabilities.


Consolidated ratios

Financial Ratios of CocaCola Equity Method vs Consolidation

2001

2000

Financial Ratios

Equity

Consolidated

Equity

Consolidated

Current Ration

0.85

0.77

0.71

0.74

Debt to Equity

0.97

2.39

1.24

2.80

Debt to Tangible Equity

1.26

(8.21)

1.56

(7.29)

Debt to Assets

0.49

0.70

0.55

0.74

Debt to Tangible Assets

0.56

1.14

0.61

1.16

Gross Profit

0.70

0.64

0.69

0.63

Return On Sales

0.20

0.13

0.11

0.07

Return On Assets

0.18

0.09

0.10

0.05

Return on Tangb Assets

0.20

0.14

0.12

0.08

Return on Equity

0.35

0.30

0.23

0.20

Return on Tangb Equity

0.45

(1.04)

0.29

(0.52)

Times Interest Earned

20.62

6.61

8.60

3.82

Inventory Turnover

5.73

6.45

5.82

6.55

Receivables Turnover

10.90

9.06

11.32

9.73

LTD to Equity

0.11

0.88

0.09

1.02

LTD to Assets

0.05

0.26

0.04

0.27

Consolidated Ratios

Financial ratios show the discrepancy between the equity method and the consolidated method. All ratios are negatively impacted. Financial leverage is the hardest hit. Debt to equity Doubles, while debt to tangible equity goes negative. Return metrics are also negatively impacted


Other bad actors using equity method

Other Bad Actors using Equity Method

  • Enron

  • Boston Chicken

  • Elan

  • WorldCom/Embratel


Other methods of debt hiding

Other Methods of Debt Hiding

  • Lease Accounting

    • Lease Trouble at Delta and others

    • Banks get preferred Airplane lease rates

    • Recalculate Airline Debt using lease payments and work backwards

  • Pension Accounting

    • Pension troubles at AMR, Delta, Avaya, Goodyear, GM, Delphi, Navistar, and Ford

    • Restate the Pension debt at realistic interest rates

    • Debt matters including Pension Debt


University of illinois xbrl kirkwood credit analyzer

University of Illinois – XBRL Kirkwood Credit Analyzer

Ratio CmpqDellHPIBM

AssetTurnover 1.53 2.75 1.26 1.01

CurrentRatio 1.17 1.48 1.51 1.09

DaysCOGSInventory 24.24 5.96 57.91 32.58

[…]

Earnings Manipulation Probablity: 0.38% 0.36% 0.17% 0.80%


Issues for xbrl

Issues for XBRL

  • Taxonomy Selection Issues

    • Select One or More Taxonomies

  • Implementation Issues

    • Must Map Data Elements to Labels

  • Poor Flexibility

    • XBRL is Flat

  • No Security


Auditor s new roles

Auditor’s New Roles

  • XBRL Validation

  • Round Tripping

  • Source verification

  • Instance verification

  • Completeness verification


Xbrl validation1

XBRL Validation

  • Roundtripping

  • Two Validation Levels

    • Level I – Well Formed – valid XML

    • Level II – Valid – tests the schema for this (XBRL document

  • Still need to test for application conformance

  • XSLT generation from multiple Instances


Round tripping

Round Tripping

Roundtripping takes a document from its original form (e.g. XHTML) then translates it to another form (e.g. XBRL), and returns it to its original form.

Often this simple test will expose many flaws in an XBRL implementation and is a quick auditor trick to validate the XBRL generation process.


Source verification

Source Verification

  • Workflow

    • Control Points

  • Security

    • Horizontal

    • Vertical

  • Integrity, Authentication, Authority


Security

Security

"The use of vertical XML standards in financial services is on the rise. However, for XML standards such as MDDL, XBRL, RIXML to achieve widespread adoption, robust security for privacy, non-repudiation, trust and message integrity will be critical," said Mary Knox, principle analyst, Financial Services at Gartner. "Horizontal Web services standards like WS-Security, XML Encryption, XML Digital Signatures and SAML are all key enablers to the increased use of XML in financial services."


Supplementing with xml security

Supplementing with XML Security

XML Security Suite is a tool that provides security features such as digital signature, encryption, and access control for XML documents. These features are beyond the capability of transport-level security protocols such as Secure Sockets Layer (SSL). The goals in creating this technology were to contribute to standards development by providing sample implementations and to supply advanced technologies to partners and developers and to gather their input.


How it works where to get commercial software

How it Works/Where to Get – Commercial Software

  • Digital signature implementation based on "XML-Signature Syntax and Processing" by W3C/IETF

  • XML encryption implementation based on "XML Encryption Syntax and Processing" by W3C

  • XML Access Control Language and implementation

  • http://alphaworks.ibm.com/nav/security?open&c=security+-+Utilities


Keel public domain

Keel Public Domain

  • Model: Service for interacting with application or business logic.

  • Persistence: Service for managing storing and retrieving object states and data.

  • Security: Service for managing security of application, including authentication and authorization.

  • Scheduling: Service for scheduling the execution of the application's various functionalities.

  • Crypto: Service for encryption of transmitted application data.


Instance verification

Instance Verification

  • Just because it is valid XBRL does not mean

    • The calculations follow GAAP

    • That the data is valid

    • That you have access to the data

    • That the Instance can be parsed by your parser


Completeness verification

Completeness Verification

  • Just because it is XBRL does not mean that all required fields are reported to the correct agency

  • That all financial data made it into the Instance


Consistency

Consistency

  • Just because it is XBRL doesn’t mean that

    • Labels aren’t overwritten in new an incorrect ways

    • That the data was transmitted correctly

    • That a filter along the way did not remove key data


Sarbanes oxley requirement

Sarbanes-Oxley Requirement

Most public companies registered with the Securities and Exchange Commission (SEC) will soon be subject to internal controls reporting similar to the requirement imposed on the large U.S. banks and other insured depository institutions more than 10 years ago. Under Section 404 of the Sarbanes-Oxley Act, most SEC registrants (other than registered investment companies) must report annually on the effectiveness of their internal controls, and their independent auditors must attest to management?s conclusions


Sox section 404

SOX section 404


Sarbanes oxley 404 issues

Sarbanes-Oxley 404 issues

  • More and Faster Reporting

  • More Internal Controls, More blackout periods, more separation of duties etc.

  • IT departments responsible for security

  • Unprepared IT departments

  • Standard controls not defined for workflow model

  • Workflow’s are not organizationally understood


Example 404 checklists

Example 404 Checklists


Checklist cont

Checklist Cont.


Checklist cont1

Checklist Cont.


Checklist cont2

Checklist Cont.


Using keel to develop controls

Using Keel to Develop Controls

  • Web Based Control Checklist

  • App to implement, Test and Report

    • WorkFlow Design

    • Field level Encryption

    • Signed wrappers


Keel environment

Keel Environment

Keel is ready made server side infrastructure. Keel incorporates multiple open source projects to provide you with a best of breed framework that works right out of the box.

* Security layer

* Database abstraction layer

* Messaging layer

* Business logic layer

* User Interface layer

* Struts

* Cocoon

* Velocity

* Eclipse


Eclipse java

Eclipse & Java


Xbrl audit issues summary

XBRL Audit Issues Summary

  • XBRL is XML with all that entails

  • XBRL can save your investments

  • XBRL is a powerful tool to allow auditors to quickly perform audits

  • A lot of work needs to be done before these systems are mature

  • Sarbanes-Oxley will further burden Auditors with its IT knowledge requirements


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