This Week in XBRL: Using XBRL for Fraud Auditing

The Blog for the Central Virginia Chapter of the Association of Certified Fraud Examiners has posted an in-depth study of potential uses for XBRL within the realm of fraud discovery and prevention. Originally posted on November 20th, the article does an incredible job of explaining alternative uses for XBRL, and how your company can use the language to keep a better eye on major financial issues.

Below, we have shared an excerpt from the blog post. To read the full text, click here, or the link at the bottom of the quote.

As one of its many projects to improve financial reporting, the SEC supports the use of Extensible Business Reporting Language (XBRL) to tag corporate financial transaction-level data as a way to connect financial accounts in a database like Oracle Financials to the underlying account detail and make browser-user instituted data query results available in close to real time on the corporate web-site.  This gives the general browser  user (whether s/he be an investor or a fraud examiner) a level of access to financial data unfettered by the conventional time-period, quarterly  based financial statement model of  financial  data reporting.   Investors can make investment decisions and fraud examiners and auditors can obtained up-to date financial data to test on a concurrent basis.

Conventional auditing, unsupported by on-line access to current data, is like trying to capture Niagara Falls in a bucket.  Not only is the data available frequently so out of date as to have limited value for testing; often it’s place and significance in the wider corporate financial picture is difficult to discern.  Is an identified problem a fluke limited to just a few transactions or is it an example of a wider, more significant control issue?  Real time availability of recent, sub-totaled, quarterly transaction level data on a multi-year basis,  can answer such a question with ease.

 

The ability to concurrently test for the presence (or suspected presence) of an on-going fraud scenario using up-to-date financial data has tremendous appeal for any fraud examiner or forensic accountant.  But there are problems; there always are.   The financial reporting model we all learned in business school  requires our client firm to prepare its financial statements under a strict set of rules and then to disclose the complete set of information at a pre-defined time.  Under the type of concurrent XBRL based system envisioned by the SEC,  financial information is available at times the user (auditor, investor, etc.) determines; all she has to do is write a database query and the information is at her finger tips.   That’s the rub.  Query language is not standard English and the consequences of using data output from an auditee system based on an erroneous query would be disastrous for  your employing attorney’s case.  So, any auditor with the desire to use such systems must either have the requisite query building skill to do so with confidence (very few do) or, better,  rely on third party experts (information systems auditors or the equivalent) as compensated assistants.

Please click here for the full article text.

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Merrill Corporation is proud to offer XBRL Complete, a suite of services that meets - and has options to exceed – the mandated requirements for XBRL for mutual funds. For more information, please click here or call 866-367-9110.

FINRA Issues Reporting Rules Amendments

A FINRA announcement has just gone out regarding a number of rules regulating the finance industry. Here is FINRA's summary of those changes.

The SEC approved amendments to NASD Rule 2711 and Incorporated NYSE Rule 472 to conform to the requirements of the Jumpstart Our Business Startups Act (JOBS Act) and make certain additional changes to quiet period restrictions consistent with the policies underlying the JOBS Act. Most of the changes to NASD Rule 2711 and Incorporated NYSE Rule 472 are effective retroactively to April 5, 2012; changes to those rules regarding quiet periods after secondary offerings and after the expiration, termination or waiver of a lock-up agreement became effective upon approval by the Securities and Exchange Commission (SEC) on October 11, 2012.

Cutting through the alphabet soup, the amendment essentially allows research analysts to attend meetings with the management of an issuer that meets the definition of an emerging growth company (EGC), even if investment bankers also attend the meetings.

If you'd like to read more detail on these rules changes, the full text of the amended rules is available at www.finra.org/notices/12-49. Alternatively, FINRA has released a PDF summarizing the specific rules affected.

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Merrill Corporation is proud to offer XBRL Complete, a suite of services that meets - and has options to exceed – the mandated requirements for XBRL for mutual funds. For more information, please click here or call 866-367-9110.

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Merrill Corporation is proud to offer XBRL Complete, a suite of services that meets - and has options to exceed – the mandated requirements for XBRL for mutual funds. For more information, please click here or call 866-367-9110.

What are the Benefits of Data Transparency?

We’ve been covering the progress of the DATA Act on this blog since the middle of last year. Throughout that process, we’ve been explaining some of the potential benefits that this legislation could bring. Over the next few weeks, we’ll be re-examining the idea of transparency in finance, and by extension, exploring what has come out of the DATA Act since it was signed in July of this year.

The Background

We first wrote about the DATA Act in October of 2011, wherein we explained how the Act was going to use XBRL to improve transparency across the nation’s industries.

By requiring the Secretary of the Department of Health and Human Services to consider XBRL, the federal government is getting the tools it needs to deliver better data -- which will help the Department better administer its child welfare programs and ultimately help states better serve children…We need to know who is and isn't receiving federal aid to more effectively help our children in greatest need. I think it's fitting that the first U.S. law mandating XBRL is helping our government better meet the needs of our most vulnerable children.

Then, in May of 2012, we started covering the senatorial debates standing between the Act and federal approval. The DATA Act was quickly approved by the House of Representatives, largely due to a high-profile scandal in which millions of dollars was wasted on an over-the-top Las Vegas conference. As it turned out, it moved through the senate just as quickly.

The DATA Act was a huge step in the fight for government financial transparency, and it was a wonderful moment to watch the Act pass uncontested.

Next week, we’ll update you with some of the research and results from this legislation, and we’ll follow that up by reporting on how this legislation could benefit your company.

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Merrill Corporation is proud to offer XBRL Complete, a suite of services that meets - and has options to exceed – the mandated requirements for XBRL for mutual funds. For more information, please click here or call 866-367-9110.

In the Wake of the Financial Crisis Pt. 3

Last week, we began looking at this report from McKinsey & Co., explaining some of the continuing symptoms of the 2009 financial crisis. McKinsey found that banks across the globe will continue to suffer from those effects for at least another few years. Here are a few more examples the report uncovered.

Regulatory changes have put an end to the proprietary trading models that many banks relied on. As a result, “[the report] prescribes ‘massive cost cutting’ to supplement what has already occurred at the capital markets giants.” Smaller retail and business banks are feeling the crunch as well.

Retail banks, however, face decreasing customer loyalty and business banks "no longer enjoy structurally lower funding costs than many of their large corporate clients," the study says.

Compounding banks' problems are technologies that make it much easier for new competitors to steal customers. Wal-Mart Stores Inc (WMT.N) and American Express Co (AXP.N) on Monday announced a joint venture to provide financial services through a prepaid debit card aimed primarily at low-income customers.

The report also noted an 8% increase in expenses, compared to only 1% increase in revenue for those banks.

Reuters also reported on a lack of investor trust.

More than two-thirds of publicly traded banks in developed markets now trade "significantly" below book value, according to McKinsey, and the average price of insurance against bond defaults for 124 banks sampled by McKinsey rose to the highest level on record last year.

Bank stock prices globally last year traded at 11 times earnings, down from 15 in 2007.

However, there may be a silver lining after all. In addition to the bad news, Reuters also mentioned a major flaw in the McKinsey report’s findings.

Some analysts challenged the dire report. Focusing on conventional double-digit returns to shareholders when interest rates and funding costs are at historic lows is irrational, said Richard Bove, an analyst at Rochdale Securities.

"Anyone who says that banks should be making traditional returns on equity today when the ten-year Treasury is around 1.6 percent has got to explain themselves," he said…

… The good news is that banks that adapt can prosper by financing infrastructure projects that are expected to grow 60 percent by 2020, the report says, and by selling advice and retirement products to aging populations in developed nations and core banking services to new customers in emerging markets.

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Merrill Corporation is proud to offer XBRL Complete, a suite of services that meets - and has options to exceed – the mandated requirements for XBRL for mutual funds. For more information, please click here or call 866-367-9110.

In the Wake of the Financial Crisis Pt. 2

Last week, we looked at a few of the industries that were victimized by the 2007-2009 financial crisis. Unfortunately, that trend is continuing with a report this week from McKinsey, which revealed that banks continue to struggle on a global scale.

McKinsey’s Toos Daruvala predicts a series of merges over the coming years.

The challenges are so great, though, that the consultant expects a host of large and small U.S. banks over the next five years to throw in the towel and merge.

"You will see significant consolidation, particularly among banks with less diversified income streams that are highly dependent on net interest margins," Daruvala said. "They will be troubled and forced to sell."

But the news gets worse.

McKinsey’s data implies the end of a 30-year trend, in which bank revenue has grown faster than GDP. "In both emerging and developed markets, banking revenues are expected to flatline at around 5 percent of GDP for the foreseeable future."

What does all of this mean? The crisis may be over, but the effects of it will likely be felt for years to come. Next week, we’ll be looking at two more bad omens in the McKinsey report.

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Merrill Corporation is proud to offer XBRL Complete, a suite of services that meets - and has options to exceed – the mandated requirements for XBRL for mutual funds. For more information, please click here or call 866-367-9110.

In the Wake of the Financial Crisis Part 1

What is now being referred to as “the financial crisis” of 2012 is over. Nearly every financial expert agrees that we are now beyond the worst of the depression, and markets are beginning to recover across the board. But, will the crisis still be impacting the way the world does business?

Mortgages - and the housing market in general - have been one of the hardest industries to be hit in recent years. Massive public outcry against the foreclosure practices of many companies have thrust mortgage servicers into the spotlight, and these companies are struggling to regain public trust. Now, thanks to regulations put forth by the Consumer Financial Protection Bureau (CFPB) may be allowing those companies to earn it back a little more quickly. CNBC has more detail on the new development.

The proposed changes by the CFPB would require servicers to consider applications for help from troubled borrowers within 30 days of receiving them. Meanwhile, servicers would not be allowed to proceed with a foreclosure until the decision on a potential modification has been made.

The new rules would apply to all mortgage servicers, not just the nation's five largest banks that earlier this year agreed to a $25 billion settlement in the wake of the "robo-signing" paperwork scandal.

The new guidelines present new challenges to mortgage servicers - especially big banks already overwhelmed with delinquent loans.

"There's a finite amount of capacity in the servicing enterprise today, and the system by design was never set up to withstand these rates of delinquency, these high rates of foreclosure for an extended and protracted period of time which is where we're at right now," said Edward Delgado, COO of Wingspan Portfolio Advisors, a Texas-based specialty servicer.

The best solution so far? Outsourcing.

…many institutions are increasingly farming out servicing, or directly selling the loans to so-called specialty servicers. These entities, which number about two dozen, often have more experience and resources to deal with troubled loans.

There is much more in this story that bears attention, and we’ll be looking at it in more detail next week, along with some insight as to how Merrill Corporation is working to better benefit your company in the wake of the financial crisis.

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Merrill Corporation is proud to offer XBRL Complete, a suite of services that meets - and has options to exceed – the mandated requirements for XBRL for mutual funds. For more information, please click here or call 866-367-9110.

Can You Have Too Much Regulation?

At Merrill Corporation, we are in the business of compliance. As a result, we sometimes wonder if we aren’t biased when reporting on the latest regulations, compliance issues, and governance requirements in the financial industry. Luckily, IMF Research decided to explore the true cost of compliance, and came back with some surprising numbers.

FierceFinance reports:

The conventional wisdom in the industry -- and perhaps even among regulators -- is that the global push for additional regulations aimed at safety and transparency imposes some significant costs.

Many would agree that these efforts collectively will provide upward pressure on interest rates charged by banks. However, a recent study by the International Monetary Fund has found that the new regulations, specifically Basel III, will not have a significant impact on rates or the global economy. The study says that "in the long term average bank lending rates are likely to increase by 28 basis points in the U.S., by 17 basis points in Europe and by 8 basis points in Japan."

This translates to say that the world’s financial institutions are more than capable of handling compliance changes in stride. Changing regulations do not appear to have any clear detriment on the global economy.

Institutional Investor’s Neil Sen explains further, “Financial regulations such as Basel III are unlikely to have a significant impact on bank lending rates or the global economy.”

You can read FierceFinance’s coverage of the report here.

The full report is available here, but a subscription is required.

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Merrill Corporation is proud to offer XBRL Complete, a suite of services that meets - and has options to exceed – the mandated requirements for XBRL for mutual funds. For more information, please click here or call 866-367-9110.