LDRSHP WEEK 8

Public Performance & Management Review, Vol. 37, No. 2, December 2013, pp. 241–262. © 2013 M.E. Sharpe, Inc. All rights reserved. Permissions: www.copyright.com ISSN 1530–9576 (print), ISSN 1557–9271 (online) DOI: 10.2753/PMR1530-9576370203 241

IMPROVINg TRANSPARENcy IN ThE FINANcIAl SEcTOR

E-government XBRl Implementation in the United States

yU-chE chEN Northern Illinois University

ABSTRACT: The financial crisis in late 2008 and its aftershocks demonstrated the need for a serious reform of the U.S. financial regulatory system. This article examines the role of e-government in improving the transparency and accountability of the regulatory system. It emphasizes eXtensible Business Reporting Language (XBRL), an information standard that can improve financial transparency by making reported financial activity information machine-readable and comparable. The article draws from e-government studies, collaborative public management literature, and management information systems (MIS) literature to develop a strategic model of e-government XBRL implementation. The proposed model consists of an overarching leadership and governance strategy with three interrelated areas of activity: stakeholder relationship management, phase-in implementation, and value articulation and clarification. The implementation process and success factors articulated in the model are illustrated by the SEC’s effort to implement XBRL. The conclusion presents policy and management lessons for better e-government implementation of XBRL and for improving transparency in regulatory systems.

KEYWORDS: e-government, financial regulation, implementation, transparency, XBRL

The financial crisis of 2007–2008 and its aftershocks called into question the effectiveness of the U.S. financial regulatory system. The Treasury Department described the upheavals as the biggest financial crisis since the great Depression (U.S. Department of the Treasury, 2009). The immediate impact was the disap- pearance of more than $2 trillion in value in retirement savings and pension funds as a result of plunging stock values in the U.S. market (Orszag, 2008). The long- term consequences can be seen in the lingering unemployment, which reached 8.5% (13.2 million people) by the end of March 2009, compared to the precrisis level of 5–6%. By the end of June 2010, the unemployment rate was 9.5% (14.6 million people) (U.S. Bureau of labor Statistics, 2010).

The gravity of the financial crisis reveals several fundamental weaknesses in the

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U.S. financial regulatory system. A serious problem is the lack of transparency when it comes to the risks involved in various financial activities. The use of complex financial instruments, such as mortgage-backed securities, masked various risks borne by financial institutions as well as investors. Moreover, regulators do not have a comprehensive and systemic view of the risks in the financial sector (Khademian, 2009). The complexity of understanding and regulating the behavior of quasi- or non- governmental financial institutions performing public services further compounds the problem (Rom, 2009; Stanton, 2009). Examples of such institutions include Fannie Mae and Freddie Mac, which are government-sponsored enterprises, and the credit-rating agencies (viz., Moody’s and Standard & Poor’s), which are private sector organizations that are paid by companies seeking credit ratings.

Therefore, increasing transparency and developing a more systemic view of the risks involved in the financial sector are two critical elements in any effort to reform the financial regulatory system. Peretz and Schroedel (2009), in their histori- cal analysis of financial crises, recommend that transparency can be enhanced by standardizing accounting reports and making standardized financial information available to all stakeholders. A more integrated regulatory system could help ad- dress the problem with the increasing multiplicity of participating organizations and their disparate incentive structures (liou, 2007). National governments should be more engaged in designing an integrated system because financial activities are increasingly globalized and nation-states play critical roles (Datz, 2009). certain policy issues cut across national borders, such as health and environment, and thus demand an international and coordinated regulatory response (liou, 2007). Without doubt, this also applies to the globalization of financial activities.

This article addresses the information challenges of increasing transparency and creating a systemic view of financial risks. The focus is on the e-government implementation of eXtensible Business Reporting language (XBRl), a new financial and business reporting language, as a critical element in any financial regulatory reform.

Information Challenges and XBRL

Enhancing financial transparency to improve the financial regulatory system needs to address two information-related challenges. The first challenge involves the problem of understanding financial information when there is a lack of standardization of financial terms in reporting across sectors. comparing the financial statements of two publicly traded companies will prove difficult and burdensome if the companies use two different definitions for a single concept like “equipment,” for example. The other, related information challenge involves the laborious process of monitoring financial activities and associated risks. Financial information that is not machine- readable and comparable introduces opaqueness into the financial sector.

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A tested solution to these two challenges is the implementation of XBRl. First, XBRl implementation can address the problem of lacking standardized financial information, which when surmounted will be one important step toward an integrated view of financial risks. Fortunately, the U.S. generally Accepted Accounting Principles (gAAP) taxonomy can provide a standard data diction- ary for financial terms. This taxonomy also enables the development of software programs to assign a digital tag to an item of financial information. For example, a numeric value of net income is tagged to indicate that it is in U.S. dollars; and following the gAAP XBRl taxonomy, three decimal points can be stipulated, for example, for the period of 2009. Such tagging makes financial data comparable and machine-readable. This addresses the two fundamental challenges, men- tioned above, that are associated with making information on financial activities transparent. Moreover, business rules can be embedded in XBRl for automatic validation. Such functionality helped the Federal Deposit Insurance corporation (FDIc) increase its efficiency in validating financial reports gathered from insured banks. Prior to automatic validation, the FDIc had a large number of financial analysts perform the validation.

Implementation of XBRl further enhances transparency by allowing all stake- holders to monitor the financial sector. XBRl lays the foundation for making finan- cial data freely available to all stakeholders and in a format that reduces barriers to understanding them. The Securities and Exchange commission’s (SEc) Interactive Data Project is a case in point. The goal of this project is to provide financial infor- mation on publicly traded companies to investors and citizens. What is unique about this project is its ability to disseminate information interactively. Even individual investors with limited means can easily search for information. Moreover, a broad implication of making information available in a digital format is the ability to lever- age semantic Web (Web 3.0) capabilities to monitor financial risks.

A dozen countries have implemented versions of the XBRl solution to improve their ability to monitor the financial sector for the purpose of financial regula- tion. The experiences of Singapore, the Netherlands, and Australia are cited in this article to illustrate various components of the integrated strategy presented below. A more thorough treatment of these implementation cases is available (chen, 2010), and XBRl International has a resource site that contains the details of selected implementation cases.1 collectively, these can be resources for an in- depth understanding of international XBRl implementation.

Integrated Strategy for E-Government Implementation of XBRL

government implementation of XBRl is essentially an e-government project. This is because it would involve the use of information and communication technol- ogy to create public value. As a result, e-government literature with an emphasis

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on IT leadership and governance for successful implementation is relevant to the effort of model development. The business literature that is focused on manage- ment information systems and on adoption and use of technology is also relevant because it pertains to successful information-system project implementation and its adoption and use as a critical measure of success. Figure 1 depicts the relevant bodies of literature as they contribute to an understanding of XBRl implementation for improving financial regulation via increasing knowledge about the financial sector and financial transparency.

The network nature of XBRl implementation can benefit from the insights of collaborative and network management literature. E-government implementation of XBRl requires collaboration between organizations in the public (governments), private (software and accounting industries), and nonprofit (professional account- ing and XBRl organizations) sectors. collaborative and network management literature provides insights into successful management of collaboration across levels of government and other sectors.

collectively, these bodies of literature identify both the overall implementation strategy and various areas of strategic action. The discussion below focuses on arguments and findings pertinent to the characteristics of e-government implemen- tation of XBRl. The arguments are organized around strategic components rather than separate bodies of literature to reflect the integrative nature of the strategic model of XBRl implementation.

E-GOvERnmEnT LEADERShIp AnD GOvERnAnCE

leadership and governing activities are fundamental for successful e-government implementation (OEcD, 2003). The complex intergovernmental, cross-sectoral

Figure 1. Literature Relevant to E-government XBRL Implementation

Collaborative Public Management: Cross-

boundary, networked

E-government Implementation: Leadership, governance, and

management

Management Information Systems: Adoption and

implementation

XBRL Implementation

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nature of XBRl implementation highlights the importance of leadership for better governance and implementation. leadership in providing the necessary executive support for e-government projects is critical for their successful implementa- tion (cook, laVigne, Pagano, Dawes, & Pardo, 2002; McDaniel, 2005). Such leadership provides the sustainable managerial support needed for e-government projects, which are usually long-term. Moreover, leadership is critical for the cross-boundary collaboration required for e-government implementation of XBRl (OEcD, 2003). E-government leaders can articulate the relevant benefits to vari- ous stakeholders (luk, 2009).

leaders of XBRl implementation can engage in three interrelated areas of governance activities to form an integrated strategy. The first area is active stake- holder relationship management. Active engagement with stakeholders is critical for e-government success (Papazafeiropoulou, Pouloudi, & Poulymenakou, 2002). Such engagement will help identify the needs of stakeholders and find shared interest and value propositions of e-government implementation. The next area is phase-in implementation. This approach assists in the transition by delivering initial benefits and working through problems at a more manageable scale. The third area is value articulation and clarification. leaders need to make the business case for various stakeholders to ensure their participation. Any major implementation decisions need to be justified based on the added public service value.

These three areas of activity form an integrated whole under the overarch- ing leadership and governance strategy, as shown in Figure 2. The broadest set of activities in terms of scope and time is active stakeholder relationship

Figure 2. Implementation Strategy with Interrelated Areas of Activities

Value Articulation and Clarification

Phase-in Implementation

Active Stakeholder-Relationship Management

Overall Leadership and Governance Strategy

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management; here identification of stakeholders and active engagement with them throughout the process are critical. The development of these relationships allows for the identification of core stakeholders and their respective interests, a critical piece of knowledge in implementation. A more focused set of activities is XBRl implementation; here a phase-in strategy will prove most produc- tive. The experience of cases in other countries has generated a large menu of choices and innovative ideas. Delivering value to core stakeholders is critical in sustaining the momentum for implementation. Therefore, value articulation and clarification are at the core of the model. This is the strategic core that should guide phase-in implementation and stakeholder relationship management. The specifics of the three areas of activity in relation to XBRl implementation are the focus of the next three sections.

ACTIvE STAKEhOLDER RELATIOnShIp mAnAGEmEnT

The implementation of an XBRl project is rather complex. The first major task is the development of an XBRl taxonomy that harmonizes the use of financial terms. The complexity of standardization depends on the number of terms involved and the number of government agencies needed for coordination. The second major task is to develop XBRl software programs and informa- tion systems for reporting businesses and government agencies. The number of industries involved is a critical determinant of the level of complexity. An XBRl implementation involving multiple industries requires more coordination effort because the interests and concerns of the various industries will neces- sarily differ.

Resource dependence is a major source of implementation complexity and a critical dimension in interorganizational relationships (Pfeffer & Salancik, 2003; Rethemeyer & hatmaker, 2008). An analysis of such dependence aids in the understanding of how a policy or program is implemented in a networked setting. collaboration among the three main participating groups is critical for successful XBRl implementation. government agencies depend on the software industry to design XBRl-enabled software programs for business reporting. They also need the assistance of professional accounting associations for outreach and educational efforts aimed at better implementation of technical standards. XBRl is a new way of handling reporting; outreach and education by trade groups and accounting associations will prove critical, especially if members are to understand the business case for XBRl implementation. When more than one government agency is involved in implementation, it is critical that collaborating agencies provide support in the form of resource contribution. For example, Australia’s XBRl implementation depends on the collaboration of professional associations representing bookkeepers and accountants (e.g., the cPA Australia Institute of chartered Accountants), the software industry, the Australian Bureau of Statistics

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and other government agencies, and numerous business associations (e.g., the council of Small Businesses of Australia).

A central administrative agency is needed for the implementation of a new technical standard that encompasses a complex web of organizational players. Provan and Kenis (2008) argue for the importance of a central administrative organization in projects in which the interests are diffused among organizations within a network. In such cases, they maintain, the need for network-level manage- ment competencies increases. That is, the importance of a central point of contact and coordination rises as the project’s complexity increases (i.e., as the number of stakeholders increases and the diversity of interests grows).2

Active engagement with stakeholders is an important element of successful XBRl implementation. The central agency works with stakeholders to collect input on the XBRl taxonomy and, of course, the actual reporting with XBRl. In this relationship, communication is especially critical when the taxonomy has to meet the needs of both reporting businesses and government agencies. Active management is especially critical for resolving any implementation obstacle within a networked setting (Mcguire, 2002). Insofar as no one organizational participant has the resources and knowledge to complete the coordinating task, a significant amount of coordination and joint decision-making is required to manage a network (Agranoff, 2007). The need for focused attention and consistent action is critical in managing a network setting that abounds with policy barriers that can prevent knowledge sharing across organizational boundaries (Dawes, 2009). For XBRl implementation, one such issue arises when businesses and software developers engage in a “waiting game.” Businesses tend to wait for software developers to produce a mature, low-cost software solution for the implementation of XBRl before they adopt the standard. however, software developers are waiting for a critical mass of businesses willing to commit to the purchase of software programs before they invest in the development of such software.

Network and project management skills are crucial in active stakeholder rela- tionship management. Mcguire (2002) has identified a set of core management activities that a network manager needs to focus on in order to help a network of organizations achieve policy and service objectives. These are: activating, framing, mobilizing, and synthesizing. Empirical evidence gathered from a comprehensive study of local emergency-management systems also points to the importance of managerial skills in improving the effectiveness of intergovernmental collaboration (Mcguire & Silvia, 2010). In the case of XBRl implementation, framing such implementation as a reduction of the administrative burden for reporting businesses may help garner their support. Of course, companies large and small are concerned about costs, but small businesses may have to bear a disproportionate burden of the costs of implementing XBRl (“Interactive Data,” 2009). consideration of the problems entailed in managing a complex IT project is also relevant in XBRl

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implementation. A central agency for XBRl implementation needs to have an adequate level of technical capacity if management is to understand and evaluate the strengths and weaknesses of the solutions suggested by service providers. IT management capacity has been identified by several studies as a crucial element for successful IT outsourcing in particular (Brown & Brudney, 1998; chen & Perry, 2003) and for e-government implementation in general (Melitski, 2003).

phASE-In ImpLEmEnTATIOn

Phase-in implementation is another area of activity in successful XBRl imple- mentation. large information technology projects, such as an XBRl implemen- tation, are complex and long-term in nature. A phase-in implementation strategy allows for identifying implementation obstacles and possible solutions. Pardo and Scholl (2002) emphasized the importance of social, technical, and behavioral issues resulting from the complexities of large technology projects in the public sector. For complex information technology projects, such as enterprise resource planning (ERP), strong project management is a critical element for success (Kerimoglu, Basoglu, & Daim, 2008). Phase-in implementation is a productive method of leading and managing complex e-government projects such as the ones for XBRl implementation.

A rich menu of phase-in implementation strategies is evident in a preliminary survey of XBRl implementation around the world (chen, 2010). This array of strategies can serve as a source of ideas for governments around the world as they contemplate XBRl implementation or make adjustments to their implementation strategies. One strategy involves phasing in large companies, then small ones. This strategy encourages the development of software and should lower costs over time. Another strategy incorporates a graduated shift from voluntary to mandatory partici- pation. The voluntary program, although positive, would have only limited adoption (Efendi, Smith, & Wong, 2011). A later mandatory participation requirement would create a network effect that could facilitate complete implementation.

Shifting from partial to full reporting is another productive phase-in strategy. Partial reporting can be used to focus initial efforts on high-value data elements, at least from a regulatory point of view. Not all data elements have the same degree of relevance with regard to the core aim of a standard business-reporting system that uses a common language, as is the case for XBRl. Partial reporting that initially focuses on critical data elements would give reporting businesses time to learn and adapt at minimal cost. The implementation of XBRl by Singapore’s Accounting and corporate Regulatory Authority (AcRA) is a prime example of such an approach.

Pilot projects constitute another strategy of phase-in implementation. This strategy identifies information system issues and simultaneously gathers feedback from the user community. User involvement, as information system implementation

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studies suggest, improves the usability of the system and ultimately increases use and satisfaction (Andersen & henriksen, 2006; Delone & Mclean, 2003).

Of the strategies mentioned above, the most appropriate for any given project is the one that best fits the institutional environment and the implementation objectives. The experience of complex enterprise resource planning projects highlights the importance of fit to the specific organizational context (gattiker & goodhue, 2005). For example, Singapore’s AcRA found it useful to imple- ment a partial XBRl report option. In this way, it was able to lower the barrier to reporting, especially because the majority of the reporting businesses were small. But mandatory reporting makes sense for countries that require a network effect or prefer a regulatory approach. countries can shift from a voluntary to a mandatory approach, beginning with larger companies and moving to smaller ones.

Value Articulation and Clarification

Articulating and realizing value is critical in guiding phase-in implementation and active management of stakeholder relationships. The need to articulate and realize value is consistent with management recommendations designed to ensure suc- cessful management of public management networks (Agranoff, 2007; Mcguire, 2002). The central assumption is that an incentive system is able to engage stakeholders and help them move toward shared policy objectives. Articulation is concerned with ensuring that each stakeholder group understands the benefits and costs associated with participation. To effectively manage change, the XBRl project office needs to spend quality time and effort to address concerns and dispel misconceptions. Such articulation is required to ensure the participation of key stakeholders and mobilize their support.

Implementing XBRl is fundamentally about managing change; demonstrat- ing that the benefits outweigh the costs is key to eliciting support for change. E- government projects typically involve changes in information processing as well as in supporting policies and procedures. In e-government implementation, change is continuous (Stojanovic, Stojanovic, & Apostolou, 2006). Public administrators need to address two fundamental challenges of XBRl implementation: diffused benefits and delayed realization. The benefits of XBRl implementation are typi- cally diffused across the entire economy. For example, the efficiency resulting from XBRl implementation may be large for the economy as a whole—as in the case of the Netherlands—but the benefits will be diffused throughout the economy. Thus, trade and professional associations may be reluctant to support implemen- tation. Delayed realization of benefits reflects the fact that real savings will not materialize until three or four years into the future, perhaps even later, when a significant number of businesses will have adopted reporting with XBRl. The initial investment required to first develop XBRl taxonomy is quite significant.

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Then, real benefits will only result after a critical mass of businesses begins to adopt XBRl taxonomy in their financial reports.

A diffused and long-term value proposition requires a sustained, high-level input of government resources during phase-in implementation, and it also re- quires active stakeholder-relationship management. More specifically, diffusion requires active government involvement in brokering reporting businesses and software-developer industry commitments; neither party has a strong incentive to invest before the benefit has amassed a critical segment of the market. Since government, representing the taxpayers, has the most to gain from aggregating the efficiency gain for the entire economy, the initial investment in the develop- ment of taxonomy and in education and outreach should be an essential part of its active stakeholder-relationship management. The long-term perspective implies the need to constantly demonstrate the value of XBRl implementation to all the stakeholders. The realization of values like efficiency and data quality should be made via proof of concepts, business cases, and so forth. An extensive education and outreach effort is required to achieve long-term value.

One management practice for sustaining momentum over the duration of long- term implementation is the Earned Value Management (EVM) approach, which was first introduced by the U.S. Office of Management and Budget. The central aim is to provide a systematic and timely way to monitor project performance. Such performance is measured against the resources allocated for the given performance target. In the case of XBRl implementation, earned value may be projected as efficiency gained through the reduction of administrative costs entailed by busi- ness reporting. Earned value can also be tied to annual performance targets, such as adoption rates, improvement in data quality, and timely reporting.

The SEC’s XBRL Implementation: An Illustrative Case

The SEc case is a critical example, given its emphasis on transparency and em- bodiment of implementation complexity. The SEc’s effort to implement XBRl deals with the fundamental benefits of XBRl: transparency and accountability. When fully implemented in June 2011, the SEc’s Interactive Data Project, which utilizes XBRl, was expected to make financial information from more than 12,000 publicly traded companies readily available to investors and the public. The goal was to make financial data accessible and ready for analysis, either via interac- tive functions on the Web or downloaded for easy analysis, even by individual investors. The unprecedented level of transparency made possible by making raw data accessible and machine-readable provides information and tools for public monitoring. This level of transparency is the basis for accountability. After all, knowing the financial activities of these companies is the first critical step in holding them accountable.

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The complexity of the XBRl implementation arises from the number of industries involved and the sheer number of reporting businesses and data ele- ments. The SEc covers a vast majority of industries; almost all industries have a publicly traded company under the SEc’s jurisdiction. The variety of industries means that definitions of financial terms will be unique to a particular industry and unique to different financial and regulatory interest groups, all of which are seeking to protect their own interests. The sheer number of reporting businesses and data elements is another source of complexity. There are an estimated 3,000 data elements for each of the approximately 12,000 companies, and this yields more than 30 million data elements to be reported each quarter. In fact, the U.S. XBRl taxonomies include at least twice as many XBRl tags and definitions as any other national taxonomy (Kernan, 2008).

The SEc case illustrates some key elements of the implementation strategy. The analysis of the SEc’s XBRl implementation draws from various informa- tion sources, including archival research, official government documents, and interviews. This article adopts the case study technique by examining both the processes and the elements of implementation.

DEvELOpmEnT AnD ImpLEmEnTATIOn OF XBRL AT ThE SEC

According to the SEc, its mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”3 The SEc accomplishes its mission mainly by making available basic financial information related to investment. Such transparency in financial information is considered the first and most important step toward a healthy financial market. Thus, the SEc requires public companies to disclose meaningful financial information and facilitates its dissemination to the public.

The increasing complexity of the financial market and advances in information technology have compelled the SEc to move to an electronic disclosure system known as Electronic Data gathering and Retrieval (EDgAR), which was fully phased in by 1996. EDgAR takes advantage of Internet technology to disseminate electronic files in hTMl and AScII formats, and this is based on paper disclosure forms. In this way, the SEc significantly improved access to and dissemination of disclosure information.4

In 2004, the SEc concluded a formal assessment of the potential benefits of implementing XBRl for information disclosure. This assessment was conducted under the leadership of its chairman, William Donaldson. The agency’s staff and leaders saw potential in using XBRl as a standardization method to increase the efficiency and accuracy of processing financial information. This prompted the initiation of a voluntary filing program in March 2005, targeting public companies that wished to file their financial statements in XBRl format.

To launch its voluntary program, the SEc invited companies to participate by

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submitting their financial reports in XBRl format. The program was designed to test XBRl technologies and identify implementation issues. The program spanned from 2005 to 2008. The establishment of the Office of Interactive Disclosure (OID) in 2007 elevated the importance of organizing the implementation effort. The number of participating companies in the voluntary program was more than 100, with a total public float of over $2 trillion, which accounted for approximately 2% of the publicly traded companies registered with the SEc (“Interactive Data,” 2009, p. 6777). The analysis by Efendi et al. (2011) suggests that these companies tended to be large and more innovative.

XBRl implementation at the SEc has involved several groups of stakeholders, and investors make up one of the main groups. With XBRl implementation, both institutional and individual investors are able to get timely financial information. Thus, XBRl is critical to the democratization of financial information, for it reduces the cost of data gathering and analysis (Debreceny et al., 2005). XBRl implementation not only provides company-specific financial information in an easily accessible format, but it also lowers individual investor barriers to financial information access and analysis. Another main group of stakeholders is constituted by the publicly traded companies in various industries. The diversity of sizes and industries means that this stakeholder group is very complex.

Still another group of stakeholders includes the accounting firms and asso- ciations that provide professional services for financial reporting. The American Institute of certified Public Accountants (AIcPA) has been instrumental in the development of XBRl taxonomy, and it represents certified public accountants in the XBRl implementation process. The financial-reporting software industry is another main stakeholder group. Both accounting firms and reporting businesses rely on the availability and affordability of software programs. Financial regulators such as the FDIc are the government stakeholders; they share the SEc’s mission of protecting the health of the financial markets. The larger XBRl community in the United States and around the world is also a key stakeholder. Its primary role is in taxonomy development and the dissemination of knowledge about XBRl implementation.

The limited-adoption voluntary program, which extended from 2005 to 2007, prompted the SEc to consider a different approach. More specifically, it published proposed regulations in May 2008 to mandate the use of XBRl for financial reporting and sought comments on these proposals as a part of the rulemaking process. According to the SEc, the mandatory stipulation was required to create a network effect, which otherwise would not be possible with the voluntary ap- proach attempted between 2005 and early 2008.

According to the SEc, the proposed regulations received more than 79 com- ment letters from stakeholders identified above (“Interactive Data,” 2009, p. 6777).

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concerns were raised about the cost of rule compliance and the complexity of compliance, among other issues. The SEc published its finalized rules in December 2008, and mandated a phased approach to implementation. With regard to costs, the SEc cited its primary responsibility to investors to provide transparent financial information as the rationale for its mandate, but the issue of disproportional cost born by small businesses was recognized in the final rule. The solution was to conduct a phase-in implementation, wherein large companies would be the first required to report using XBRl, then medium-size companies, and later small ones. This approach would give the software industry time to develop applications and slowly bring down costs for small companies.

Since 2005, an important concurrent development has been the development of XBRl taxonomy and XBRl implementation by the FDIc and in other coun- tries. The FDIc took the lead in 2005 and was the first U.S. federal agency to implement XBRl. Since 2006, more than 8,000 financial institutions have filed XBRl-formatted quarterly reports to the FDIc (Federal Financial Institutions Examination council, 2006). The FDIc was instrumental in disseminating infor- mation and knowledge about XBRl implementation. In 2005/2006, the XBRl unit of AcIPA worked on the development of the XBRl taxonomy for the U.S. gAAP. This development provided the standards necessary for the SEc’s XBRl implementation, because a vast majority of the corporations filing with the SEc follow the U.S. gAAP accounting standards.

At the time of writing, the most recent development in the SEc’s effort to imple- ment XBRl is the requirement for all mutual fund companies to comply by 2014 (cacas, 2010). Entering the second year of XBRl implementation, the Office of Interactive Disclosure at the SEc focused on the phase-in process, and it aims to bring in a large number of companies in its final year, hoping to move beyond the XBRl taxonomy based on U.S. gAAP by 2011. The complexity of implementa- tion entailed by bringing in mutual fund companies and making the data available online is likely to put significant demands on the SEc’s resources.

Supportive momentum has begun to gather on capitol hill, especially with the increasing recognition of the need for transparency in financial activities, including those beyond the SEc’s purview as well as those within. For example, Senate Bill 303 aims to improve public access to data through the Web site grants. gov by having a uniform standard for reporting, where the XBRl standard is considered the most relevant (cacas, 2010). The Obama administration has made open government a priority. The Web site USASpending.gov is an example of its efforts to make federal government spending more transparent. The comptroller of the Office of Management and Budget (OMB) has recognized the potential of XBRl for the Web site USASpending.gov, especially when the U.S. Treasury has centralized data available for reporting (cacas, 2010).

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InTEGRATED STRATEGY FOR ThE SEC’S XBRL ImpLEmEnTATIOn

Leadership and Governance at the SEC

leadership and governance activities for the SEc’s XBRl implementation illus- trate the encompassing nature of leadership and the connectedness of the three areas of activity presented earlier in the section on e-government implementation. chairman christopher cox’s leadership was instrumental in the XBRl imple- mentation. he was a champion of using XBRl to modernize interactive data disclosure (Efendi et al., 2011). he actively engaged stakeholders by educating staff and legislators on the relevance of XBRl for achieving public policy objec- tives such as transparency and accountability. In addition, the OID provided the organizational capacity to lead the XBRl implementation.

The SEc has focused on the strategic priority of increasing transparency in the financial sector for the benefit of investors and the public. This policy focus has helped the SEc to articulate its position to various stakeholders and to stay on the path of creating value for the public. central to the phase-in implementation, the move from voluntary to mandatory participation was justified on the grounds of generating tangible benefits for both investors and the public. The specifics of the three areas of leadership and governance activities are outlined below.

Active Stakeholder-Relationship Management

The SEc’s XBRl implementation has a well-established lead agency, the OID, that is charged with project management and oversight of stakeholders. having a central agency with a clear policy priority helps the SEc navigate the diverse interests of the different groups of stakeholders. Moreover, the SEc has actively engaged various stakeholders via both formal and informal processes. Formal processes include incorporating public commenting as an established element of the rule-making process. Information available in the pressroom section of the SEc Web site and public appearances by SEc officials provide additional formal channels of communication. Informal processes include the SEc’s participation in XBRl conferences, training sessions, and meetings with representatives from professional associations and industries.

The SEc has adopted a collaborative approach to developing and implement- ing an XBRl taxonomy. It reached out to the XBRl community and accounting associations to help it identify policy issues and technical challenges associated with taxonomy development. For implementation, the SEc collaborated with voluntarily participating companies to help with XBRl reporting, and it involved the XBRl specialists in the software industry. Such collaboration allows the SEc to understand the barriers to implementation from the perspectives of the reporting businesses and the software industry. For example, the SEc conducted interactive data roundtables to gather input from stakeholders such as investors, regulators,

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financial auditors and analysts, and technology professionals (Booth, 2007). The SEc has sustained its implementation effort as part of its active manage-

ment. Its active engagement activities include working with stakeholders and identifying challenges and opportunities for implementation. The finalized rule on mandatory XBRl reporting published at the end of 2008 was the culmination of this effort. More recently, the OID has been actively leading the effort to imple- ment the mandatory requirements. It has sought to clarify the complex technical details regarding footnote tagging and representation of business rules.

Phase-in Implementation

The SEc implemented several elements of a phase-in strategy to manage change. One element was the graduated shift from voluntary to mandatory participation. The desire to enact this shift resulted from experimenting with voluntary report- ing for more than three years. An evaluation conducted by scholars at the end of the three-year period showed limited adoption (Efendi et al., 2011). The SEc’s own analysis indicated that the cost of compliance was not overly burdensome. The estimated average cost was approximately $40,000 for first submission and approximately $15,000 for subsequent years. This was based on a cost-benefit analysis conducted with participants in the voluntary program (“Interactive Data,” 2009, p. 6804). These evaluation results supported the decision to shift from a voluntary to a mandatory approach. The mandatory approach created the network effect necessary to drive adoption and increase the size of the market for the soft- ware industry, enough to encourage it to develop XBRl solutions.

Phasing small companies into mandatory XBRl reporting was another ele- ment of the implementation strategy. According to the final rule published by the SEc, domestic and foreign large filers with equity floats of more than $5 billion worldwide belong to the first group of XBRl filers for the fiscal period ending on or after June 15, 2009 (“Interactive Data,” 2009). The next group encompassed all other large accelerated filers using U.S. gAAP, for the fiscal period ending on or after June 15, 2010. All remaining filers using U.S. gAAP constituted the next group to file financial statements for the fiscal period ending on or after June 15, 2011. Foreign private issuers using International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) were the last group to submit their annual reports for the same period for all remain- ing filers. The SEc anticipated that this phase-in implementation could help the development of software and would lower costs over time.

Value Articulation and Clarification

Articulating and clarifying the value of XBRl at the SEc is important in direct- ing phase-in implementation and ensuring active management of stakeholder relationships. The primary mission of the SEc is to serve investors. In that

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light, transparency is the highest value, and quality and timeliness of financial information constitute the two pillars of transparency. The shift from voluntary to mandatory reporting in XBRl as one variety of phase-in implementation is consistent with the SEc’s core value of realizing transparency. Moreover, the SEc must consider the disproportionate cost burdens that small and medium-size companies must bear with mandatory adoption. The phase-in approach, starting from large companies and gradually incorporating small companies, can reduce the costs of compliance. Once transparency is articulated as the primary value, the cost for businesses to prepare and file financial data in XBRl format becomes a secondary consideration.

The SEc articulated the benefits of XBRl to sustain its implementation. From the standpoint of investors and their supporting financial analysts, XBRl provides a faster and easier way to use the financial information filed with the SEc. Making all reported financial information follow the same reporting standard ensures qual- ity of data, comparability of company information, and ease of analysis. Reporting businesses are able to communicate their financial information more effectively and efficiently. With advances in business analytics, reporting businesses adopting XBRl are likely to see an increase in internal efficiency as well. The early experi- ences of United Technologies corporation (Stantial, 2007) and Wacoal (haseqawa, Sakata, Sambuichi, & hannon, 2004) demonstrate the promise of enhanced internal efficiency in preparing financial reports. For the SEc, enhanced efficiency can be seen in the use of software programs to ensure regulatory compliance, especially when compared against the former use of manual validation.

The XBRl implementation at the SEc adds value to transparency and account- ability. For example, transparency of executive compensation can be facilitated by using XBRl because data can be machine-readable and -comparable. The Inter- active Financial Report Viewer can help stimulate the development of financial analysis software tools that leverage the tagged data using XBRl. having the data machine-readable and -comparable is likely to further increase transparency and accountability, especially as the next generation of semantic Web technolo- gies begin to mature. coupled with the growth of open-source and collaboration opportunities, citizens will likely have tools that enable them to monitor publicly traded companies, and they will likely have an oversight capability that otherwise would previously have been possible only for large financial-analysis firms.

Analysis of the SEC’s XBRL Implementation

The main findings of the SEc’s XBRl implementation are summarized in Table 1. The SEc’s experience shows the importance of leadership and a central management agency in XBRl implementation. chairman cox’s leadership has been acknowledged as a key success factor, along with the establishment of the

chen / IMPROVINg TRANSPARENcy IN ThE FINANcIAl SEcTOR 257

Office of Interactive Disclosure to provide organizational leadership. This find- ing reinforces the fundamental importance of leadership in managing long-term, intersectoral, large e-government implementation. Its importance is consistent with the recommendations of the studies on the role of leadership in e-government implementation (luk, 2009; McDaniel, 2005; OEcD, 2003).

The SEc’s active engagement has utilized informal and formal communication channels and covered all stages of implementation. The stakeholder relationship is marked by a central implementation governmental agency and by a collaborative approach to obtaining support and input from stakeholders. This finding supports the relevance of having a central administrative agency with a network of organizations with diffused interests, as argued by Provan and Kenis (2008). The active nature of communication and management coincides with the recommendations for over- coming barriers to collaboration in a networked setting (Agranoff, 2007; Dawes, cresswell, & Pardo, 2009; Mcguire, 2002; Papazafeiropoulou et al., 2002).

The phase-in approach has been productive for the SEc. The SEc’s experience shows that a voluntary approach has only limited ability to create significant market demand for XBRl software and to generate enough financial information to realize the benefits of XBRl. The move from large to small filers of financial statements is likely to be effective in reducing the costs and diminishing the learning curve for small filers. This finding is consistent with the value of a gradual approach in effective implementation of complex information system projects.

The SEc’s focus on delivering public value to investors and the general pub- lic in terms of ensuring a healthy financial market has guided it throughout its XBRl implementation. Its move to mandatory XBRl reporting is justified by its primary mission. This singular focus also guides the SEc’s effort to put more machine-readable detailed financial information online as the centerpiece of its interactive data project.

Table 1. Key Findings of SEC’s XBRL Implementation

Main strategic component Main findings

leadership and governance

chairman cox was instrumental in providing leadership, sustained by organizational support of the Office of Interactive Disclosure. This serves as the overarching strategy for the three areas of activities.

Stakeholder- relationship management

collaborative approach engaged stakeholders at all stages of XBRl implementation and utilized formal and informal communication channels.

Phase-in implementation

gradual and deliberate shift from voluntary to mandatory approach to XBRl implementation, the need for a mandatory approach to create network effect and lower compliance costs

Value articulation and clarification

Provided justification for shift in implementation strategy and demonstrated value to investors and the public to guide implementation and stakeholder-relationship management.

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Conclusion and policy Recommendations

Transparency of financial activities is a critical element in a comprehensive regu- latory strategy designed to combat the proliferation of increasingly complex and opaque activities in the financial sector. The financial crisis arising in late 2008 and its aftershocks increased public interest in the health of a globalized finan- cial market. An e-government implementation of XBRl is an important step in moving to the much-needed goal of transparency. Providing machine-readable financial information to regulators and the general public, as promised by XBRl with interactive disclosure, will significantly increase transparency and provide an integrated view. To this end, this article has discussed the relevance of XBRl, summarized examples of e-government XBRl implementation strategies, and examined an illustrative case study.

The study is an exploratory investigation into the role of electronic government in improving transparency in the financial sector. The findings and policy recom- mendations draw from both the literature and the early implementation experience of the SEc. Policy and management recommendations should be qualified with this fact in mind. At the same time, this early investigation offers opportunities for future research into the impact of information technology on clarifying risk transparency and the resulting ability to manage systemic financial risks.

The XBRl e-government implementation, as proposed by this article, has an overarching leadership and governance strategy embodying three interrelated areas of activity: active stakeholder-relationship management, phase-in implementation, and articulation and clarification of benefits. The examination of the SEc’s XBRl implementation shows how the proposed strategic model of XBRl implementation works in practice. This case reinforces the key notions of implementation strategy and illustrates how various areas of activity work together.

The analysis of the SEc’s experience offers broad, specific policy and manage- ment recommendations. The overall policy and management recommendation is to consider the proposed strategic model of e-government XBRl implementation. leadership and governance are foundational for an e-government XBRl imple- mentation that is intersectoral, long-term, and complex. Other, similar XBRl implementations would benefit from finding a strong organizational champion and sustaining leadership. Active stakeholder-relationship management is essential, given the multitude of stakeholders involved and the technical complexity of new data standards that encompass wide-ranging business rules. The SEc’s experience demonstrates the value of having a central management agency in complicated implementation. Future e-government implementation of XBRl will have a better chance of success with a central implementation agency.

Phase-in implementation can successfully manage change that requires time, learning, and broad-based adoption. The lesson from the SEc is the need for a

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mandatory approach in creating the network effect required to achieve the goal of universal adoption of new technical standards and lower compliance costs. Other countries may take note from the SEc in considering some form of mandatory requirements. The move from large to small filers is also a useful phase-in imple- mentation option that is transferable to XBRl implementation projects in other countries. The articulation of core values is likely to become salient in XBRl implementation as governments and other participating organizations put more emphasis on the creation of public value.

This article provides some broad lessons for improving regulatory systems through enhancing transparency via the use of information technology. Public administrators need to create an integrated and systemic view through information standardization. For example, Mullen (2005) recommends a tighter and integrated view of government-wide performance information. The experience of XBRl implementation also suggests the need for such standardization. Implementation should extend beyond the SEc to include the FDIc, the Federal Reserve, and other agencies that collect information on the financial sector. Enhanced transparency by e-government holds the promise for better accountability (Kudo, 2008). Targeted transparency that can result in ease of access and analysis by ordinary citizens and by stakeholders is a productive avenue (Fung, graham, & Weil, 2007). The deployment of information technology can improve the efficiency of information gathering, dissemination, and monitoring.

Another broad policy lesson is concerned with the implementation of technol- ogy-enabled transparency for regulatory systems. Public managers must actively identify and engage all stakeholders, including regulators, regulatees, and the interested public, to provide a workable integrated view of the financial sector being regulated. The ability to maintain focus on the core public value created through increased transparency is also critical. The sustained effort to conduct phase-in implementation will increase the chances of success, as e-government projects tend to deal with a high level of complexity and uncertainty.

Acknowledgments

The author acknowledges research support provided by the IBM center for the Business of government. An earlier version of this article was presented at the Fifth Sino-U.S. In- ternational conference on Public Administration, “The Role of government in Fighting the Financial crisis,” Xiamen, china, June 14–16, 2010.

notes

1. More details on major XBRl implementation projects can be found at www.xbrl.org/ knowledge_centre/projects/map/, accessed December 17, 2010.

2. The project managers of the Australia SBR (Standard Business Reporting) project have emphasized the importance of stakeholder-relationship management.

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3. A direct quotation from the SEc Web site: www.sec.gov/about/whatwedo.shtml, ac- cessed May 2, 2010.

4. More details on the history of disclosure of financial information are available at www. sec.gov/spotlight/xbrl/oid-history.shtml.

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Yu-Che Chen is an associate professor of e-government and public management in the Division of Public Administration at Northern Illinois University (NIU). Dr. Chen received his master of public affairs and Ph.D. in public policy from Indiana University–Bloomington. His current research projects are on cross-boundary e- government, smart cities, e-governance performance, and open government. His most recent co-edited book is Electronic governance and cross-Boundary col- laboration. His research has appeared in Public Administration Review, American Review of Public Administration, Public Performance and Management Review, and government Information Quarterly. His teaching interests are in informa- tion technology management, collaborative public management, performance management, and research methods. He received NIU’s MPA Professor of the Year Award in 2009 and 2013, is associate editor of the International Journal of Public Administration in the Digital Age (IJPADA), and is chair of the Section on Science and Technology in Government for the American Society for Public Administration (ASPA).

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