Why XBRL Exists

City seal of Detroit
We Hope For Better Things Rising From The Ashes

The City of Detroit released a joint report of its auditor general and inspector general  yesterday, detailing the problems in several areas of city governance. The areas that have attracted the attention of the media related to the city’s pension funds. The funds have made numerous payments over the years that are outside their purpose, for example year-end cash payments to active workers and pensioners. And it gets worse.

I would like to say that this is a demonstration of the power of audit, and the need for independent and powerful auditors. But the previous auditor general seemed to have accepted the unusual payments, which in total may have cost the pension funds billions of dollars.

Some commentary on Detroit’s mess has been of the ‘blame the victim’ mode. These pensioners should have known better, the sentiment goes. They should have held those pension trustees accountable. They should have returned the cash outlays at Christmastime, and demanded they be invested appropriately.

No. I started my career at Goldman, Sachs, and I’m comfortable thinking in terms of net present value, earnings volatility, and random walks. Imagining that a retired bus driver or nurse’s aide will have the same investment sophistication as a Wall Street quant is ludicrous and part of why the SEC exists – to protect the individual investor.

The XBRL effort was begun in the run-up to the scandals of Enron and WorldCom. Yes, XBRL, and the transparency it brings to financial data, was not a reaction to these scandals and Sarbanes-Oxley, it was in anticipation of these scandals. Mike Willis, Charlie Hoffman and other audit leaders saw the need for better data transparency. Technologists such as Walter Hamscher and myself shared that vision.

This is why XBRL exists, for me. To keep pensions from blowing up and leaving people with nothing. Poor, sick, under-educated people at the end of their working lives for whom a job retraining program is not an option.

Effective capital allocation, based on accurate and usable data, can head off problems before they cause a crisis. Independent audit and XBRL are part of providing the data the capital market needs to make these allocation decisions.

PS – the caption on the image above is a translation of the Latin motto that forms part of the image. How sadly apropos it is.

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