A few days ago, Jeff Henson of the XBRL USA blog published a highly useful post on the pluses and minuses of the data standard. Listing the disadvantages, he writes:

XBRL facilitates near real-time disclosure. The potential to quickly report information in automated ways is a double edged sword. On the one hand, near real-time disclosure improves transparency and sharing of information for a variety of beneficial purposes. On the other hand, near real-time disclosure may emphasize short-term results at the expense of long-term objectives. Some argue that financial information shared in a real-time way may cause undue volatility in stock prices and impulsive decisions by investors, suppliers, customers and business managers.

A few years ago, the audit chiefs of the big acunting firms published a paper that offered their vision of the future of financial reporting. In discussing a new paradigm of real-time reporting that includes nonfinancial indicators, they offer a different view than the one Jeff describes:

Finally, and perhaps unter-intuitively, more frequently reported information may reverse some or much of the “short-termism” about which rporate managers and others have long mplained. Once investors have almost real-time aess to financial and other information about mpanies, forecasting “quarterly” profit numbers will no longer be relevant, while forecasts of daily or weekly profits will be pointless. As a result, by having more frequent information, investors and their mpanies may begin looking over longer time horizons. The disclosure of more useful, non-financial forward-looking information should reinforce this outme, along with ntinued mpensation reforms by public mpanies themselves that reward long-term performance.

Note the “perhaps unter-intuitively” in the first sentence. American mpanies have long been aused of “short-termism,” which includes a focus on managing earnings to meet quarterly targets (and hence analyst expectations) at the expense of long-term goals and the overall good of the firm. If, as some have argued, reporting quarterly is an important reason for the “short-termism” of American managers mpared with their unterparts in Europe (who still typically report semi-annually), won’t ntinuous reporting merely exacerbate this tendency?

It is nceivable that reporting a ntinuous stream of information will give some managers the perspective of day traders, and they will give all their energies to polishing whatever bit of data will next be made public.

But it seems much more likely that, as the audit chiefs imply, the sheer futility of this exercise will make managers unncerned about individual data releases. Because investors are being nstantly updated on mpany performance, quarterly reports won’t be the headline events they are today, and they will ntain far fewer upside or downside surprises. Managing quarterly earnings will be not only less necessary but more difficult: reporting stellar inme will raise suspicion if you’ve been giving the market mediocre numbers on a host of indicators for the past twelve weeks.

This new world of financial reporting was envisioned in a CFO.m article Back to the Future: What the SEC should really do about earnings management that was published more than ten years ago, before the first international XBRL nference:

…There are those who say the only way to s earnings management is to render the quarterly earnings release obsolete. In fact, these forward-thinking acunting experts argue that most current rules and reporting practices have outlived their usefulness, especially with the emergence of new knowledge-based industries. They ntend that layering on new guidelines and new disclosures only further encumbers a system whose artificiality enurages earnings management… Instead, they envisage something mpletely different — a real-time financial reporting system in which analysts and investors have ntinuous, worked aess to a wealth of disaggregated rporate data.

What about the charge that ntinuous reporting will increase the volatility in stock prices, which ours when new, relevant information is released to markets that surprises investors? Here’s what KPMG partner Bob Elliott said about volatility in the CFO.m article I cited earlier:

To the extent that you disclose more rporate information on a more-frequent basis, it seems to me that uninformed volatility would be rced. You’d still have volatility when exogenous events our that change the real value of the mpany, but you’d have less volatility from lack of information or misinformation in the marketplace.

It does seem possible to me that ntinuous reporting uld increase intraday volatility slightly, as some trading bemes geared toward that particular day’s release. But as Mr. Elliott expresses, the substantial volatility often associated with quarterly reports would decline significantly. 

Quarterly reporting for US mpanies has been around for many decades, and it is part and parcel of the investing environment. But there is nothing sacrosanct about it, and if new technology makes better alternatives feasible, they should be adopted. That XBRL can be the facilitator for this new era of financial reporting should be unted among its advantages, not one of its minuses.