The Search for Killer Apps in the Knowledge Capital Economy and XBRL World
CHICAGO—Introducing myself to participants at the 16th National Conference on Managing Electronic Records Conference the past two days, I explained my recent work not as managing electronic records per se, but as helping to mandate their use – specifically the use of eXtensible Business Reporting Language by public companies, mutual funds, and credit rating agencies.
Most MER Conference speakers and some participants have heard of XML-based XBRL standards. Not surprisingly, participants understand intuitively how bad electronic records practices contributed to the credit crisis by making it difficult to subject information about asset-backed securities to market scrutiny.
Notwithstanding commiseration on the sidelines about ASCII-based non-standard and unstructured “disclosure” and how credit rating agencies exploited the opacity of asset-backed securities in exchange for granting well-compensated ratings under a government structured oligopoly, the public tone of the conference has been generally positive, underscoring how better records management and better business go hand-in-hand. Sure, there’s the constant fear factor – you need a record keeping system that’s reasonable in the circumstances and improvements in technology are changing the circumstances, or you risk writing a big settlement check for something that might not stem from your fault or negligence – but the big picture, that better information management means better business, hasn’t been lost.
The scope of the challenges that these electronic recordkeeping professionals face is considerably larger than mere compliance with well-articulated XBRL industry reporting standards like those set by the SEC and FDIC. True, MER participants now have more than one XML-based records standard from which to choose, including Electronic Discovery Reference Model XML. However, without central organizations like the SEC and FDIC to set a common standard like XBRL and facilitate its adoption, adoption is slow.
Indeed, litigation discovery rules – a main driver for the MERS Conference – aren’t contained in a few volumes of the Code of Federal Regulations, U.S. GAAP literature, FDIC rules, and a few technical manuals. Discovery rules live in the vast cloud of U.S. and global law. Instead of mission-specific agencies, the discovery rules live in a huge information ecosystem, influenced not only by U.S. and state judiciaries (not to mention the other branches), but by international custom and thousands of judges around the world.
Litigation is the most universal of rulemaking processes. Its subjective and evolving discovery rules impose considerable costs — both directly and to mitigate litigation risk — on all who participate in economic activity.
My sense is that XBRL flavored XML could meet customer demand by empowering software creators to continuously improve their products and by empowering their customers to continuously add value to their business processes, making them more efficient. As it stands now, the largest challenge seems based more on fear than hope. It is to anticipate how judges and juries might view business conduct in a world of records management that’s trying desperately to keep up with technology. Is there a taxonomy for that?
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Could not the killer app in the knowledge economy be a combination of both the knowledge and the people that drive that knowledge? Is the killer app, quite possibly, not an application at all? The most important part of the CLOUD, and ironically, all of that case law, is individuals creating precedent one dispute and one outcome at a time. In a sense, the common law is a pretechnology version of a "tag cloud." So, how can we harness this tag cloud in new ways to ensure both discovery and eDiscovery?
As David Weinberger points out in "Everything is Miscellaneous," that humans play a role in categorizing the world is not news. There is a difference now, though. For the first time, we have an infrastructure that allows us to hop over and around established categorizations with ease. We can make connections and relationships at a pace never before imagined.
The most powerful taxonomy and the killer app could very well be the harnessing of the power of individuals, acting together.
Hi Paul…
I wanted to tell you and your readers about a new open source community that I have joined…
http://freerisk.org/
I specifally wanted to invite to to become a contributor on our new financial markets regulation wiki…
http://freerisk.org/wiki/index.php/Main_Page
Your knowledge and experience could be very useful for the project. We are building it as a resource for market participants, financial technology experts, regulators, legislators, academics and the media.
I visited with a number of Congressional staff people last week and there is a tremendous appetite for this kind of neutral information resource.
We look forward to your contributions.
Thanks, Cate! Great Wiki headline: "Riski"
This all goes back to a basic idea that if you're going to use other people's money, you need to disclose material information to market scrutiny in a structured format. U.S. GAAP worked pretty well as a structure over the years, but Enron's SPE's and the i-banks' ABS were the results structure evasion. Freerisk.org looks like a great start on the road back to effective market scrutiny.
If it's too complex for the market to value using accurate material well-structured information, it's too complex for investment at levels that create systemic risk. A few billion in knowing investment in opacity could be fine; a few hundred billion in investment of other people's money in opacity is catastrophic.
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Great that you're working with Congress, too. The cost of supporting the standards to make this work is trivial relative to the benefits of better standardization and structure (and the cost is trivial relative to the bailouts, too). It would be great to get bipartisan support for Rep. Issa's bill. Oregon and Nevada are both using XBRL at the state level, so I wonder if Sen. Wyden or Sen. Reid might use one or both of those experiences to build on the Issa bill?
Cheers,
Paul