2007 International Conference on XBRL: Taxonomies and Assurance May 11 – 12, 2007

Auditing an XBRL Instance Document: The Case of United Technologies Corporation

University of Waterloo Efrim Boritz Won Gyun No Agenda

 Introduction

 XBRL and Assurance

 Case Research Method

 Reporting Framework for Electronic Filings

 Assurance Framework for Electronic Business Reporting

 Findings

 Recommendations and Conclusion Introduction

 Increased XBRL implementation for regulatory filings across the world. . U.S.: SEC XBRL voluntary program on EDGAR and $5.5M to XBRL-US to develop taxonomies. . U.K.: Plans to make XBRL mandatory for company tax filings from 2010. . Canada: CSA XBRL voluntary filing program on January 19, 2007. . Japan: TSE XBRL reporting system in 2006.

 XBRL 3rd in FEI‟s top 10 financial reporting challenges for 2007(Heffes, 2007)

 Most companies currently providing their information using XBRL are doing so without assurance.

 Very limited guidance and experience on XBRL instance document preparation

 SEC‟s voluntary XBRL filing program . Some errors in SEC filings

 Case study of the EDGAR filing of United Technologies Corporation

. Perform mock audit procedures.

. Interview preparers and auditors.

. Address a number of issues that an auditor might confront if/when provides assurance on XBRL instance document. XBRL and Assurance Three Phases in Electronic Financial Reporting

Phase I - Paper Paradigm Electronic Financial Reporting (Past)

Phase II - Paper Paradigm Electronic Financial Reporting Using XBRL (Current)

Phase III - XBRL Paradigm Financial Reporting (Future) SEC’s Voluntary XBRL Filling

 SEC‟s voluntary XBRL filing on EDGAR

. February 3, 2005

. File paper format and furnish XBRL format statements.

. MD&A, notes, and accountant‟s report are optional.

. Companies create customized taxonomies to enable the XBRL filing to parallel the paper format filing as closely as possible.

 Some insights into SEC filings (at February 28, 2007)

. 36 companies and total 126 fillings

. Significant parts of the filed instance documents are based on companies‟ own customized taxonomy extensions.

. Instance Validation: 51 (49.5%)

. Taxonomy Validation: 114 (90.5%)

. Financial Reporting Instance Standards (FRIS) and Financial Reporting Taxonomies Architecture (FRTA) Case Research Methodology

 Adopt case research methodology due to:

. The context in which the filings under the voluntary SEC program are made.

. The limited information available on applying the new XBRL technology in a useful way

. UTX‟s Q3 2005 8K filing represents a critical incident: The first XBRL filing assured by a public accounting firm

 United Technologies Corporation

. Multinational corporation based in Hartford, Connecticut, USA

. $40 billion company that provides high-technology products and services to the building systems and aerospace industries worldwide

. Eight business units Carrier heating and air conditioning systems, Hamilton Sundstrand aerospace and industrial systems, Otis elevators and escalators, Pratt & Whitney aircraft engines, Sikorsky helicopters, Fire & Security protection services, Power, and United Technologies Research Center. Research Objectives

 Compare the XBRL instance document in detail to the paper format filing.

 Interview preparer to obtain explanations.

 Identify issues that an auditor might confront if performing audit procedures on an XBRL instance document.

 Learn about and report on the nature and extent of the work that would be required to determine whether the translation of the paper format document to the XBRL document was complete and accurate.

 Provide recommendations for both auditors and XBRL instance document preparers. Longitudinal Analysis of UTX Filings Analysis of Selected Other Filings Reporting Framework for Electronic Filings Assurance Framework for Electronic Business Reporting

Client Acceptance

1. Acceptance Planning

3. Planning the engagement: Understanding the subject matter 2. Terms of engagement

4. Assessing the Testing & Evidence appropriateness of the subject matter 7. Obtaining evidence

5. Assessing the suitability of the criteria 8. Using the work of an expert Evaluation & Reporting 6. Risk and Materiality

9. Management 10. Reporting representations

 From Assurance Working Group of XBRL International (2006) INTERACTIVE DATA: THE IMPACT ON ASSURANCE, NEW CHALLENGES FOR THE AUDIT PROFESSION  From Hayes, R., Dassen, R., Schilder, A., & Wallage, P. (2005) Principles of Auditing: An Introduction to International Standards on Auditing Audit Process Guidelines and Client Acceptance Phase

 Guidelines Client Acceptance

. Assurance framework proposed by the AWG 1. Acceptance

. Staff Q&A Regarding XBRL Financial Reporting (PCAOB) 2. Terms of engagement

 Client acceptance phase

. A auditor examining an engagement involving XBRL instance documents should not only have adequate knowledge of regulatory requirements, XBRL taxonomies, and XBRL specifications to perform the examination, but also have sufficient understanding of the company‟s financial statements and underlying financial records to evaluate the risk of misstatement in the instance document (PCAOB 2005, p. 3).

. Acceptance • Have professional competency and sufficient knowledge and skills required to perform the engagement.

. Terms of engagement • Prepare a report regarding the XBRL instance document. Audit Process Planning Phase

 Users are most likely to be assured that the data presented Planning

in the XBRL instance document is a complete and accurate 3. Planning the engagement: Understanding the subject reflection of the data in the (audited or reviewed) financial matter

statements, and whether the appropriate taxonomies are 4. Assessing the appropriateness of the used (AWG 2006, p. 15). subject matter

5. Assessing the suitability of  Planning the engagement & the criteria Assessing the appropriateness of the subject matter 6. Risk and Materiality . The subject matter of the XBRL engagement: 10-Q instance document

. Primary focus of our substantive process:

• Assess whether the elements in the XBRL instance document of UTX‟s 10-Q are the same as the financial facts in UTX‟s paper format 10-Q.

• Examine whether the appropriate taxonomies are used for mapping the facts in the financial statements to XBRL elements.

 Assessing the suitability of the criteria

. XBRL Specification v2.1, approved XBRL taxonomy, and stand alone add-on taxonomies would be considered as suitable criteria (PCAOB 2005, p. 4). Audit Process Testing and Evidence Phase

 The objectives of examination procedures regarding Testing & Evidence XBRL instance documents are to assess whether the 7. Obtaining evidence XBRL-tagged data comply with the appropriate XBRL 8. Using the work of an specifications and taxonomies and to evaluate whether expert

the data elements in the XBRL instance documents 9. Management representations reflect the same information as the corresponding official EDGAR filings (PCAOB 2005, p. 5).

 Obtaining evidence

. Examine whether the 10-Q instance document is a valid document that complies with XBRL Specification v2.1 using Fujitsu Instance Creator.

. Examine whether the UTX taxonomy, the company extension of the approved XBRL taxonomy, is a suitable taxonomy using Fujitsu Taxonomy Editor.

. Assess whether the 10-Q instance document is the complete and accurate reflection of the financial facts stated in UTX‟s 10-Q by performing a 100% manual substantive audit consisting of two-way tracing. Audit Process Manual Two-way Tracing: Step I  Contexts Audit Process Manual Two-way Tracing: Step II  Financial Facts and XBRL Elements Audit Process Manual Two-way Tracing: Step III  Notes and MD&A Audit Process Evaluation and Reporting Phase

 Evaluate the 10-Q instance document based on the Evaluation & Reporting evidence obtained through the audit process. 10. Reporting  Evaluate whether PWC‟s report regarding the XBRL instance document is consistent with the PCAOB‟s recommendation and includes the basic elements suggested by the AWG. Findings Taxonomy  Found that only “44.3%” of the 10-Q instance document was based on the approved XBRL taxonomies.

 Could not determine whether this use of custom extensions is appropriate due to the lack of assurance standards or practices with respect to this matter.

 A custom taxonomy was used instead of the approved XBRL taxonomy that was available.

. Accountants Information – Name vs.

 Used different elements for the same names, signatures, job titles, and date contained in different exhibits.

. James E. Geisler and Gregory J. Hayes in the signature section of UTX‟s 10-Q were not used in the section 1350 certifications. Instead different taxonomy elements were used. Findings Instance Document  Contexts

. 145 contexts

. Not in any logical order

. Could cause problems in subsequent periods to determine inter-period consistency (e.g., quarter to quarter).

 Labels

. Titles and subtitles were not always presented in the instance document in a consistent manner, or were missing altogether.

. Some labels were missing or not exactly the same in the label linkbase as in the taxonomy.

 Totals

. Some totals which appear in the notes in the 10-Q are omitted in the instance document.

. Sometimes totals are in the instance document and sometimes they are left as implicit items defined in the calculation linkbase. Findings Notes and MD&A

 Disaggregation of textual narratives in both notes and MD&A

Textual Narratives XBRL Elements Findings Accountant’s Report  Used own taxonomy for „Report of Independent Registered Public Accounting Firm‟ instead of using usfr-ar (US Financial Reporting - Accountants Report) taxonomy. Findings Accountant’s Report Regarding XBRL Engagement

 AWG (2006, p. 24): 9 basic elements should be included in the report.

 PCAOB (2005, p. 6)

. An audit report: if the XBRL instance document has been audited. . A review report: if it was reviewed and the report was filed with the SEC. . Do not express opinion: if it was reviewed, but the review report was not filed with the SEC. . Disclaim an opinion: if it was not covered by an audit report or review report.

 The AWG‟s recommended elements were satisfactorily addressed in the report.

 PWC stated that the underlying information in the 10-Q instance document has not been audited and did not express an opinion on that information in the report since the review report prepared by PWC was not filed with the SEC.

 The accountant‟s opinion on the instance document was created in HTML format rather than XBRL and was filed as a separate document. Findings Accountant’s Report Regarding XBRL Engagement Findings Summary

 Took an XBRL expert about 63 hours to complete (not counting other steps that would be required).

 Had high assurance that the instance document was a complete and accurate reflection of UTX‟s 10-Q paper format filing.

 Cannot form a conclusion on the fairness ...in accordance with GAAP of the instance document.

. No assurance standards or guidelines for making such an assessment

. Limited knowledge for evaluating the MD&A, regulatory information, and the appropriateness of the company‟s own extensions to the XBRL taxonomies Recommendations

 Auditors‟ effort, time, and cost could be reduced.

. A deliberate structuring of an XBRL instance document

. A logical ordering of elements in the XBRL instance document (e.g., by financial statement, notes, and MD&A)

. An embedded description of the structure

. Explanation of why custom taxonomies are required or are preferred to approved taxonomies.

. Create rules for naming attributes (Sgt_Ottis_2004 vs. Context11).

. Organize contexts systematically and document rules used to create them.

 Assurance on XBRL instance documents.

. Some form of comfort/assurance will be necessary.

. Need guidance for both preparers and auditors.

. If an external report is provided, then it should be provided as an XBRL instance document to utilize the advantage of XBRL.

. Need a taxonomy for an auditor's assurance report on XBRL instance. Conclusion

 Report on a case study in which we conducted a mock audit on the XBRL instance document of UTX‟s 10-Q to identify issues that an auditor might confront if performing audit procedures on an XBRL instance document.

 Identified several significant issues that will need to be addressed by preparers, standard-setters, regulators, and auditors.

 Provided recommendations.

 Since we were independent of the preparation and assurance processes used by both UTX and PWC, our findings may not fully reflect some of the problems that occurred during the preparation and review of the XBRL instance document.

 For near future

. Understanding the process and internal controls over creation of XBRL instance documents will be essential because a purely substantive approach may not be feasible.

. Auditors will need knowledge of the XBRL taxonomies and specifications. Questions & Suggestions