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Looking For Trouble

Under new IT leadership, the SEC upgrades technology to become a better watchdog and head off scandals that could shake market confidence

The SEC also must review data in a number of different electronic formats, including E-mails, which Booth says often contain "all the smoking guns." Without a cohesive, advanced system for accessing and searching documents related to an investigation, attorneys and examiners can spend months poring over evidence to find examples and make certain connections.

The goal is to enable investigators to search across documents and use automated tools to analyze their content. Tied to that is the planned deployment of content-management and workflow software. Booth is reviewing vendors and plans to begin implementing a system later this year or early next. "All the tools that we're deploying will allow the attorney to find similar concepts using different vocabulary, recognize patterns in the way E-mails are exchanged, and other, more-advanced kind of analysis," he says. "One can only imagine how much more productive this will make us."

Workflow tools will help the agency manage the complex process of initiating an investigation, which involves staff attorneys, general counsel, and SEC commissioners. The same is true for approving a new regulation: One team writes the plan, various managers revise it, counsel and commissioners review it, comments from the public are included, and so on. "There are dozens of potential places for the document to get revised or bottlenecked," Booth says. "We need to build the ability to collaborate and track [the thousands of documents] that are moving through the commission at a given time."

Another key component of Booth's plan to improve the regulatory process revolves around the adoption of standards such as the Extensible Business Reporting Language, or XBRL, an XML-based markup language for tagging data in financial statements, and the Financial Information Exchange Markup Language, another XML format for highlighting transactional data such as stock purchases. The SEC is considering letting companies use XBRL in filings for the upcoming year-end reporting season. The SEC already has three forms that use XML tags for data about individuals associated with SEC registrants.

Each year, the SEC processes and disseminates to the public more than 600,000 documents that are filed through its Edgar online-reporting system. Using standards should make it easier to analyze filings for potentially questionable activities and prioritize projects in the process. "We ought to be able to be substantially more effective, do investigations more quickly so we can act or get out of people's hair more quickly," Booth says.

As a uniform way to electronically distribute business reports, XBRL will make it easier to compare the financial performance of one company against others and know that the data are comparable, according to a report last year by R. Timothy McNamar, at the time a visiting fellow for corporate governance at the Cato Institute and a former deputy secretary of the treasury under Ronald Reagan. "If Enron had filed in XBRL, its reported revenues, cash flows from operations, and profits would have been compared against industry standards," McNamar wrote. "Its growth rate and the growth rate of its purported cash flows from operations would have been so far above the industry norms that it would have been flagged for an SEC staff review."

Without applying standard tags across companies, industries, and geographies, "there'd be absolutely no way the SEC could meet the requirement of reviewing [the] number of filings" Sarbanes-Oxley demands, says John Batt, VP of marketing and strategic planning at financial printer Bowne & Co., a member of XBRL International, an industry group promoting the use of the standard. Bowne and several other companies last year conducted an XBRL pilot to tag second-quarter earnings releases. The tags, embedded in newswire releases, contained much of the financial data filed with the SEC. The pilot showed how XBRL can make it easier to conduct financial comparisons across industries, Batt says. While it's premature to identify specific advantages for companies that must file with the SEC, he adds, more-advanced XBRL tools could make it easier for companies to repurpose information that's contained in management reports, internal documents, tax filings, and SEC financial filings. "The SEC initiative will help to give XBRL the shot in the arm to encourage companies to continue to develop the tools," he says.

Booth has a chance to provide a booster shot to the SEC's business-technology efforts. In the past, he says, the agency has viewed IT as "providing decent baseline service but not excellent baseline service." That will change, promises Booth, who's putting in 65-hour weeks, splitting his time between the Alexandria, Va., office where the IT staff works and the Washington headquarters. He already has approval to add 30 full-time IT staffers to supplement 100 in-house and 300 contract employees as he pushes to turn the agency into an IT-savvy organization. "It's all about opportunity," Booth says. "At the end of the day, I'm certainly not discouraged about anything."

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