A third of Israeli companies get int'l financial reports wrong

Imagine that you're a sophisticated American investor interested in finding prospects in some foreign stock exchange overseas. You would like to examine various companies' financial data before deciding where to sink your money. You've been told that accounting standards in the country that you've chosen require companies to issue reports in an international reporting markup language, so even if you don't speak the local language, you can still be spoon-fed the financial figures you need about publicly traded companies there.

	Ariel Markelevich and Moshe Terry
	Photo by: Moti Kimche

Now imagine that after reviewing the internationally-adapted financial reports, you discover that more than a third of them are deficient either because they're missing information or the data doesn't square with the original reports in the local language - the line on profits or losses is missing, for example, or information on cash flow from current operations or profits per share simply isn't there.

That's what faces a potential foreign investor looking to invest in Israel and relying on data published in the international reporting language of business, XBRL. That's short for eXtensible Business Reporting Language.

"The eyes of the securities authorities around the world, including the SEC [the U.S. Securities and Exchange Commission], are on us to learn from us and our experience in implementing the project," said Moshe Terry, head of the Israel Securities Authority when XBRL was introduced here two years ago.

The ISA had hoped that Israel would be a light unto the nations. Barely a flicker, really: In practice the project has been more reminiscent of the Tower of Babel.

Two years later, the term XBRL may sound vaguely familiar to accountants working with publicly-traded companies here, but many of them wouldn't even remember exactly where they heard it.

The ISA is the party that formats the reports in XBRL, after the firms send the data in a format compatible with the international reporting language. Nonetheless, the ISA also has the companies declare that in the event of a discrepancy between the XBRL and the Hebrew, the Hebrew version is binding.

A study conducted by a team of three U.S.-based researchers found that 34% of the 2008 corporate reports showed inconsistencies between the XBRL reports and the Hebrew versions. In 11% data was missing, and in 28%, there was a mismatch in the content.

The research was conducted by Ariel Markelevich of Suffolk University in Boston, Lewis Shaw of Suffolk and the University of Haifa, and Hagit Weihs of Brandeis University. The results of their study have been published on the Social Science Research Network website.

"There were instances in which companies had to report accumulated depreciation that put in depreciation expenses instead," said Markelevich by phone from Boston earlier this week. "There were cases in which companies reported losses per share as profits per share in XBRL, and a case in which a company put its data for 2008 in its balance sheet, but in the middle of the collection of numbers, it switched to figures from 2007. There were 15 companies that simply didn't report a profit and loss statement in XBRL."

Issue of credibility

In the United States, by contrast, the rate of error is between 1% and 5% and mistakes are corrected as soon as they are discovered, said Markelevich. "The fact that more than a third of [Israeli] companies' reports are inaccurate, including some of the largest firms, creates an issue of credibility regarding the entire XBRL database. When we told Americans involved in accounting about this, they were shocked by the scope of the problem."

In addition to errors in inputing the data, there are other explanations for discrepancies between what Hebrew-speaking Israelis get and what the outside world sees. The implementation of XBRL in Israel was carried out at the same time as the switch to IFRS, International Financial Reporting Standards. This meant that the reporting format in XBRL was not consistent with the manner in which Israeli companies had been reporting their results.

IFRS also gives a certain amount of leeway to Israeli firms to exercise their judgment regarding reporting of some financial parameters, which could explain the absence of some of the information. There were also instances in which there were mistakes in the Hebrew version that were later corrected in Hebrew but not in XBRL.

The ISA has specifically acknowledged that there may be discrepancies between the two versions. It's not certain, however, that these explanations will satisfy the foreign investor, and someone may look into the limits of legal liability on the matter.

Markelevich refused to provide information about specific companies, but if someone wanted to find information in XBRL about Israel Chemical's net profits for 2008, for example, or the cash flow from current operations at Direct Insurance (Bituach Yashir ) or diluted profits of the U. Dori Group, they would run into problems.

XBRL is the accounting vision for the future. It could enable downloading data from 10 companies into an Excel file, and comparing between them easily, making it possible to quickly decide where to invest. The idea behind its adoption in Israel was to attract foreign investors who would not have to know Hebrew or local standards. But at this point, it seems that the chaos in XBRL reporting could actually cause foreign investors to be put off and create suspicions about investing Israeli companies.

Foreign investors could potentially increase their involvement in the Israeli stock market now that Israel was accepted into the the Organization for Economic Cooperation and Development.

As of 2006, close to 40,000 companies around the world had used XBRL to publish financial data and other information.

The language was developed by an international consortium, and is quickly becoming the standard in the field of financial reporting.