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Wilson So is the Director of Hitachi America, Ltd. 
Steve Adelman has been working at the intersection of financial services and technology for more than two decades. As the Managing Director of The SEC’s XBRL Rule: Answering the Tricky Questions
Written by Matt Kelly Posted on May 28, 2008
Matt Kelly is editor-in-chief of Compliance Week, a magazine and online newsletter on corporate governance, risk, and compliance. Prior to his role at Compliance Week, Kelly was a reporter and contributor on corporate compliance and technology issues for magazines such as Time, Boston Business Journal, eWeek, and numerous other publications.
Well, the captain of the football team has finally announced that he will be attending the big XBRL homecoming party. Now everyone is just waiting to see what he’s going to bring when he shows up.
Of course I’m talking about the Securities and Exchange Commission. Two weeks ago, it confirmed what everyone already knew: that it is going to push through some sort of rule mandating XBRL for financial reports starting as early as next spring. As usually happens in the bureaucratic world of U.S. securities regulation, the SEC voted on its proposal before the language of any proposal was available. Official word from the Commission is that the language of the proposing release will be published “soon.” In the common tongue, that translates into “once the SEC staff gives up trying to answer the really tricky questions.”
So here we wait. And that gives us an excellent opportunity to try answering those really tricky questions ourselves.
Auditor Attestation One of the great fears Corporate America has for XBRL is that auditing firms will horn in on the action. If auditors start inspecting the accuracy of XBRL tagging efforts (and increase their billable hours accordingly), CFOs and their financial department minions will go into orbit. That is precisely what happened when the Sarbanes-Oxley Act came along in 2002. To this day, corporations grumble that auditors force excessive testing (read: costs) upon them under threat of a bad auditor’s opinion.
At the SEC meeting on May 14, when the commissioners approved the XBRL proposal, everyone was notably silent on the question of auditor attestation. The SEC certainly knows this is a big deal and auditors themselves go to great lengths to say they do not want to start testing XBRL-tagged statements. (Whether you believe them or not is a different matter.) So plenty of SEC watchers believe the proposing release won’t include auditor attestation either.
Legal Liability So let’s assume auditors aren’t going to start testing the accuracy of XBRL tags. What happens when some company, inevitably, files a financial statement with data tagged incorrectly? At the moment, the SEC says it will extend the same liability protections as companies in its pilot XBRL program received; XBRL statements will be “furnished” rather than “filed,” thus liability under federal securities law will be limited.
That may be a wise introductory step. But in the long term, if the SEC really wants investors to use and rely on XBRL, it can expect investors to want to sue somebody when an XBRL-tagged statement proves unreliable, or for someone to be held accountable if a company tries to use XBRL fraudulently. I don’t even know how XBRL could be used fraudulently right now; however, as enthusiasts keep saying it will usher in a new wave of innovation in financial technology, we can expect that new forms of fraud or sheer ineptitude will be part of that… and we’ll need some way to bring the law to bear on the offenders.
Tagging Standards Yes, the new XBRL taxonomy of U.S. Generally Accepted Accounting Principles is a comprehensive dictionary of terms to describe financial data. Companies still need to agree on when to use those terms. The better analogy here is to think of the taxonomy as a thesaurus, providing many different words as substitutes for some other word. In the world of XBRL-tagged financial statements, that is going to mean disputes over exactly what qualifies as, say, a “distressed asset,” or an “allowance for doubtful accounts.”
Several XBRL enthusiasts have told me the solution is for industries to get together and form a consensus on what tags to use under what circumstances. But the word “consensus” derives from the ancient Greek “something industries can rarely do.” Will the SEC’s proposing release address this? Probably not, and that’s probably wise. But that doesn’t make the question go away.