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XBRL Mandate Offers Additional Visibility for the SEC

Written by Neal Hannon Posted on June 2, 2008

Neal Hannon is an XBRL consultant based in Stamford, Connecticut. He was the Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF) and a member of the accounting departments at the University of Hartford and Bryant University. He has been an active member of the XBRL consortium since 2000, serving as the first education committee chairman and later serving on the first XBRL US steering committee.

With all US public market participants — including foreign filers — faced with the prospect of an SEC mandate to report in XBRL beginning this December, it is time to look at what the preparers and consumers of financial information will gain and lose with interactive data. The largest companies (those with market capitalization over $5 billion) are currently scheduled to begin furnishing their required SEC filings tagged with XBRL if their fiscal year ends after December 15, 2008. Companies with market capitalizations greater than $75 million with fiscal years ending after December 15, 2009, are slated for mandatory furnished XBRL filings in 2009. All other filers including foreign filers will follow suit in 2010.

Good News for Analysts and Shareholders
Compared with current EDGAR filings, retrieving financial information from SEC filings will be simple. First, the new proposed rule regarding XBRL requires companies to send the XBRL forms to the SEC and to post same on their company websites. In this day and age of automated RSS feeds and email updates, newly filed data will be immediately available from both the SEC and the company in a format that will be directly consumable by analytic software.

There are two direct benefits to this development. First, the data will be immediately usable without the error-inducing activity of re-keying data. Second, the data will contain the original markups of the company to a national taxonomy or dictionary of terms that will be in common use over the industry. Look to XBRL-specific analytical tools to get the most out of SEC filings in XBRL. According to the XBRL US website, just under a dozen vendors have XBRL-specific analytical tools ready for use today.

Another major benefit to the tagging of financial information for users of SEC filing data will be the coming tagging of the notes to financial statements. Most people agree that the key to understanding a company’s financial data is presented within the language of the accompanying notes. Up to this point, the information in the notes has been difficult to dissect and understand. Starting in 2009, however, large companies will be required to use the new US GAAP taxonomy to tag the required disclosures commonly contained in the notes to the financial statements. This means that, for the first time, individual pieces of the notes to financial statements will be parsed by the SEC filer into standard computer consumable tags. In other words, you will be able to see which US GAAP regulation a particular company used to determine its revenue recognition disclosures and thereby gain new insight into the corporation’s financial reporting.

The SEC Will “See” Every Filing
Why might some companies be unhappy about XBRL tagging? Ever since the first SEC chairman mentioned XBRL (namely, Arthur Levitt in 2000), the march toward marking up SEC filings in an electronic format has been steady and predictable. The SEC sees tremendous benefit from the technology. In his opening remarks on May 14, 2008, Chairman Christopher Cox declared:

Like ASCII and HTML before it, XBRL can be viewed as nothing more complicated than a computer language. But if we embrace its potential, it can truly revolutionize the benefits that investors derive from corporate disclosures. It will enable analysts at the SEC and in private industry to vastly improve their comparative capabilities.

Clearly, the SEC is looking to improve their ability to sort through the overwhelming volume of current filings. Cox commonly refers to current EDGAR filings as “just an electronic filing cabinet for the 1930s-era paper forms.” Take the following quote from John White, the Director of the SEC’s Division of Corporate Finance:

These steps will represent real progress, both for SEC filers and investors. All of the technology is coming together to make electronic filing a true analytical tool. The staff has gathered valuable experience during the almost three years that public companies have been submitting interactive data in our voluntary filer program. This helps give us a strong foundation for moving forward.

Make no mistake. The SEC’s Division of Corporation Finance is under the gun to increase Sarbanes-Oxley section 408 reviews of all public filers. As a reminder of what this entails:

Section 408: Enhanced Review of Periodic Disclosures by Issuers
The SEC shall review disclosures made by issuers (including reports filed on Form 10-K) on a regular and systematic basis for the protection of investors. Issuers will not be reviewed less frequently than once every three years.

In today’s environment of ever-larger SEC filings, the corporation finance and investment management arms of the SEC are under increased pressure to review as many corporate filings as possible. The following is an excerpt from the SEC’s annual report:

Enhancing Disclosure The Divisions of Corporation Finance and Investment Management exceeded the requirements of the Sarbanes-Oxley Act to review the disclosures of at least 33 percent of all reporting companies and investment company portfolios per year. These disclosure reviews helped deter fraud in public securities transactions and helped provide relevant information about emerging and novel issues to investors.

TABLE 2.20 PERFORMANCE MEASURE
Percentage of Reporting Companies and Investment Companies with Disclosures Reviewed by the SEC (Both targets exceeded)
                                                                         FY07
                                       FY03 FY05 FY06  Plan   Actual
Corporations                     23% 22% 50%   33%   36%
Investment Companies    10% 54% 37%   33%   38%

ANALYSIS OF RESULTS: FY 2007 targets were exceeded for this measure. The Divisions of Corporation Finance and Investment Management were both on track to continue reviewing entities once every three years as required.

Interestingly, the analysis presented in the SEC annual report mentions only percentages of reporting companies but does not speak to the letter of Section 408, namely, that disclosures by issuers be reviewed at least once every three years. A more precise accounting of Section 408 compliance might reveal a different story. It will be very interesting to see how these numbers will change once the SEC begins to collect meaningful XBRL filings from the large cap filers. If Corp Fin and Investment Management teams use the full potential of the XBRL filings, a computer-based review of 100% of SEC filings is certainly possible. For the vast majority of reporting companies with high quality accounting and quality XBRL submissions, the additional scrutiny will not be a problem. If the accounting isn’t right, however, your company will be singing the blues. After all, it’s all about the accounting.

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This entry was posted on Monday, June 2nd, 2008 at 2:56 pm and is filed under General, . You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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