On July 7th, the SEC issued two new observations and a sample comment letter aimed at improving the quality of XBRL submissions. The observations concerned the use of custom tags and missing calculations. The issuance of a sample comment letter signals that the SEC may begin to issue direct warnings to companies that are not in compliance with SEC rules regarding the filing of XBRL exhibits.
When the final rule regarding XBRL was published in 2009, the SEC provided a phased in schedule for adherence to rules published in the EDGAR Filing Manual. With the completion of the third year of participation for smaller filers, every USAcompany with XBRL reporting requirements is now submitting “as filed” XBRL exhibits which carry full legal liability. See the DataTracks blog on the expiration of limited liability.
What’s the issue with Custom tags?
The use of a custom tag where a standard tag could have been used makes XBRL data difficult to analyze and compare. With custom tags, the SEC notes that the use of company generated one of a kind XBRL tags, although legal within the reporting rules, was expected to be reduced over time. Although the use of customized tags has fallen with the companies in each of the first two phases of XBRL implementation, the rates of usage for phase 3 filers (smaller reporting companies) have not fallen as expected.
Could the high usage rate of custom tags for smaller companies be related to the filing agent used? From the SEC’s custom tag observation:
As part of our assessment, we also observed a strong correlation between third-party provider selection and exhibits with high custom tag rates. In our sample of smaller filers with high custom tag rates, 64% were served by the same third-party providers, of which one third-party provider accounted for 33% of all filers with a high custom tag rate. This suggests that in many instances the high custom tag rate may not be determined by the unique reporting requirements of a filer or available taxonomy, but an artifact of the reporting tool or service used. More generally, and as the figure below shows, there has been a large increase in the number of third-party XBRL providers over time, which tracks the phase-in of smaller filers, growing from 11 in 2009 when the regulations were implemented, to 25 in 2011 when the smaller filers began to file, and approximately 34 in 2013. We recognize that the continued innovation and growth in product offerings may be a contributing factor in continued high custom tag rates among smaller filers.
In other words, the selection of third-party providers can make a difference in the number of custom tags generated. Remember, individual companies are ultimately responsible of the selection and submission of you’re the content in your XBRL filings. Starting with a high quality vendor such as DataTracks will help you avoid any potential comment letters from the SEC regarding XBRL exhibits.
What about Calculations?
The SEC also issued a sample “Dear CFO” letter concerning missing calculations within XBRL filings. What is a missing calculation? On financial statements, rows and columns generally imply that the display represents numbers that add to sub-totals. For example, Cash, Inventory and Accounts Receivable might be implied to add together to represent total current assets. Reading a financial statement, our eyes are trained to imply the math. Within an XBRL filing, calculations need to be included that implicitly detail the calculation in an XBRL linkbase or an error will occur. The fallout of such an omission can be financial data that just doesn’t add up.
Again, high quality XBRL venders such as DataTracks check all filings for missing calculation data prior to submission to the SEC.
Why is the SEC finally issuing observations and letters about XBRL errors? Here is a brief review of several significant outside actions have accelerated both the interest and the political pressure for the SEC to get tougher on errors:
- The House of Representatives Committee on Oversight and Government Reform is reviewing the SEC’s implementation and enforcement of the Interactive Data Rule, which requires companies to file their financial statements in XBRL. In September 2013 letter sent by Committee Chair Darrell Issa (R–CA) to SEC Chair Mary Jo White, Congressman Issa asserts that the SEC should more vigorously enforce high-quality XBRL in corporate disclosures and embrace the use of XBRL data throughout the SEC’s internal operations.
- On October 23, 2013,the Capital Markets Subcommittee of the House Financial Services Committee found most committee members and witnesses agreed that the current XBRL system is flawed. The SEC was criticized for failing to take action against the persistent errors in XBRL filings while some experts blame unreliable data for investors’ indifference to XBRL financial statements.According to Representative Robert Hurt, (R) Virginia, “there is evidence that less than 10 percentage of the investors actually use XBRL”
- On May 14, 2014 by a vote of 51-5, the House Committee on Financial Services approved H.R. 4161 or The Small Company Disclosure Simplification Act. The Act “Exempts emerging growth companies and issuers with total annual gross revenues of less than $250 million from the requirements to use Extensible Business Reporting Language (XBRL) for financial statements and other mandatory periodic reporting filed with the Securities and Exchange Commission (SEC).”
- On May 22, 2014, the Data Transparency Coalition sent a letter to the House Committee on Financial Services calling for the SEC to begin cleaning up submitted XBRL data. The letter states in part “The SEC adopted XBRL for financial statements in 2009, but still has not begun requiring filers to address material errors in these filings. Inadvertent yet damaging errors, such as flipped positive and negative signs and misplaced decimal points, are common throughout the SEC’s XBRL data set.”
Many companies still submit XBRL exhibits that contain errors and omissions. The SEC, however, is no longer be silent regarding XBRL. On July 7, 2014, the SEC posted two items of new XBRL guidance to their website:
How does the SEC Enforce their rules?
Typically the SEC utilizes three methods to address issues with filings. First, filings are accepted or rejected based upon set criteria as stated in the EDGAR Filing Manual (EFM). All rules for filing XBRL exhibits are published in the EFM. As typical in the startup of a new technology (See EDGAR Update 1993 (http://www.gao.gov/products/IMTEC-93-19R), the SEC is taking its time to get the system right. Presently, the accept/reject mechanismat the front end of the EDGAR systemis set to accept all but the most serious of errors.
Second, a filing received by the EDGAR system is often scrutinized internally by staff or flagged for review by the Accounting Quality Model or RoboCop, to determine if the reports contain information that lie outside of normal parameters. If the return is found to be in compliance with SEC reporting regulations, no further action takes place.
Third, filings found to contain serious errors or missing data trigger a comment letter. The comment letter will specify the areas of concern and ask for the filing company to reply to specific questions. Prior to July 7th, the SEC had not issued comment letters regarding issues with the technical application of XBRL.
Combine the relative newness of XBRL filings with a maturing EDGAR system, which was recently revised for the 16th time since March 2009, and one can easily see why the SEC has been rather lenient on XBRL errors. One could argue that it’s difficult to keep up with the moving target of EDGAR filing rules, significant accounting changes and an immature marketplace for help filing XBRL with the SEC.
Why You Need DataTracks
DataTracks can review custom tags and help companies bring down their custom tag rates. Companies are facilitated with an easy-to-review document to confirm XBRL tags for those who are interested in reviewing the custom tags. This would ensure easy review and arrest avoidable custom tags.
Companies using DataTracks are already among the leaders in filed data quality. Independent analysis (XBRL Cloud’s EDGAR Dashboard, Digital Financial Reporting Blog )of calculation errors and other best practice adherence have consistently rated DataTracks at or near the top in fewest errors per filing.
As a process, DataTracks ensures calculations errors and SEC best practices are handled before delivering XBRL files to companies. Although it is important to note that each company’s XBRL flings are ultimately the responsibility of the company’s management team, choosing a high quality XBRL vender is a great place to start.