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The evolution of the SEC; What it means for XBRL filers

  • 30 Jun 2015
  • Neal Hannon
  • XBRL

The Securities and Exchange Commission (SEC) has undergone many changes recently as it has adapted to major legislative initiatives such as the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).  Each act required the SEC to create regulations that define how public corporations are to comply with each act.  Along the way, the SEC itself has undergone a transformation from a document centric organization to a data-driven organization.  Commission Chair Mary Jo White’s opening remarks at the SEC’s Investor Advisory Committee on October 9, 2014 as reported on this DataTracks blog indicted a strong push by the SEC towards structured data.

The SEC’s push for more structured data is both a defensive and an offensive strategy.  As required by the Sarbanes-Oxley Act of 2002, the SEC undertakes some level of review each reporting company at least once every three years and, according to the SEC, they review a significant number of companies more frequently.  The every three year requirement is met through a review of paper based documents. Recently, the SEC has begun to screen every company’s filings with the help of structured data tools empowered by XBRL. This defensive strategy enables the SEC to comply with Sarbanes-Oxley while identifying companies for further scrutiny.

On the offensive side, the SEC has recently added the Corporate Issuer Risk Assessment (CIRA) program to its normal review process.  As explained by Mark J. Flannery, Chief Economist and Director, Division of Economic and Risk Analysis in a recent speech, the new program goes well beyond the initial efforts of the SEC under the former director Craig M. Lewis (See Accounting Quality Model here). Flannery said:

“The first is the Corporate Issuer Risk Assessment (CIRA) program, which expands upon an “accounting quality model” that had been developed to detect anomalous patterns in financial reporting. Tools developed under this program seek to identify situations or activities at corporate filers that warrant further inquiry [i.e. referral to Corporation Financial Department]. The original (AQM) effort focused on estimates of earnings quality and indications of inappropriate managerial discretion in the use of accruals. This is now only one of more than over one hundred custom metrics (emphasis added) provided to SEC staff through an intuitive dashboard.”

This new step would be nearly impossible for the SEC to undertake without a strong assist from structured data in the form of XBRL coded filings.  To further emphasize the point, the recent Dodd-Frank legislation contains a provision for reporting certain executive compensation matters including pay-for-performance and the ratio between the CEO’s total compensation and the median total compensation for all other company employees.  Rules for reporting these items are proposed to take effect in early 2016 and are presently planned to include an XBRL format requirement.  Getting the data into the SEC’s database in a structured format will allow the SEC to conduct various analysis as needed.

Proposed Pay-Versus-Performance Rules

According to Flannery, every time a new rule is proposed or a new form requirement identified, the people at DERA will determine if this new activity is a good fit for structured data in the XBRL language.  As previously mentioned, the proposed pay versus performance rule will come with an XBRL requirement. If approved by the Commission, this will be the first instance of an XBRL requirement in the proxy statement.  Clearly, the Office of Structured Disclosure, which is a part of DERA, are advancing into areas not yet tagged with XBRL provided there is a corresponding benefit associated with the cost.  The larger question is if and when will the SEC propose detailed tagging for management discussion and analysis (MD&A).

More “Dear CFO” Letters to Come?   

In a recent interview, Flannery indicated that the SEC may begin using its structured data for sending out more alerts in the form of “Dear CFO’ letters soon.  The issue appears to be the quality of XBRL.  According to Flannery, DERA published a report on Staff Observations of Custom Tags in which the SEC detailed the percentage of custom tag usage for each of three classifications of filing companies.  Although the trend for using custom tags is generally lower over time, Flannery indicated that the usage of customized tags makes comparisons more difficult. Additional “Dear CFO” letters on the quality of XBRL cannot be ruled out for later this year.

The message being sent from the SEC is twofold.  First, the use of customized tags is being discouraged.  As the taxonomies mature over time, the need to develop a customized tag will diminish.  Second, with the SEC and especially DERA moving to a higher reliance on structured data, creating a special tag for what some filers will insist as unique situations may in fact begin to invite “Dear CFO” letters. It has also been noted that smaller companies who may be new to the XBRL requirement tend to use a higher amount of customized tags.  If your company is new to XBRL, teaming with experienced pros will definitely pay big dividends.

Staying with an Experienced Team

The importance of staying with an experienced team of XBRL specialists cannot be overestimated.  DataTracks keeps you abreast of all changes to XBRL due to both accounting changes and rule changes coming from the SEC.  If the SEC moves to the use of XBRL, we will be on top of any changes you may need to consider.  DataTracks constantly monitor trends in filing, changes proposed by the Financial Accounting Standards Board and their advisory groups.  We also seamlessly integrate changes to approved taxonomies as well as the ever expanding requirements for XBRL beyond the basic financial statements.  Stay with DataTracks and you will always be ahead of the game.

About DataTracks: DataTracks US is part of DataTracks Services Limited, leaders worldwide in preparation of financial statements in EDGAR HTML, XBRL and iXBRL formats for filing with regulators. With a track record of over 10 years, DataTracks prepares more than 12,000 XBRL statements annually for filing with regulators such as SEC in the United States, HMRC in the United Kingdom, Revenue in Ireland, ACRA in Singapore and MCA in India.

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