Year-end Reflections on XBRL and the SEC

With 2014 coming to a close, it’s the perfect period to reflect on the developments in XBRL with regards to the US Congress and the Securities and Exchange Commission (SEC).

SEC Actions

In 2014, the SEC made several moves to strengthen XBRL.  First, they began issuing “Dear CFO” letters to companies who presented documents with missing required XBRL elements. Second, they almost immediately replaced Dr. Craig Lewis (who returned to his academic position at Vanderbilt University) with Dr. Flannery as Director of its Division of Economic and Risk Analysis (DERA).  Lewis was instrumental in establishing the accounting quality model (aka Robocop) within the SEC to improve the quality of financial reporting and to give the SEC a predictive model for detecting anomalies in filings.  The SEC moved quickly to fill the role established by Lewis which is an indication of the value they place on continuing his Department’s work.

During this entire year of the SEC’s initial phase of limited liability, all XBRL filing companies have been complying with the mandate to send “as filed” XBRL exhibits to the SEC.

The moot question here is, has anything changed with the call to compliance?

Compliance vs Correctness

In an ideal world, investors and analysts would love to see error free data that is easily consumed by basic analytic software that enables immediate assessment of the financial stability and progress of the companies participating in our security markets.

From the SEC’s perspective, the commission longs for the day when raw XBRL data feeds can immediately determine compliance to reporting rules and US GAAP, while providing a basis for detecting fraudulent activity.

As evidenced by recent statements from the SEC (see Chairman White’s opening remarks to the Investment Advisory Committee to the SEC ) and by reports in the press (see for e.g., David Trainer, XBRL Would Be Wonderful If It Always Worked) that many filers’ XBRL-formatted submissions include errors in basic information, such as:

  • the number of shares that are outstanding
  • conflict with the concurrently-filed plain-text versions
  • and failure to include required data elements

it is fairly obvious that we are far from an ideal world.

Capitol Hill Pushback

As reported in this blog earlier this year, the House passed HR 5405 containing a provision that would exempt small companies with revenues less than $250 million from XBRL reporting.  In support of the provision from XBRL exemption, Senator Robert Hurt citied high cost and low usage as the primary drivers for the “relief” from reporting.  Upon investigation, both assumptions have been proved wrong.

Although various XBRL industry groups and companies have countered the cost argument (see Opposition Mounts for House XBRL Exemption Legislation and the FEI Research Foundation report on Page 19), this did not deter the House from including the “XBRL exemption” in the final version of  the HR 5405 bill.

Growing Usage of XBRL                       

While slashing red tape is a favorite gallery-playing sport of Congressional Committees, this particular exemption will have an adverse effect on the SEC and investors and analysts interpreting financial data.  As reported by Glenn Dodggett of the CFA Institute here, it is a well-established fact that the usage of XBRL is growing both in the US and the global market.

Reinforcing XBRL’s growing acceptance and usage in the USA, PriceWaterhouseCooper’s partner Mike Willis cites various groups who are active users of XBRL here. Willis’ point is that there is a growing body of data available from XBRL filings that analysts and investors are depending upon.  In addition, the SEC is also making moves to extend the reach of XBRL.

What will 2015 SEC XBRL bring?

Now that the US Senate has shifted to a Republican majority, the actions of the Senate Finance Committee with regards to HR 5405 will come under close scrutiny.  A Companion Senate Bill will likely be introduced for consideration.  Once introduced, watch out for Amendments to the Bill that address the XBRL reporting provisions.  Reducing both transparency and usefulness of XBRL by exempting a certain group of reporting entities would be a major step backwards for the investing public and the SEC, indeed a matter of great concern.

The SEC is likely to step up its campaign to improve the reporting of data and its support to the program.  Expect the Chair to again be vocal in support of XBRL, and increased public appearances from the Staff of the Division of Economic and Risk Analysis.

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