CFOs who question the value of the Securities and Exchange Commission’s mandate to have companies use XBRL (eXtensible Business Reporting Language ) formatting, believing it doesn’t add value to their organizations and is just another compliance burden, need to take a fresh look at the data reporting standards.
XBRL is a giant step toward providing high quality, transparent financial information to investors for analysis and decision-making. According to XBRL U.S., since the mandate became effective, more than 9,300 public companies have filed approximately 71,000 XBRL submissions, making the mandate one of the most successful regulatory compliance initiatives in the world. As a result of the large number of filings, the SEC has collected a massive data repository of financial information. Indeed, access to filing information has been democratized. It is simple to access and download financial filings by using an XBRL viewer, such as the SEC’s viewer.
But proper XBRL formatting also helps corporate executives stay out of trouble with the SEC. While the rollout date for the SEC’s Accounting Quality Model (AQM), which would trigger alerts if any unusual findings occurred in a company’s XBRL tagging, has not been announced, CFOs should take immediate steps to strengthen their XBRL filing tagging processes to produce accurate filings.
The AQM’s analytical power, after all, has the potential to produce an exponential increase in a company’s comment letter issues. The AQM essentially allows the SEC to dig into companies’ XBRL filings to look at problems and red flags that need further explanation and analysis. It is a sophisticated econometric-based model to identify filings’ abnormal and outlier information.
Think of it as data mining and analysis for examining registrants’ filings and identifying risk exposures. Developed by the SEC’s Division of Risk, Strategy and Financial Innovation (RSFI) and headed by SEC Chief Economist Craig Lewis, the AQM is based on a model that evaluates hedge fund risk and performance to identify funds that need further review. Under the Sarbanes-Oxley Act (SOX), the commission is required to examine all public companies’ filings every three years. The AQM streamlines the screening process for this review by performing an analysis as soon as the filing is submitted. Filings evaluated by the model are assigned a risk assessment score and are then ranked. The Division of Corporate Finance can use the ranking as a selection criterion for further examination.
The initial focus of the AQM is to measure companies’ accounting disclosures and earnings management characteristics that could be used to predict misleading or fraudulent accounting practices. This could include evaluating accruals and reserves booked by a company. Had this capability been available in early 2000, the major accounting frauds like Enron and WorldCom might have been averted. The model can also compare a company’s filings to its industry peer group to determine whether or not a company’s financial reporting is aligned with its industry’s reporting characteristics.
Similarly, while audits of XBRL tagged data prior to submission are not required, CFOs should consider engaging their internal or external auditors to review the accuracy of tagged data.
Increased Scrutiny of Financials
Though no guidance has been released about the implications of the expiration of the SEC’s limited liability provision on October 31, 2014, which was a grace period where mistakes can be made in XBRL tagging without repercussions, it is highly unlikely that the SEC’s patience for tagging errors will last indefinitely. When the liability provision goes away, it should lead to increased scrutiny of companies’ financial filings, though, such as Forms 10-K and 10-Q.
As of April 2013, approximately 1.2 million errors were identified in XBRL-filed financial statements. During the adoption phase of the XBRL Mandate, XBRL submissions were considered furnished to the SEC, not filed, until 24 months after a company’s initial filing. Filers have been protected from the normal SEC penalties assessed for inaccurately filed financial information as long as the company made a good faith effort to file accurately tagged financial statements and correct errors in a timely manner.
Thus, the dual exposures of the limited liability provision expiration and the adoption of the AQM by the SEC mean CFOs and their companies should put renewed focus on XBRL filing quality.
Kristine Brands, CMA®, is an assistant professor at Regis University in Colorado Springs, Colorado. She is also a member of the IMA‘s(Institute of Management Accountants)Global Board of Directors.