The Securities and Exchange Commission suggested during a meeting today that had its plans for a new financial reporting system been implemented earlier, they could have provided more transparency during the financial market meltdown.
Launched in June, the project involves changing the way companies make their regulatory filings with the SEC and will be designed so that investors can more easily and clearly access that information. As it is, participants in a roundtable today said that not many people use the current EDGAR system, instead turning to company websites, analyst reports, and Yahoo Finance for the latest information about a business’s financial results.
Before a two-panel roundtable began this morning, SEC Chairman Christopher Cox blamed the hidden credit risks in illiquid financial instruments and off-balance sheet entities for contributing to the avalanche of troubled-bank problems. “The current credit crisis has shown the importance of transparency in the marketplace,” he said before introducing the roundtable that has been scheduled since at least August.
Through this new project, called the 21st Century Disclosure Initiative, the SEC is reevaluating its current method of collecting companies’ financial data since, Cox said, “insufficient transparency is at the heart of today’s market problem.” Further, he defended the SEC — and his own — reputation, under attack lately from some congressional leaders, and especially Republican presidential candidate John McCain. The critics have said that the commission should have done more to stave off the effects of Bear Stearns’s problems and other financial failures in recent months. And Sen. McCain has said he would have called for Cox’s ouster had the Arizonan been in the White House.
Cox listed several enforcement actions that the SEC has taken recently against insider trading and broker/dealers accused of selling risky subprime mortgages, among the more than 50 subprime-mortgage related investigations the commission has underway. He also reiterated his call to Congress to create regulatory oversight of the $58 trillion credit default swaps market.
To be sure, today’s roundtable didn’t delve much into credit-market problems or issues emanating from them. On the agenda was a discussion about the problems with the SEC’s current filing system and ways to improve it.
The SEC is working on creating a company filing system that could create a continuous stream of company submissions created with XBRL, or data-tagged, electronic documents for easy searching. The SEC plans to eventually replace Edgar with IDEA, or Interactive Data Electronic Applications. Cox has said IDEA, which will cost the SEC $48 million, should be up and running within three years.
In effect, the commission would be modernizing from a “form based” system to an electronic one, explained William Lutz, a Rutgers University professor who is heading the project. “With this system, investors will find the data they want with minimum number of keystrokes and then they can slice, dice, and manipulate it to get the information they want, in the form they want,” he said.
The two corporate finance representatives on the panel said that EDGAR is useful. Robert Sorrentino, director of accounting policy and external reporting at Xerox, said he uses it to compare his accounting practices to other companies and, as an investor, to research companies’ financials. Kara Jenny, CFO of Bluefly Inc., also considers it a valuable tool but lamented that her vendors and creditors still turn to her small company first to get the scoop on her financial data. Those requests for information takes up her and her team’s time.
The SEC expects to have a plan by the end of this year for updating its filing system.