The Securities and Exchange Commission has touted XBRL as a saving-grace technology that will meet investors’ demands for more comparable financial statements across companies. But how much the implementation of data-tagging software will cost companies in the long run is still up for debate, even as a handful of volunteers continue to test it.
One key cost could be the price of assurance. Accounting firms or other third parties may need to be hired to show that companies applying XBRL — extensible business reporting language — to their financial statements used the software correctly and tagged their financial data correctly. However, auditors are not saying how much they would charge for such a service, according to the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFR).
Some of the committee’s members, including a current and former CFO, have worried that auditors’ fees for XBRL could rise to the level seen during the first few years of complying with Section 404 of the Sarbanes-Oxley Act. XBRL advocates on the panel dispute that claim. Still, the committee is acknowledging that while internally prepared XBRL documents should be independently reviewed, it should not result in a significant increase in audit fees.
Their solution may be to recommend that the experience of the first round of companies that are mandated to use XBRL — if the SEC takes up CIFR’s suggestion to do so on a phased approach — should be closely watched. On Friday, CIFR voted to ask the SEC to require the 500 largest U.S. public companies to use XBRL-tagged financial statements for one year, followed by large accelerated filers. After evaluating how those first phases went, the SEC should then consider whether to require other firms to also use XBRL.
“Until a group of reporting companies have been required to furnish to the SEC XBRL-tagged financial statements and notes using the new U.S. GAAP taxonomy for a period of time that will allow investors and other market participants to evaluate [their] reliability, it may be premature to make concrete suggestions regarding assurance,” the committee wrote in a memo to the SEC.
Assuming an aggressive schedule, the soonest the SEC could require companies to use XBRL is this fall, predicted John White, director of the SEC Division of Corporation Finance.
At a November CIFR meeting, Varian Inc. finance chief Edward McClammy and former CFO of Business Objects SA Thomas Weatherford voiced their concerns of audit fees that could rival those of 404 costs. “I’m concerned that when you get the auditor involved, it will create another 404,” said Weatherford, who retired as CFO in 2002. “There’s no doubt in my mind that litigation will happen. This will be a disaster.”
Peter Wallison, a senior fellow of the American Enterprise Institute for Public Policy Research, believes the double-checking of a company’s tagging of financial data does not have to be costly. One way is by printing out the XBRL format of a financial statement that has already been audited to see any differences and make sure the audited numbers have carried over into the new format. “We have allowed ourselves to get frightened by the level of assurance,” he said. “There’s no way the accounting profession can make this into a Section 404″ in terms of fees.
Still up in the air is what level of assurance investors would expect. As it is, auditors looking over a company’s financial statements do not opine on each data point, noted James Quigley, CEO of Deloitte Touche Tohmatsu. The question remains whether auditors would have to review each XBRL data tag.