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SEC Told to Mandate XBRL

The commission's committee for simplifying financial reporting pushes hard for interactive technology, in a document sent to Chairman Cox.

A Securities and Exchange Commission advisory committee is paving the way for the regulator to require companies to turn their traditional financial statements into more easily searchable, comparable, and interactive documents.

If the SEC takes the committee’s advice, all U.S. publicly traded companies could be required to file audited XBRL financial statements in three years. In the near term, the largest companies could be required to use the extensible business reporting language to tag their financial data and share that information with the SEC without an external auditor’s review.

On Monday, the SEC Advisory Committee on Improvements to Financial Reporting (CIFR) voted to submit its midpoint progress report to chairman Christopher Cox later this week. It will also be available for public comment. CIFR’s recommendations include: reduce industry-specific accounting rules, add more investor representation on the Financial Accounting Standards Board, and create guidance for auditors’ professional judgment.

The committee’s recommendations also ask the regulator to eventually mandate that all public companies use XBRL, following a phased-in transition based on company size and reviews of the program’s progress. The SEC, whose staff members participate in the meetings, plans to act quickly on considering these recommendations. On Friday, Cox said he has asked the SEC staff to make an XBRL-related proposal to the commission later this year.

But the details of the committee’s recommendations for XBRL has one committee member worried that the group will constrict the program and “severely impair” its overall value for the U.S. financial reporting system. He cited the recommended review milestones as the reason for his concern.

At Monday’s meeting, Peter Wallison, a senior fellow at the American Enterprise Institute for Public Policy Research, tried to assuage committee members’ fears that the use of XBRL could lead to high assurance costs for companies hiring auditors to check that they have tagged data correctly. He was also concerned with the committee’s recommendation that the SEC accept XBRL-prepared statements as “furnished” appendages to companies’ traditional financial statements, at least initially.

By considering the XBRL material “furnished” rather than “filed,” during the transitional phase of formally introducing the technology into its system, companies would be less inclined to carefully tag their data and would likely introduce mistakes, he claimed. The acceptance of material that is considered furnished does not carry the same liability concerns as filed documents, unless there is proof that the material was intentionally false or misleading, noted Wallison.

However, Wallison was in the minority. While the committee allowed Wallison’s seven-page dissent to be attached to nearly 100-page committee report, the other members still felt a need to give companies wiggle room as the use of XBRL in SEC filings continues to be explored. “We want to go on record [as saying] we should go slow on legal liability,” said CIFR chairman Robert Pozen, who also chairs MFS Investment Management.

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