Gregory Hanson, CFO of Adventrx Pharmaceuticals, is intrigued by the benefits that regulators claim interactive-data technology could provide to companies and investors. He’s already gone to the trouble of getting estimates for how much service providers would charge his $50-million market-cap company to convert its financial filings into a searchable format, using extensible business reporting language (XBRL).
At the same time, he’s not convinced that the positives of XBRL will outweigh its potential negatives, at least for a company the size of his. With a four-person accounting staff, he worries about the time involved for Adventrx to take on XBRL — and how he could possibly make room on the biopharma company’s priority list, among the projects for improving the treatment of cancer and other diseases, for example.
Indeed, for a small, publicly traded company, the list of new regulations and future rules is already long — including the possibility that the Securities and Exchange Commission could mandate the use of XBRL, as early as this year.
“How do I explain to my company that it’s worthwhile to pursue XBRL as a volunteer or test basis, when accounting resources are already fully utilized with recent implementations of internal controls under the Sarbanes-Oxley Act of 2002, accounting for uncertain tax positions under FIN 48, and now looking forward to fair value accounting and potentially other far-reaching accounting pronouncements in the future?” Hanson asked during a recent meeting of the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFR).
Last month, CIFR recommended that the SEC require all publicly traded companies to use XBRL eventually. The SEC plans to propose some type of XBRL plan for companies this spring but has not said whether it will be required.
Hanson believes that regulators have a lot of issues to consider before they can rope small companies into the XBRL fold. For instance, have they taken smaller businesses’ limited resources into account, and will large companies’ benefits for using XBRL trickle down to the small caps? Hanson doubts that one of the potential advantages of using XBRL — the idea that analysts could have more time to pay attention to smaller companies — will pan out. Hanson also wonders if service providers can handle the amount of work that would be required if all SEC registrants started using XBRL at the same time.
Despite SEC chairman Christopher Cox’s enthusiasm for the technology, the regulator’s voluntary program has remained small, with just over 50 companies participating since it began two years ago. The pilot program has revealed some of the costs associated with data-tagging: Comcast, for example, reported spending just $5,000 and 150 hours on its first XBRL filing.
But smaller companies don’t have the time or resources to give XBRL a test run just yet. At the same time, CFOs like Hanson believe they have no choice. “While the voluntary approach to implementation shows a friendlier style from the SEC, we all know that the requirement for implementation is forthcoming,” he wrote in a statement provided to CIFR.
He’s hoping small-company finance chiefs can learn from the experiences of their larger brethren. He suggested that regulators give small companies at least an additional year than larger companies to begin using XBRL. CIFR recommended that the SEC use a phased-in approach for XBRL implementation, based on company size and the commission’s reviews of the program’s progress.
What Hanson has done so far is to gather numbers. He estimates that taking XBRL implementation in-house would cost a company the size of his at least $50,000 for the first year, with that expense getting halved in subsequent years. He attributes the higher first-year cost to training; the development of a new internal control over financial reporting, new documentation; software licensing, testing, and installation; and the preparation and review of the XBRL-prepared filings. He did not include external-audit costs in this cost estimate.
The alternative is to farm out much of the initial set-up to a service provider, which would reduce the expense to at least $30,000 a year, Hanson estimates. Edgar Online, one of the XBRL service providers, says converting a company’s paper financials to XBRL statements can take less than 10 hours. Edgar has not publicly said how much it charges companies, CEO Philip Moyer told CFO.com.
One XBRL-related estimate that has been seemingly impossible to pin down is audit fees. Some of CIFR’s members, including a current and former CFO, have worried that external checks of XBRL financial statements will mean audit-costs increases similar to those experienced during the first few years of Sarbox compliance. XBRL advocates say that fear is unfounded. However, the audit firms have not come forward with any projections on how much assurance of XBRL filings will cost companies.