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FEI on Data Tagging: No Benefit to CFOs

Companies participating in the XBRL voluntary program have seen no improvements to their internal operations, according to Financial Executives International.

For the past few years, XBRL advocates — including Securities and Exchange Commission chairman Christopher Cox, service providers, and some early adopters — have claimed that both companies and investors will reap advantages from data-tagged financial statements. What they have not been saying is how long it would take for those benefits to kick in for the key people putting those filings together — CFOs and their finance teams.

For now, there isn’t much incentive, according to Financial Executives International. “As preparers, we have learned that there are no improvements at this time in our internal processes as a result of creating and providing tagged information, and that preparers do in fact experience increased costs and efforts as a result,” wrote Arnold Hanish, chairman of the FEI’s Committee on Corporate Reporting, in a letter to the SEC’s Committee on Improvements to Financial Reporting (CIFR). He based his assessment on the experiences of companies that have tested XBRL (extensible business reporting language) through the SEC’s volunteer program and that participate in the FEI’s committee.

While the FEI isn’t against an eventual requirement for more companies to begin using XBRL, Hanish’s letter suggested that the data-tagging movement should slow down. The matter, of course, is up to the SEC, which could consider an XBRL-related proposal as early as this month, according to commission spokesman John Nester.

The SEC has the backing of the CIFR, which in February recommended that all publicly traded companies be required to turn their traditional financial statements into interactive documents, following a phased-in transition based on company size and the regulator’s reviews of the program’s progress.

The CIFR has subtly backed off putting XBRL on the fast track. In its midpoint progress report to Cox, the committee said the SEC should mandate XBRL’s use “over the long term.” An earlier draft said the SEC should do so “within a defined time frame.”

The committee — made up of current and former CFOs, professors, securities lawyers, investor advocates, and audit-firm executives — acknowledges that XBRL’s potential benefits may not be apparent to SEC filers just yet. At some point, the technology could “improve the integration of company operating and reporting data,” the members wrote in their recent report. Then companies could save money, the CIFR believes, by being able to internally tap their electronic financial data for use in areas outside of SEC filings, such as taxes, industrial filings, benchmarking, and internal-management purposes.

But for now, most companies will stick with the bolt-on method of applying XBRL and will likely do so in the near future, “yielding no benefits to preparers,” according to Hanish. This means that companies will tag their data only after preparing their financial statements rather than seamlessly doing it while crunching their numbers. The so-called integrated approach is not yet available, Hanish lamented in his letter, and it’ll likely be a number of years before large companies could even think about changing their already-complex ERP systems to accommodate a new application.

The FEI also pokes holes in the other purported benefits of XBRL; namely, that it will provide analysts and investors with financial data quicker, and that investors actually want it. The organization predicts XBRL could instead lead to analysts receiving excess information. “Strategically, the long-term direction of this project needs to be determined and communicated — is it to upgrade the manner in which data is filed with the SEC, or is it to provide (key) information to investors and analysts for their use?” Hanish asked.

If it includes the latter, then the speed XBRL will bring to financial reporting could help companies by allowing them to more quickly update erroneous information about themselves published by third parties, according to Mark Bolgiano, president and CEO of XBRL US, a nonprofit firm hired by the SEC to create the XBRL tags. Ideally, XBRL’s widespread use will result in investors receiving financial information as soon as it’s filed through “continuous reporting,” he told CFO.com.

This story includes additional reporting by Alan Rappeport.

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