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New Insights on XBRL and Other SEC Reporting Practices

Robert Herz | December 11, 2012

The results of a recent survey by the Financial Executives Research Foundation (FERF) provide some interesting findings on the practices employed by a cross-section of SEC registrants in preparing and filing their quarterly and annual financial reports.

The FERF survey, which includes responses from 416 companies and is titled SEC Reporting Practices and the Impact of XBRL: 2012 Survey, covers a number of areas relating to SEC reporting processes, including the size of SEC reporting teams; the number of working days it takes companies at quarter and year end to close the books, to release earnings, and to file documents with the SEC; bottlenecks encountered in the reporting process; how long it takes to prepare and review XBRL reports and the level of outsourcing of these functions; the length of “pencils-down” periods XBRL providers require to produce a final version of the XBRL-tagged financial statements; and customer satisfaction ratings for various providers of XBRL solutions.

One of the significant trends identified by the survey is that more companies are taking greater responsibility for their XBRL filings by bringing all aspects of their filing practices in house, rather than outsourcing those functions. The survey results also suggest a movement away from “stand alone” providers of XBRL solutions to “disclosure management solutions” which the survey defines as “fully integrated SEC reporting solutions which address collaborative drafting, XBRL, EDGARizing and filing.” Such disclosure management solutions continue to gain a significant share of the SEC filer market. And the move appears to be successful for most companies, with providers of such solutions garnering the highest customer satisfactions ratings in the survey.

Companies seem to like the higher level of control and greater in-house coordination and integration of the various aspects of preparing and submitting both the EDGAR and XBRL documents, with some solutions even eliminating any pencils-down period. Companies employing such a solution experience greater control over the timing of filing documents with the SEC and an overall reduction in SEC reporting cycle times, according to the survey.

In line with the continuing movement to such solutions, the 2012 survey indicates that most companies expect to file their SEC documents at least as quickly as they currently do, with many companies expecting to file faster over the coming year. In-house disclosure management solutions can also help companies maintain greater security over the information contained in in the SEC documents prior to their filing with the SEC than may be the case with companies that need to transmit this information internally within the management team involved in preparing the filing and to third parties, including auditors, outside counsel, and outsourced solution providers for EDGARizing , XBRL tagging, and submission to the SEC.

The biggest concern raised by survey respondents regarding XBRL compliance was to question the overall cost and benefit of the SEC's requirements to file XBRL-tagged financial statements. It is an important concern and one that I have certainly heard expressed in financial reporting conferences and in my discussions with financial statement preparers about XBRL. They question whether their XBRL filings are being reviewed and used by investors and other financial statement users, either instead of or in addition to the financial statement information contained in their EDGAR filings. My own view is that it may be too early to tell whether there will be a broad uptake of the XBRL filings by financial statement users as the bulk of SEC registrants only recently began to file a full set of XBRL-tagged financial statements.  

Who's Using XBRL?

What is certain at this point is that one of the major users of the XBRL financial statements is the SEC staff in the Division of Risk, Financial Innovation and Strategy (Risk Fin), who have developed a customized software platform to download and extract information from XBRL filings. Risk Fin staff have used this platform to provide the staff of the Division of Corporation Finance (Corp Fin) with customized analyses for use in their reviews. This has enabled the Corp Fin staff to better target their comments, to discern trends and to perform peer group analysis on registrants across an industry. These automated processes for screening machine readable data should enhance the overall efficiency and effectiveness of the SEC's regulatory oversight.

Companies seem to like the higher level of control and greater in-house coordination and integration of the various aspects of preparing and submitting both the EDGAR and XBRL documents, with some solutions even eliminating any pencils-down period.

I also understand that the SEC has formed an internal Center of Technology Excellence, one of the objectives of which is to develop data management oversight and analytical tools that enable robust risk analysis. I also understand that the staff of the Financial Accounting Foundation used the XBRL financial statements as part of their recent post-implementation review of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and that this greatly expedited their review process. And I understand that the major data aggregators that compile reported financial information and sell it to others have begun using or are exploring how to use the XBRL-tagged data.

But what about investors, the actual end users of financial statements? To what extent have they begun to use XBRL-tagged financial statements in their investment analysis? That question is the subject of a soon to be published survey of investors and financial analysts by the Center for Excellence in Accounting and Security Analysis (CEASA) at Columbia Business School. My understanding is that the survey will indicate that while there is clear and significant demand for timely, structured, machine-readable financial statement information of the sort that is provided via XBRL, there are currently a number of factors that seem to be inhibiting its widespread use by investors and financial analysts. These factors include concerns over the quality and reliability of the XBRL data including whether it properly matches the corresponding financial information in the EDGAR filing and the use of what appear to be inappropriate company specific “extensions” in XBRL-tagged financial statements.

Many analysts and investors indicated that they would not consider using the XBRL-tagged information unless there was auditor assurance on the data. Investor and analyst respondents also pointed to certain challenges in gathering, processing, and consuming XBRL-tagged financial statements. Hopefully, the results of the CEASA survey will prove useful to filers, to investors and analysts, and to the XBRL development community and the SEC in considering ways to further enhance the usability of XBRL-tagged financial information.

One potential enhancement that I understand the SEC may be considering is the use of “inline XBRL“ in which the tagging is done as part of and within the HTML filing and not as a separate document. That approach is already used for filings in certain other parts of the world, such as the United Kingdom, and is similar to the approach utilized by certain of the disclosure management solutions discussed above. Allowing issuers to use one document would eliminate the need to coordinate two documents containing the same information, could help eliminate or significantly reduce the use of inappropriate extensions, and could enhance the review process and the overall quality of the resulting data.

Another common concern cited by FERF survey respondents is the fear of getting SEC comment letters on their XBRL filings. That is an understandable concern in light of the fact that the SEC staff uses XBRL-formatted data and that the limited liability safe harbor (that was afforded issuers during the first two years after their initial XBRL filing) has begun to expire, subjecting the controls and processes over the XBRL-tagged financial statements to the same liabilities as the information in the EDGAR filings. Only approximately 5 percent of the survey respondents, however, engaged their external auditor to review their XBRL filing in the most recent quarter, although that percentage is expected to roughly double over the coming year.

Still, this may understate the extent to which companies are engaging their auditors for XBRL review services, the survey noted, as some companies may only be doing so in regard to their 10-K or only on a periodic basis for the quarterly filings. Nevertheless, the apparent relatively low level of external auditor review would seem to suggest that either companies are: A. confident in their in-house tagging procedures or those performed by their outsourced XBRL provider; B. they believe the SEC staff is unlikely to raise serious questions on their XBRL filings; C. they are concerned about the cost of having their auditors review the tagged financial statements; or some combination of these factors. However, as smaller SEC registrants become subject to the increased liability provisions, I imagine that some of them may want to engage their auditors to review their XBRL filings.

 There are lots of other interesting findings in the FERF survey, which is available at www. ferf.org. Accordingly, I would encourage those involved in SEC reporting at companies to review the survey results and compare them with your current processes and practices. And also look for the CEASA survey which should provide a number of interesting insights regarding the use of XBRL-tagged financial information by investors and financial analysts.