Even With SEC XBRL Guidance, Problems Persist

Recent XBRL guidance from the Securities and Exchange Commission is expected to help steer companies to provide more accurate information, but some worry it won’t go far enough to fix the problems that prevent better use of open source financial statement data.

“XBRL has been a failure since the beginning,” says Dave Frankel, an independent consultant with SlingStone Group, formerly with EDGAR Online. “The SEC had the right idea but didn’t commit to it fully. This latest guidance is kind of a weak attempt to get things moving in the right direction. Most in the industry are skeptical whether it will have any effect.”

Although the SEC is one of the first federal agencies to require its regulated population to provide information through an interactive data format, it also has been challenged by the House Committee on Oversight and Reform about its follow through. Led by Chairman Darrell Issa, the committee has hounded the SEC to crack down on persistent errors made by companies as they submit their financial statement data in XBRL to improve the overall quality of data available to prospective users. Studies have shown, and XBRL advocates have said, that investors and analysts make little use of data provided through XBRL because they see the errors and don’t fully trust the numbers.

Whether in response to congressional prodding or of its own initiative, the SEC recently issued two new pieces of guidance to tell companies to correct some common mistakes in their XBRL filings. In its “Dear CFO” letter, sent directly to an unspecified number of companies but published openly to warn other companies as well, the SEC advises companies to be more careful to provide calculation relationships in their XBRL filings. Calculation relationships enable users of the data to understand what numbers add up to produce total figures, such as current and non-current assets producing the total asset number.

Ted Uehlinger, a director at PwC, says the Dear CFO letter reminds companies that providing calculation relationships isn’t just an optional extra step, but is a required step in submitting the XBRL filing. “Where you have numbers that are footing, you’re required to have calculations for those numbers,” he says. “The SEC is looking at filings to see if you have those calculation relationships, and for those that don’t, it means reviewing the requirements of the filing.”

XBRL has been a failure since the beginning. The SEC had the right idea but didn’t commit to it fully.
Dave Frankel, Independent Consultant, SlingStone Group

If a company discovers its filings are missing calculation relationships, that suggests they should review their process to determine what steps are missing, allowing the calculation relationships to be overlooked, he says. “A lot of companies use automated tools, but it doesn’t pick this up. It will check the calculations that are there, but it doesn’t assure they’re all there. You have to look for them.”

In separate guidance, SEC staff published its recent observations that smaller companies are still relying too heavily on producing custom extensions rather than finding relevant tags in the GAAP Taxonomy that would correctly reflect a particular data point or disclosure. The SEC identified and addressed this problem early on with all public companies, and it has seen improvement among larger companies. The use of custom extensions is a concern because it makes it more difficult for users of the financial statement data to compare data across companies when like data is not tagged consistently.

“It’s easier and faster to create an extension than to find the element that should be selected,” says Campbell Pryde, president and CEO of the XBRL U.S. Consortium that is promoting XBRL adoption. “Smaller companies use a lot of automated software. This reflects the time and resources that smaller companies have to spend on this.”

“As they are doing their next quarterly filing, it’s easier to just use what you used last time and roll over year on year. So they need a little more discipline over controls,” Pryde adds. “With a lot of bigger companies, we don’t have this problem.”

Pranav Ghai, co-founder of Calcbench, which provides a platform for working with financial data submitted via XBRL, says if companies heed and act on the guidance, it should produce some meaningful improvements in the quality of XBRL data. “We haven’t quantified calculation relationship problems, but we see hundreds every quarter,” he says.

SAMPLE CFO LETTER

In July 2014, the Division of Corporation Finance sent the following letter to certain public companies regarding their reports on Form 10-Q and the XBRL requirement to include calculation relationships.
 
July 2014
Name
Chief Financial Officer
XYZ Corporation
Address

Re:


XYZ Corporation
Form 10-Q
Filed [ ]
File No. [ ]

Dear [ ]:
As you know, our rules require that you file an exhibit to certain of your filings that includes your financial information in eXtensible Business Reporting Language. Our rules also require that you include calculation relationships for certain contributing line item elements for your financial statements and related footnotes. Through our selective review, we have noticed that your filing does not include all required calculation relationships.
Acceptance of your filing by EDGAR does not mean that your filing is complete or in compliance with the Commission's requirements. We ask that you, in preparing your required exhibit with XBRL data, take the necessary steps to ensure that you are including all required calculation relationships. Please refer to Chapter 6, specifically Sections 6.14 and 6.15, of the EDGAR Filer Manual for information about this requirement. You may find other guidance relating to your structured data filing requirements on the SEC web site at http://xbrl.sec.gov/.
Please contact the Ask OID Help Desk at (202) 551-5494 with any questions you have about your structured data filing requirements.
Sincerely,
Division of Corporation Finance
 
Source: SEC.

If, for example, companies only list five items in a calculation relationship for a particular figure but in fact add a sixth number, the user of the data can’t tell what the number should be. “Sometimes when we see out-of-bounds changes, oftentimes it’s because they got the calculation relationships incorrect,” Ghai says.

Guidance on extensions should also help further improve that issue as well, Uehlinger says. “Filings are getting better, and the extension rate is coming down,” he says. “When smaller companies have higher extension rates, it’s not really due to unique circumstances of that company. They’re relying too heavily on the external tool and not using judgment. You can use automated software, but it doesn’t replace judgment.”

Still, other errors persist beyond those recently called out by the SEC that companies also need to correct before investors and analysts will show greater trust in the data, Ghai says. A big one is scaling errors, he says, or the misplacement of zeroes or decimals to overstate or understate figures.

Recent analysis by Calcbench showed as many as one in eight XBRL filings contain at least one scaling problem. Another persistent problem is sign switches, Ghai says, or the expression of positive numbers as negatives and vice versa. For example, companies often misinterpret the meaning of a particular element that contains a negative concept in its definition, then inadvertently negate it by adding a negative sign that contradicts the definition.

Pryde agrees that investors and analysts aren’t optimizing the use of data provided through XBRL because of the lack of data quality. “The way data quality is being managed around this whole initiative has been terrible,” he says. “I don’t think it could be any worse. There’s been very little communication from the SEC, so there hasn’t been a strong incentive for folks to get it correct. It’s a cycle, and hopefully the SEC attention to this should start to break the cycle.”

Others are more optimistic. “I think the data is pretty useful even as it is,” Ghai says. “Obviously changes need to be made, but we can make great use of the data, and we do.”

If companies can address the errors the SEC has called out, plus the scaling errors and sign switches, the tide will turn. “These are easy things to fix,” Ghai says, “and once we fix them, it’s off to the races.”