Good news for companies weary of the unfulfilled promises around publishing financial data using XBRL: You are likely to see some game-changing events soon that promise either to put the brakes on the technology or finally push it into fruition.
On one hand, the new Republican Congress seems intent to relieve smaller public companies (those with revenue below $250 million) from the requirement adopted by the Securities and Exchange Commission in 2009 that all public companies submit their financial statement data in eXtensible Business Reporting Language, or XBRL. House Republicans failed in their first attempt last week to accomplish that goal, but future efforts are likely to gain steam.
The SEC and XBRL advocates, meanwhile, are pleading with Congress for more time to show the benefits that XBRL can bring to capital markets before adopting a small-company exemption—which would eliminate more than half of all public company financial information from the data set that is growing via XBRL filings so far.
“XBRL is not working,” says Hudson Hollister, executive director of the Data Transparency Coalition, which advocates greater use of digital data throughout government. “XBRL could work, but right now it is not working. Instead of getting rid of structured data, Congress should be instructing the SEC to fix it. But the frustration is justified.” Supporters of the exemption, he says, see companies putting a lot of time and money into providing data to the SEC via XBRL and getting no benefit from it. Nor do they see investors getting any benefit.
Investors and other users of financial statements have been slow to use XBRL, at least in part because it is riddled with errors. The SEC collects the information and has made public statements and broad appeals for companies to improve the quality of XBRL submissions, but has not reached out to companies individually to compel them to correct errors.
Charles Hoffman, an independent XBRL advocate, analyzes data for errors and says about 98 percent of individual data points reported through XBRL are accurate, but about 40 percent of all companies have errors in their submissions. “I cannot read the primary financial statement correctly for 40 percent of companies,” he says. “That means it cannot be automated.”
“XBRL could work, but right now it is not working. Instead of getting rid of structured data, Congress should be instructing the SEC to fix it. But the frustration is justified.”
Hudson Hollister, Executive Director, Data Transparency Coalition
In nearly six years since the largest public companies first began submitting their financial statement data via XBRL, the SEC has delivered only one enforcement action as a result of poor data quality, Hollister says. “We’ve seen fewer than 10 restatements as a result of XBRL filing, and we still have a dual reporting system,” he says, where companies are required to file both traditional financial statements and the XBRL submission. Advocates want the SEC to let companies file under “inline XBRL,” which allows XBRL tags to be embedded into the HTML document. The SEC is considering the idea.
The SEC has said it wants to give companies time to learn the XBRL submission process without the threat of enforcement actions. In a written response to a Congressional inquiry on the SEC’s efforts to improve the structured data system, SEC Chair Mary Jo White said the SEC staff provided for a phase-in to allow companies to “adjust” to the requirement. She said the staff has provided guidance to enhance comparability across companies and filings.
“That work continues today,” White wrote. She expressed concern over the possibility of an exemption for smaller companies. “Access to significant amounts and types of data, both structured and unstructured, is vital to the commission’s work of regulating the U.S. capital markets.”
Getting to a Better Place
Most recently, the SEC released its database of information collected through XBRL, to give capital markets free access to the full set of data that has amassed so far. That move should go a long way to encourage investors to make better use of the information, Hollister says.
Mike Starr, former deputy chief accountant for the SEC and current director of strategic initiatives at Workiva, says he believes the SEC needs to do more. “Until the SEC starts to enforce providing error-free data, you won’t be able to optimize the benefits that could be achieved by using XBRL data in the first place,” he says.
Susan Yount, also a former SEC staff member who worked on interactive data and now director of reporting practices at Workiva, says companies are trying to improve their filings, but they don’t necessarily know where they make mistakes because the SEC doesn’t call them out.
“It’s fair to say filers today believe they are filing correctly because they haven’t heard anything from the SEC,” Yount says. “They know if they do something with an accounting disclosure that’s not correct, they will hear it. In the absence of any conversation, it’s not an unreasonable assumption if you don’t hear anything [to think] it must be OK.”
Starr says the XBRL movement suffers from a lack of direction. “It’s just a lack of understanding of what the issues are and what needs to be done to correct those issues,” he says. There are movements afoot, he says, to provide better ways for people to query the data, which would help a lot to optimize the expected benefits of structured data.
Campbell Pryde, president and CEO of the XBRL US consortium, agrees information needs to be more consistent before the benefits of XBRL will be realized. "We've found in talking with filers there's just a lot of miscommunication out there," he says. "Some filers are saying nobody told me I'm not doing it correctly, so I don't need to do anything. That's not everyone, but they're just not getting constructive feedback."
SAMPLE XBRL LETTER
Below is the letter that was sent by the Division of Corporation Finance in July 2014 to certain public companies regarding their reports on Form 10-Q and the XBRL requirement to include calculation relationships.
Meanwhile, he says, the SEC needs to back up its words with more decisive action. “That would get us off the status quo, but until they require errors and inconsistencies in data tagging to be corrected, they’re not going to get the movement they want.”
Louis Matherne, chief of taxonomy development at the Financial Accounting Standards Board, says he and his staff are doing all they can to make the taxonomy for U.S. Generally Accepted Accounting Principles easier to navigate, to reduce the error rate even further. The staff is eliminating, or studying for elimination, elements that are not being used; they are offering guidance and developing more; and they are working to address inconsistent modeling in the taxonomy.
“Anecdotally, the error rates are declining,” Matherne says. “There are several things required to improve data quality. I would love to see preparers put more resources into their XBRL exhibits, but there’s a perception that there’s not much use. There hasn’t historically been the sort of enforcement you need to make it happen.” Overall, the system needs more education and more assurance on data quality, he says.
Alex Rapp, co-founder of XBRL analysis platform Calcbench, says he’s seen the XBRL movement lose some steam in the past few years. “The public perception is that it’s a failed initiative, but it’s not,” he insists. Interest in use of the firm’s platform has grown steadily, he says, and data quality is improving.
“It’s a complicated pile of data. There was a false promise by some of the early founding fathers that this solution would be magic, but it’s not,” he says. “It’s embarrassing that we’re talking about going back to a paper system.”