But the quality of filings ‘is not where it needs to be’
It took a while for Charley Hoffman’s dream to come true. But now, nearly 15 years after the certified public accountant (CPA) from Tacoma, Washington first suggested a scheme for electronic reporting of financial information, income statements, balance sheets, tax and regulatory filings around the world are going digital.
That’s not to say traditional text-based filings are going away anytime soon (if ever), but a significant milestone was passed recently in the US. Virtually all US publicly traded companies have been submitting financial statements via XBRL for the past two years under a ‘no fault’ trial run. Now XBRL filings are held to the same legal liability as traditional HTML filings.
XBRL promises more timely, accurate and efficient reporting and easier comparability from company to company, proponents argue, benefiting filers, investors and regulators. But potential users of interactive data have been slow to embrace it for several reasons. High on the list is a spotty track record on accuracy.
The quality of filings ‘is not where it needs to be,’ concedes Lou Rohman, vice president of XBRL services for Merrill Corporation, which provides regulatory filing services for issuers. While not naming the companies, Rohman cites several examples of discrepancies between what the XBRL filing says and what the filer intended to say.
Some errors are relatively minor, such as not tagging a share repurchase authorization as a subsequent event. But more glaring errors have also occurred: in one case, a $39 mn adjustment to cost of goods sold was erroneously tagged as a benefit when it was in fact a charge.
The best way to avoid mistakes is to have a ‘knowledgeable XBRL individual’ in-house or an external resource that is part of the accounting team, Rohman advises. Most aspects of XBRL require human involvement and can’t be automated with software, he warns.
In addition to concerns over errors, institutional investors have cited inconsistent tagging by US issuers within the same industry as a factor limiting usability. ‘It’s mostly a US problem,’ says Cheryl Neal, spokesperson for XBRL International.
Unlike many non-US regulators, the SEC allows US filers to provide unique extensions to the XBRL taxonomy, in effect saying they are different from their peers. In most other jurisdictions, unique extensions are rarely allowed, Neal says. ‘Countries like Japan and China are doing well,’ she adds. ‘They fill out a form and their data automatically gets tagged.’
US issuers can expect increased scrutiny from regulators. Late last year, Craig Lewis, chief economist of the SEC’s division of risk, strategy and financial innovation, laid out his vision for an accounting quality model in which XBRL-tagged data will feed a set of ‘quantitative analytics’ to uncover potential ‘earnings management’.
Discretionary accruals that are ‘outliers’ among peer companies and ‘poor absolute or relative performance’ versus peers that may tempt management to inflate current earnings will be flagged for further scrutiny, Lewis explains.
In addition, pressure from Congress promises to keep the SEC pushing the issue. Recently US Congressman Darrell Issa, a long-standing proponent of XBRL, slammed the SEC publicly, saying its implementation of interactive data reporting is ‘stagnant’. Issa, who chairs the influential House Oversight and Government Reform Committee, charged that the SEC ‘does not fully utilize’ the interactive data it already collects.
Perhaps the next big hurdle facing issuers is when auditors are likely to get involved. To date, interactive data has not been audited and there is no specific timeline for when that will happen, but Rohman sees the development as inevitable, now that liability for tagged data and traditional data are the same. ‘It’s just a matter of time,’ he observes. Other questions looming concern whether and how footnotes and proxy statements fall under XBRL.
And perhaps the single biggest factor is time: with only a couple of years of tagged data history available, analysts are limited in their assessment of how usable XBRL data is. As more history is accumulated and as accuracy increases, it’s likely the investment community will find XBRL delivering on the promise and vision of a certain CPA from Tacoma.
