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Game Changer: Congress Challenges The SEC Over XBRL Quality

Merrill Disclosure Solutions | December 09, 2013


The XBRL stakes have been raised for the SEC and corporate filers. In the House of Representatives, the Committee on Oversight and Government Reform is reviewing the SEC's implementation and enforcement of the Interactive Data Rule, which requires companies to file their financial statements in XBRL. In a game-changing letter sent by Committee Chair Darrell Issa (R-CA) to SEC Chair Mary Jo White in September 2013, Congressman Issa asserts that the SEC should more vigorously enforce high-quality XBRL in corporate disclosures and embrace the use of XBRL data throughout its internal operations. According to Committee staff and XBRL experts alike, this communication (the "Issa letter") marks a turning point in the establishment of XBRL as a standard language for SEC filings, while it raises new risks for companies whose financial disclosures have errors because of sloppy XBRL tagging.

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Issa Letter: Progress Is Stagnating
In his letter, Rep. Issa complains that the SEC's progress with XBRL is “stagnant.” Citing academic reports, including a white paper from Columbia Business School's Center for Excellence in Accounting and Security Analysis, along with information from unidentified former SEC staffers, Rep. Issa makes three claims:

  • The SEC does not internally use the XBRL data (or “structured data”) that issuers file.
  • The agency is buying expensive data from commercial providers when it could instead be using the XBRL data it already collects.
  • The SEC has “failed to address” quality control over XBRL filings.

On the topic of XBRL quality, Rep. Issa notes that the SEC has not issued “even one comment letter” on what his letter describes as “1.4 million ” identified (as of September 6, 2013) in SEC filings by XBRL US. He points out that these “significant errors” threaten to make the data unreliable and therefore unusable. Asserting that XBRL filings should be “as accurate and credible” as EDGAR filings, he criticizes the SEC for not providing adequate guidance or imposing “proper enforcement.” The letter asks the SEC to brief the Committee staff and provide designated documents to help the staff in its review.

Dimensions2013-Issa Response

The SEC's Response
In compliance with Rep. Issa's demands, a few SEC staff members met with Committee staff in late September, and the SEC sent an initial written response. While the SEC has not yet satisfied the document request, the Committee is working with the SEC on a schedule of production. Hudson Hollister, an attorney who is now Executive Director of the Data Transparency Coalition and formerly was with the SEC and Issa's oversight committee, believes the SEC is still “evaluating the substance” of its response.

The SEC does not comment publicly on its dealings with Congressional committees. However, Dimensions was able to speak with an unnamed senior Committee staff member who worked on the letter to the SEC and attended the September briefing. In the view of this staff member, “the SEC has indicated it takes the concerns expressed in the letter seriously.” The Committee sees the SEC's initial response as part of an ongoing dialogue. It accepts that the SEC is handling many requests from Congress and that the process will unfold over a lengthy period, with more SEC briefings to come.

Nevertheless, in the opinion of the Committee staff member (and Rep. Issa; see sidebar), the SEC is not doing anything to enforce an improvement in the quality of corporate XBRL filings. The Committee wants the SEC to take a “leadership role” by demonstrating that quality matters and to take a more serious view of its responsibilities under the Interactive Data Rule. Despite these concerns, the Committee is “cautiously optimistic” that the SEC will become more assertive about XBRL quality, according to the staff member.

The Bigger Picture
As indicated by the Issa letter and our discussions with Committee staff and other sources, the XBRL requirements for SEC filings are part of a much broader effort to establish the use of structured data throughout the US government. This modernizing vision is a “passion” for Rep. Issa, according to our source on the Committee staff, and has also been expressed in his rebooted push to pass the DATA (Digital Accountability and Transparency) Act. Improving the quality of XBRL filings will help demonstrate the benefits of structured data use in creating a more open, interactive, and automated government - giving credibility to the DATA Act (which passed the House in 2012 and again in November 2013, and as of December 1, 2013, is under consideration in the Senate).

With federal budgets constrained indefinitely, one purpose of the DATA Act is to cut costs by using structured data (such as XBRL) to automate the processing and review of information and increase its transparency. Although structured data automation cannot handle all aspects of the preparation and review of SEC filings, the long-term vision sees this technology as a low-cost way to perform much of the labor-intensive efforts currently done by hand - thereby lowering government expenditures and improving government efficiency.

This vision extends far beyond SEC filings. For example, President Obama, signing an executive order in May 2013 requiring an open-data policy, indicated that structured data formats (which presumably would include XBRL) must become mandatory for executive departments. Clearly, the XBRL requirement for SEC filers is here to stay. Furthermore, it is likely to be expanded to other securities-related disclosure documents, such as proxy statements, as suggested in the recommendations of the SEC's Investor Advisory Committee.

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Because of this overarching progress toward structured data through the US government, the current and former Committee staff members who spoke with Dimensions emphasized that companies must accept XBRL as the future for corporate disclosure. While change can be difficult, companies (not just the SEC) bear responsibility for the quality of XBRL filings.

“Many companies are taking this step toward digital financial reporting very seriously,” Charles Hoffman, often called the “father of XBRL” and the author of XBRL for Dummies, XBRL Essentials, and the blog Digital Financial Reporting, explains to Dimensions. “Others are not and don't really get the bigger picture.” Mr. Hoffman finds that apathy and resistance are common when new technologies are introduced. However, he believes that in this case the consequences of foot-dragging are particularly high. “The big loser here if this does not work will be investors and the capital markets,” he warns. “With the amount of information which is bombarding people these days, something like XBRL is absolutely essential.”

FASB Response
The Financial Accounting Standards Board, whose US GAAP Taxonomy is the lexicon for XBRL filings, declined to comment on the Issa letter. A statement to Dimensions from an FASB spokesperson affirmed that the FASB is “continually improving the taxonomy and making it easier to use.” The spokesperson pointed out the series of user implementation guides that the FASB launched this year and the proposed improvement to the calculation hierarchy that is expected to be finalized for the release of the 2014 Taxonomy. The FASB is committed to “helping companies and investors fully utilize the power of the taxonomy so that the capital markets can fully realize its benefits,” the spokesperson explained.

SEC Enforcement Actions Are Possible
Nobody knows what the SEC, operating with limited resources, will do next to bolster its enforcement of XBRL quality in corporate filings. Some experts believe the time is right for the SEC to strike with a strategic enforcement action - perhaps a case against a chronic XBRL slacker, a company that continually violates the basic XBRL tagging rules and the guidance and observations the SEC has provided. Alternatively, the SEC could target a small number of filers with publicly available comment letters. If other filers, by observing such examples, believe that they too are under the SEC's microscope, they may bring to XBRL filings the same meticulous approach they use to prepare EDGAR filings.

“A bit of enforcement, even as a symbolic signal, would give investors more confidence that the SEC is serious about the quality of structured data submitted to it,” says the Data Transparency Coalition's executive director, Hudson Hollister. “It would encourage [investors] to start using the data to make better, faster investment decisions.” According to Mr. Hollister, the Data Transparency Coalition is trying to promote a compromise between the views of Rep. Issa and the differing perspectives of Rep. Robert Hurt (R-VA), vice chair of the Capital Markets subcommittee in the House Committee on Financial Services. Rep. Hurt has considered a proposal to exempt some small companies from the XBRL filing requirement. Mr. Hollister said that the Coalition wants the legislators to achieve a consensus and then pressure the SEC to expand its XBRL requirements and improve the quality of XBRL filings. (For more on that effort, see Mr. Hollister's blog commentary on the topic.)

Message For Companies: XBRL Quality Matters
The big takeaway for all companies? XBRL is here to stay; the quality of XBRL filings is of crucial importance; and filers whose financial disclosures continue to have XBRL-related mistakes risk provoking SEC actions.

“Be prepared to get serious about XBRL,” advises Professor Dan Gode, Clinical Associate Professor of Accounting at New York University's Stern School of Business. (See his interview in the October 2013 issue of Dimensions.) David Lynn, an attorney in the Washington DC office of Morrison & Foerster, would not be surprised if the SEC's Division of Corporation Finance began issuing comments on XBRL tagging as part of its regular review of SEC filers. “At this point,” Mr. Lynn tells Dimensions, “I think companies should continue to do what is required and strive to improve the quality of the XBRL data as much as possible. They won't be questioned on it if the SEC decides to step up its review efforts because of the Congressional prompting.”

“The [Issa] letter doesn't change the auditor's roles or functions,” maintains Kristine Brand, a professor at Regis University School of Business and the author of a monthly column on XBRL in Strategic Finance. “But smart filers will take a look at how their auditors, or CPAs working for their XBRL vendor, can contribute to filing quality.” Prof. Brand further explains to Dimensions that all companies now need to evaluate their XBRL filing policies, procedures, and internal controls to “ensure that they are filing accurate and high-quality XBRL filings.” She warns that it is “no longer a question of if, but when, the SEC will enforce filing accuracy.”

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