Lou Rohman, Vice President, XBRL Services, Merrill Corporation | September 20, 2016
The gap between software and the human brain gets smaller every year. Smart virtual assistants like Apple’s Siri think like we do (and maybe better), and self-driving cars are now on our roads (probably driving better than most of us). But here’s one area where software can’t fully replace a knowledgeable human: catching every potential error in your company’s XBRL filings. There are still a wide range of very common errors and other issues that cannot be detected by error-checking software.
Error-checking software is the first line of defense
Over the past few years, automated XBRL-error-checking software made some big advances. Just this spring, the XBRL US Data Quality Committee showed that its validation tool helped reduce a certain type of XBRL errors by 64 percent. All filers should be checking their XBRL filings against the DQC’s free validation rules tool. It’s great for catching common errors like invalid axis/member combinations and negative values where positive values are expected. This should be your first tier in a quality assurance strategy. It’s fast, it’s reliable and it’s free.
Software still can’t catch many types of XBRL errors
There’s still plenty that error-checking software can’t do. I helped Financial Executives International's Financial Executive Research Foundation put together a report titled, “Beware XBRL Errors in SEC Filings Including those Not Detectable By Software.” The report covered common types of XBRL errors that slip through the error-checking software filters:
- Using different XBRL tags to disclose the same information at different locations in a filing
- Using different member elements to describe the same category of information at different locations in a filing
- Creating a custom extension element when an appropriate axis element exists in the US GAAP Taxonomy — a big problem I discussed here
- Erroneously entering values exactly as they appear in the paper-based filing
Example: The paper-based disclosure refers to “a recorded loss of $20 million.” Entering this information as-is for the XBRL filing produces an error that erroneously states that there was a recorded gain of $20 million. For XBRL purposes, this information should be entered as -$20 million.
- Using a tag that represents a different meaning that what is disclosed in the paper-based document
Example: The paper-based filing reads, “The company had a net operating loss tax carryforward of $38 million.” Erroneously using the Deferred Tax Assets Operating Loss Carryforwards tag changes the XBRL meaning to, “The company had a deferred tax asset of $38 million related to net operating loss tax carryforwards.” The appropriate tag is the Operating Loss Carryforwards tag.
Essentially, software has a hard time evaluating context. Error-checking software can tell you if an element or value is technically invalid unto itself — but it can’t tell if that technically correct usage is erroneous in the larger context of the entire disclosure. Software also can’t identify discrepancies between the traditional paper-based filing and the XBRL filing.
You need (human) XBRL expertise
If you’re relying only on software to clean up your XBRL filings, there’s a good chance your filings include errors like those described above. And it's very clear that you don’t want to make these errors. The SEC is noticing, and they’re sending communications directly to CFOs.
To handle the complexities and nuance of XBRL tagging, every company should have a knowledgeable XBRL individual involved with their filings. Whether it’s an internal or external individual, your XBRL expert should be experienced with accounting disclosures and XBRL tagging requirements, and extremely familiar with the most recent US GAAP Taxonomy and the EDGAR Filer Manual.
At Merrill, we’ve been deeply involved with XBRL even prior to the SEC’s 2009 mandate. We have the largest U.S.-based team of XBRL-knowledgeable CPAs in the industry, which has been key to helping thousands of companies prepare high-quality filings and confidently move forward with XBRL.