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The Importance of XBRL Quality: Insights From Experts

Merrill Disclosure Solutions | January 14, 2014

The age of XBRL has reached a turning point. Now that all publicly traded companies in the United States are tagging their SEC filings in XBRL, the focus has shifted from implementation to quality. Most filers now bear full liability for mistakes in their XBRL disclosures, so public companies can no longer risk allowing their XBRL files to contain errors that would skew their financial reporting.

Merrill Disclosure Solutions-The Importance of XBRL Quality

Other factors make XBRL quality more critical than ever. For example, the SEC has developed an analytical model that uses XBRL data to examine corporate SEC filings and flag anomalies for further review. At the same time, Congress is pressuring the SEC to get tough on the pervasive errors that have marred corporate XBRL filings up to now. Financial data from XBRL filings is being gathered and made available to investors, analysts, and others in the market; in other words, people right now are using XBRL data to do research on corporate performance.

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Clearly, companies must make XBRL excellence a top priority. To help filers, Merrill Corporation assembled three XBRL experts - Mike Schlanger, Vice President of XBRL Business Development & Strategy at Merrill; Lou Rohman, Merrill's VP of XBRL Services; and Campbell Pryde, President and CEO of XBRL US - for an instructive webinar, XBRL Insights: Critical Issues Facing Filers. As the moderator stated in his introduction: “With [XBRL] usage on the rise, every filer's XBRL data will be more closely scrutinized than in the past.”

The SEC's new command of quantitative analytics

The SEC's command of XBRL analytics is becoming more sophisticated. Filings that are inaccurate because of careless XBRL tagging will be detected, a point emphasized during the webinar. In particular, Mr. Rohman noted, one of the SEC's most important new projects in the XBRL area is the Accounting Quality Model (AQM), ominously nicknamed “RoboCop” by the business media. Created by the SEC's Division of Economic and Risk Analysis (DERA), the AQM is a quantitative analysis tool that the SEC will use to detect apparent anomalies for further consideration by a human examiner. “It's not an insignificant thing,” Mr. Rohman stressed. “It's something that we'll be hearing about, and it's something that the SEC is taking very seriously.”

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What exactly does the AQM do? “The Accounting Quality Model takes in 10-Q and 10-K information, and it uses XBRL as the source,” explained Mr. Rohman. “One area of focus is that it looks at the difference between net income versus cash flow, which is really the accrual-basis accounting effect, and it breaks down those accruals by discretionary accruals and nondiscretionary accruals.” The focus is, naturally, on the discretionary accruals. “It's primarily looking at to what extent is a company stretching these accruals to manage earnings.” The result of this and other assessments is a risk score, Mr. Rohman explained. “The higher the risk score, the more likely it's going to be forwarded to the enforcement resources.”

Feeding the AQM

Because the source of the AQM's analysis is XBRL data, the quality of XBRL tagging is now more important than ever for filers - a point that Mr. Rohman spelled out clearly. “I know that, from looking at XBRL filings, there are going to be certain filings that won't be consumed properly by the AQM - simply because they have poor structuring, poor tagging, poor-quality XBRL. To me, it seems very highly likely and logical that the SEC is going to issue comment letters for those types of XBRL filings with errors that prevent proper consumption by the AQM.”

There will be cases where certain common and persistent XBRL tagging and structuring mistakes will boost the risk score. Make no mistake: XBRL errors can hurt. A sloppy XBRL filing by a company whose financials are in good order may still be flagged for further review, said Mr. Rohman, “when in reality it shouldn't be [flagged] - it's just that the XBRL is bad.” “That's very unfortunate for the filer,” he added. “Because of the XBRL, they're getting reviewed when they otherwise wouldn't have.”

When will the AQM start its patrols? Mr. Rohman reported that Craig Lewis, DERA's director and chief economist, has said the model will be implemented in 2013, so the model is likely already on the prowl. (For more on the Accounting Quality Model, see the AQM article in the December 2013 issue of Dimensions and the interview of Craig Lewis in the April 2013 issue.)

Both Congress and the market demand XBRL excellence

For a look at the twin beams of scrutiny - governmental and commercial - being focused on XBRL data in SEC filings, Moderator Schlanger turned to Campbell Pryde, President and CEO of XBRL US. Mr. Pryde began by summarizing the pressure Congress is putting on the SEC to enforce a high standard of XBRL quality - a push that is ultimately part of a bigger government drive to lower regulatory costs.

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In particular, Rep. Darrell Issa (R - CA), chair of the House Committee on Oversight and Government Reform, expressed his views on XBRL use and quality in a strongly worded letter to the SEC in September 2013. “One of the things that [the House] Committee  wants to [do] is to make sure that this data is being used far more effectively than it currently is,” observed Mr. Pryde.

Enforcement is a key part of the Committee's vision. “This is a big issue for the folks in Congress,” Mr. Pryde stressed. “They want to see more efficiency.” (For details on the importance of Rep. Issa's letter and the related developments since its release, see the December 2013 issue of Dimensions.)

Situated uncomfortably under this Congressional microscope, the SEC seems poised to take meaningful action against corporate filers whose XBRL disclosures are not correctly tagged. As Mr. Pryde pointed out, SEC comment letters have started to include complaints about XBRL errors. (See, for example, item 15 in the SEC's comment letter to Standard Drilling Inc.: “We note that you have checked the Smaller Reporting Company box on the cover of your Form 10-Q. The XBRL Document and Entity Identification Information rendered as part of your filing appears to contain a number of data element errors, including but not limited to, your classification as a non-accelerated filer. Please revise to comply with the requirements of Section 405 of Regulation S-T and the EDGAR Filer Manual.”)

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The SEC is not the only one scrutinizing corporate XBRL filings. The market is amassing and using XBRL data from corporate SEC filings. Citing information gathered by XBRL US, Mr. Pryde listed the many types of commercial distributors - from data aggregators to media companies - that are collecting and parsing the XBRL data in corporate financial disclosures., for example, has developed a tool for its website that lets users access XBRL-tagged data in companies' SEC filings. The SEC is also working on making XBRL-tagged financial data available to the public in various ways, including CSV and Microsoft® Excel formats.

In fact, as Mr. Pryde outlined, the number of governmental and commercial entities distributing XBRL financial data during 2013 has more than doubled since 2012. Some are established data aggregators, such as Thomson Reuters, while others are new vendors.

Anticipation of growing market demand for XBRL-tagged financial data has led to the development of many innovative analytical XBRL tools. Additionally, Mr. Pryde reported, XBRL US is working on integrating XBRL data into Google search results to “get a much broader audience of people looking at financial-reporting information and being interested in what companies are doing and in how they are performing.”

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XBRL excellence requires more than software

Producing high-quality XBRL data is not just a compliance exercise. For all companies that make SEC filings, ensuring accurate financial disclosures in XBRL is a matter of pragmatic, market-driven importance -as vital as the accuracy of traditional EDGAR filings. Software can help to reduce the number of mistakes in XBRL instance documents, Mr. Pryde explained. However, as Mr. Rohman emphasized near the close of the webinar, it takes more than software to craft the kind of XBRL excellence that Congress, the SEC, and the market are demanding.

“Errors that can't be checked by software…really require the involvement of knowledgeable XBRL individuals,” Mr. Rohman asserted. “That's a key point of getting the XBRL right. By knowledgeable, I mean individuals who understand the SEC rules, the accounting disclosures, the intricacies of the XBRL itself, and then are able to apply that experience to the XBRL document.”

Human involvement and expertise are vital

Since it is the filer that bears the eventual responsibility and culpability for accuracy, it is important that companies seek assurances about the quality of their tagging and verify its accuracy. XBRL submissions in which Merrill is involved are all prepared or reviewed by consultants who are experienced CPAs with in-depth XBRL knowledge. These consultants understand the intricacies of XBRL and the SEC rules, and can apply that expertise to XBRL documents. Merrill's unique expertise allows corporate executives to move forward with confidence, knowing that their XBRL filings do not contain errors.

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Merrill experts work in teams, and every team has several seasoned members involved with the XBRL files. The team reviews each file to ensure that the tagging is consistent with the current XBRL taxonomy. The experts investigate essential items to ensure compliance with applicable rules, guidelines and best practices, resulting in high-quality XBRL. They also provide training and education for personnel at the filer/company. This equips corporate staff with insight into the crafting of high-quality XBRL documents.

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