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XBRL Insights: Six Critical Issues Facing Filers (Part 2 of 2)

Merrill Disclosure Solutions | August 13, 2013

Mike Schlanger

Mike Schlanger

Mike Schlanger, Merrill Corporation's Vice President of XBRL Business Development and Strategy, with input from Lou Rohman, Merrill's Vice President of XBRL Services, has summarized six considerations that filers must understand before preparing XBRL instance documents. Part 1, which appeared in the June 2013 issue of Dimensions, explains that XBRL is a language, and you are the translator; software does not verify accuracy; and XBRL potholes are everywhere. Part 2 continues here with three more insights: why you need expert help; liability risk has arrived; and XBRL uses are expanding.

Number 4

Both internal and external expertise is necessary Communication and support, both internal and external, are crucial. There must be a dialogue between the company and the vendor. Here at Merrill, the vendor, we know that we must understand the company's native language, or else we will not be able to craft a proper translation into XBRL. Yet even within the native reporting language of the company, points will remain that we need to clarify with company personnel.

Mike Schlanger Quote 1 - Part 2 of 2

Probably the most important thing we do to prevent errors in XBRL filings is to conduct one-on-one discussions with the staff at our client companies. Topics of discussion include unique aspects of the client's filings and ways to represent those aspects in the correct XBRL structure and data entry. The result has proven serendipitous: At many ofour client companies, personnel have achieved significant expertise in the requirements of XBRL because they learn through this process and build on their knowledge from quarter to quarter.

Recently, we've seen a trend of companies moving to a disclosure management platform based on SaaS (software-as-a-service), before they have undertaken the necessary educational effort to ensure that they “know what they need to know” about how XBRL works. Merrill strongly believes in the value that companies will achieve by moving to this type of integrated SaaS platform, which includes insourcing XBRL and which we will be releasing this year. However, too many filers wrongly believe that transitioning to an integrated, single-source platform (where the source data flows into the XBRL files) will alone ensure high-quality XBRL.

Number 5

The honeymoon is over: liability risk is now real for many filers. The key to liability prevention is careful, thorough preparation of the XBRL instance document. Companies need to have similar controls and procedures in place for their XBRL work as they do with their traditional financial disclosures and SEC submissions.

For the first 24 months after a company is mandated to submit an Interactive Data File (but no later than October 31, 2014), SEC rules were protecting XBRL filers from liability for misstatements. Depending on when they were phased in, filers have already lost their liability protection or will lose it in 2013 or 2014. Even for filers still in the limited liability phase, the SEC could take action, depending on the circumstances, since limited liability applies only to filers that make a good-faith effort to comply with SEC rules and that promptly correct any failures when they become aware of an error.

Filers that fail to comply with the SEC's XBRL requirements may be ineligible to use short-form registration statements, such as Forms S-3 and S-8, and Form 144 (used when an individual resells restricted stock). However, the loss of eligibility to use these forms is not the only exposure a company may have. Filers also face the risk of lawsuits by the SEC and investors that may arise if XBRL tagging and instance documents are materially inaccurate or misleading. [For more details on XBRL liability, see the article in the August 2012 Dimensions.]

Mike Schlanger Quote 2 - Part 2 of 2

SEC staff members urge filers to be certain they are not continuing to make the troublesome errors that the SEC continues to point out. Concerned about the ongoing quality of filings, the SEC feels that filers should now have both the tools and the knowledge to make compliant filings. “We suspect that the SEC's generally 'hands off' approach to interactive data may be about to change,” warn the editors of The Corporate Counsel (“Farewell To XBRL Limited Liability For LAFs,” September-October 2012, Page 11). They add that the SEC will start raising “specific concerns with issuers,” either in the traditional review of filings or as a separate review by the SEC's XBRL experts.

Number 6

XBRL is here to stay: the SEC, the FASB, and investors are using it. Many corporate disclosure professionals question whether the SEC is looking at XBRL filings, but the Commission clearly is. It is indeed using the data and has even specified that it applies customized software to parse XBRL data and put it in a relational database for analysis. Sources at the SEC explain that the Commission uses data from XBRL filings both to identify problems with the underlying accounting and disclosures in individual filings and to evaluate the overall quality of accounting and disclosures. It has, for example, used XBRL data to analyze pension discount rates among filers and to help make risk assessments for filings.

XBRL filings do not languish in an unused database. Tools that automatically analyze, compare, and flag financial statements for disclosure problems and accounting fraud are being created by the SEC Division of Economic and Risk Analysis. [EDITOR'S NOTE: Until June 2013, this was named the Division of Risk, Strategy, and Financial Innovation, or RiskFin.] The mining of XBRL data is a key part of these tools. Craig Lewis, director and chief economist of that division, urges companies to check their XBRL work to ensure that their filings are not automatically flagged for examination by the monitoring system. (The Dimensions interview with Dr. Lewis appears in the April 2013 issue.) Mistakes in XBRL elements can affect the score you get from the monitoring model, increasing the chances that your company will be flagged for an SEC review or potential enforcement action.

Additionally, it is important to understand that XBRL-tagged data is living and breathing well beyond the SEC. The market is using it to get information about companies. Investors and analysts have begun to mine XBRL filings to gather, study, and compare information about companies. For example, Jim Cramer's website, TheStreet, is now offering its users direct access to an XBRL-based search engine from 9W Search. The Financial Accounting Standards Board also uses XBRL data for research. Its post-implementation review process for accounting standards studies XBRL files to gather data about how accounting standards have been disclosed. Information can take just minutes to obtain using the XBRL database.

While still at an early stage, XBRL and the associated software tools for using it are developing very quickly. As the body of data grows over time, the use of XBRL can only increase. The longer the time series of XBRL data, the more useful the data will become. The XBRL data filed with the SEC today is part of that time series, making it just as important as what may be filed five years from now.

Mike Schlanger Quote 3 - Part 2 of 2

The SEC's own use of XBRL data has redoubled its focus on XBRL quality. Investors, analysts, and the makers of software tools are taking XBRL seriously. The time has come for all filers to take it seriously, too.

For the first three insights, see Part 1 in the June 2013 issue of Dimensions.

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