Ten years have passed since the SEC’s XBRL requirement came into effect. Despite the challenges of the transition from traditional filing to structured data, using XBRL in SEC financial reporting has proven to be a great success. The use of XBRL-tagged data in financial disclosures continues to accelerate among investors, market analysts, and the SEC staff who conduct review and enforcement activities. It is becoming the norm for the collection and analysis of financial data.
The SEC’s vast structured database is transforming and improving the way financial disclosures tell companies’ stories to investors. It is solving the two problems the SEC sought to address with the XBRL mandate: The need to make the ever-expanding universe of corporate financial information more easily accessed by investors who are facing investment decisions; and the need to regulate this data universe so that the SEC can ensure compliance with accounting rules, mitigate risks to investors, and detect accounting fraud or other forms of corporate wrongdoing.
In a Toppan Merrill webinar broadcast on September 18, 2019, three experts from different markets sectors discussed XBRL’s success story:
- Mike Willis, Assistant Director of the SEC’s Office of Structured Disclosure.
- Emily Huang, CEO and co-founder of idaciti (which makes tools for analyzing structured data). Ms. Huang explained how Inline XBRL brings a company’s financials to life and how painfully apparent XBRL mistakes are to investors and analysts.
- Mike Schlanger, Vice President of Solution Sales at Toppan Merrill. Mr. Schlanger offered best practices for filing high-quality XBRL disclosures.
Today, we'll cover how 100% XBRL coverage has transformed SEC review and enforcement.
To listen to the full webinar, click here.
100% XBRL coverage has transformed SEC review and enforcement
100% XBRL coverage has transformed SEC review and enforcement XBRL has transformed SEC review capabilities, according to SEC regulator Mike Willis, Assistant Director of the SEC’s Office of Structured Disclosure. With
XBRL filings, the SEC staff now has—inhouse—100% coverage of reporting companies and of financial disclosures in structured-data format. This is a 7- to 10-fold increase in the coverage that was previously available from commercial sources of financial data in structured form. This enhancement has given the SEC staff unprecedented oversight in filer reviews and enforcement activities.
XBRL-tagging mistakes and inappropriate extensions can be detected immediately. Assessments of errors in XBRL quality are included in the review and comment process for a registrant. “SEC staffers have called vendors and registrants on specific data-quality errors,” Mr. Willis noted. “If your phone has not rung, good for you. But it has rung for others, including vendors.”
First stop for enforcement investigators
XBRL has also greatly enhanced the SEC staff’s reporting-compliance
assessments. Machine-readable XBRL tags are directly linked to the underlying FASB codification. That, Mr. Willis observed, enables identification of missing, incomplete, or inconsistent disclosures. “With a mouse-click, we can now
identify what’s not in a financial report.” SEC enforcement investigations use XBRL filings heavily. “Due to the granular nature of structured disclosures,” he warned, “XBRL disclosures are the first stop for an enforcement investigation of financial statements.”
Narrative disclosures monitored for troubling signals
The SEC is also using machine learning to monitor the narrative portions of financial reports. “We’re monitoring the tonality of the narrative disclosures and comparing the tonality of the narrative disclosures with the related disclosures to identify inconsistencies as a signal for closer review,” explained Mr. Willis.
Data shared with the IRS and other agencies
“We are performing economic and market analyses. We are able to aggregate data. It is very useful to monitor changes in overall cash, effective tax rates, geographic trends, etc.” He revealed that the SEC shares the machine-readable datasets with other agencies and standards organizations, such as the IRS, the US Census Bureau, the US Bureau of Economic and Business Affairs, the Federal Reserve Board, the FASB, the IASB, and others.
XBRL mistakes send disturbing signals to the SEC and the market
While poor XBRL quality distorts a company’s financial story, Mr. Willis noted, it is not entirely useless to investors. Just as bad XBRL is a beacon for SEC review and enforcement staff, it may function as a lighthouse, warning investors away from rocky accounting controls and shallow corporate governance. “Those issues provide very useful and often very interesting insights about filers’ choices, reporting processes and controls, and sometimes their absence,” he observed. “Some data-quality errors require very subjective assessments, and they provide significant insights into the company’s judgment.”
Overuse of custom extensions
One example Mr. Willis gave of an XBRL warning flag is the excessive use of custom extensions instead of standard XBRL tags from the US GAAP taxonomy. When the percentage of custom extensions exceeds the average in the
company’s sector by double or more, it is a red flag not just for SEC staff but also for analysts and investors.
“Excessive and inappropriate extensions are wildly obvious to the user,” he warned. “They say a lot about the filer. As a result, filers should pay very close attention if they’re in that bucket. We see extensions for property, plant
equipment, cash, and other disclosures where we should not see them.”
Another big red flag is incorrect tag selection. For example, SEC staff sometimes finds that “gross revenue disclosures are tagged with the defined-benefit discount rate—completely inappropriate!” Missing XBRL tags are an even bigger gaffe. “That raises a question in the analyst’s mind about whether the filer even has adequate reporting processes and controls.”
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