The use of XBRL-tagged data in SEC financial disclosures is becoming the norm for the collection and analysis of financial data. During the last year, we have seen increasing use at the SEC, with several divisions incorporating XBRL data into their routine work, and at financial data consumers (e.g., Moody’s, Goldman Sachs, CFA Institute, hedge funds) who are realizing value from these file feeds. It is time for companies to step up and fix any remaining problems with their XBRL tagging.
The importance of XBRL quality goes far beyond SEC compliance. Without quality data tagging, companies lose control of their public financial narratives—control that is more important now than ever in an online age of fast judgment and “cancel culture.” Clumsy XBRL tagging may inadvertently prompt bad investment decisions by investors or their advisors, leading to lawsuits. Moreover, companies that do not have expertise in mining XBRL data about their industries may fall behind their peers who do.
These and other important observations are the theme of a recent Toppan Merrill webinar: XBRL Use Reaches The Critical Tipping Point. Three experts from different aspects of the XBRL sector spoke about the turning point that digital financial reporting has reached.
- Leslie Seidman, former chair of the Financial Accounting Standards Board (FASB) and now a board member at General Electric and Moody’s. Ms. Seidman outlined why companies, for their own good, need to address lingering issues with XBRL quality.
- Emily Huang, CEO and co-founder of idaciti. Ms. Huang discussed how XBRL brings a company’s financials to life and how companies and data users can employ XBRL to conduct robust disclosure research.
- Mike Schlanger, Vice President of Solution Sales at Toppan Merrill. Mr. Schlanger reviewed the history and progress of XBRL disclosure and explained why the use of XBRL data is now at a “critical tipping point.”
XBRL financial reporting is at a “critical tipping point”
Mike Schlanger, Toppan Merrill’s VP of Solution Sales, gave a brief history of XBRL use in the United States, where the SEC began mandating XBRL tagging in 2009. He covered the transition from paper filings to interactive structured data to Inline XBRL, which combines the benefits of umanreadable and machine-readable formats.
“Each year since the XBRL mandate began in 2009, there have been signs of increasing XBRL usage,” he observed. Now, “there are unmistakable signs that XBRL use is at or near a critical tipping point that can lead to a dramatic expansion of use in the marketplace.” In other words, XBRL quality is not just a matter of compliance for companies but a necessity for being properly understood by investors and analysts in the market.
Of course, the compliance aspect of XBRL quality remains vital. “The SEC has 100% coverage of all SEC reporting companies, being able to access hundreds of metrics to slice and dice and mash and combine the information. Whether you are the smallest company or the largest company, they can see instant results of that data from the use of XBRL. They [fulfill] information requests from the IRS, the Treasury, and Congress.”
He further noted that within the SEC, key divisions are realizing significant benefit from the XBRL filings. For example, several SEC professionals report that most financial disclosure fraud investigations at SEC Division of Enforcement begin with XBRL data. “It facilitates the organization of hundreds of metrics to conduct trend analysis research on company disclosures by size of company, by peer group, by individual values and metrics—looking for outliers, identifying required disclosures (or their absence), and much more.”
With poor XBRL quality, everyone loses—especially the filers
Leslie Seidman has chaired the Financial Accounting Standards Board (FASB), which develops and maintains the US GAAP taxonomy, and now sits on the board of directors at GE and Moody’s. She presented a sobering reality check on XBRL quality, warning that companies must step up and fix remaining XBRL issues or risk losing control over their own financial narrative. “Companies are wrong if they think that their XBRL files are not being used today.” Investors, analysts, and peer companies can search for XBRL-tagged financial data “almost as fast as you can think of it.”
She suggested a “powerful analogy” to argue the case for XBRL quality: “When you are traveling on a highway, you almost never want to use the cash lane for tolls anymore. That is because the automated EZ Pass lane saves you time and money. But what if it frequently had problems? What if it often charged you the wrong amount? Or the toll gates got stuck? You might decide to stick with the cash lane even though it takes longer. Unfortunately, we still have some of those glitches with XBRL.”
The key issue behind those XBRL glitches is insufficient data quality. “My key message today is that companies have to make it a priority to address the remaining data-quality issues. We do not tolerate mistakes in our traditional financial statements. Now, with Inline XBRL, your traditional financial statements and your XBRL financials are one and the same. The accuracy of your financial information has to be consistent, no matter how it is being provided to the marketplace.” Mistakes in XBRL disclosures,
whether standard or Inline, carry the same liability as in other disclosures in filings.
The risks of poor-quality XBRL data, she concluded, fall mostly on the filing companies themselves. She urged filers to address errors in their XBRL data “before they have a major problem with investors relying on inaccurate data, which then might lead to an enforcement action or lawsuits or both.”
Her vision for the future of digital reporting is that everyone focuses on the accuracy of the machine-readable tagging. “If you add that to the great technology available to easily use and interpret XBRL data, then everyone will want to use it, like the EZ Pass lane. We will have a lot more time to focus on analysis and insights, rather than wasting time and money obtaining and processing data.”
Using XBRL, following a peer’s disclosures is “like checking social media”
Emily Huang is the CEO and co-founder of idaciti, which creates applications for analyzing structured data and which processes Inline XBRL filings from the SEC every 10 minutes. Ms. Huang illustrated how XBRL brings a company’s financials to life in the platform that investors and analysts now use to research and analyze the information.
Companies, she observed, want to know what other companies are doing and how and where they disclose information. “XBRL data is a great way to follow the disclosure of your peers.” With the speed and ease of its data access, Inline XBRL makes this vigilance quite convenient. “I can check it just like social media.”
XBRL-related information on peers—how many other companies use that data point, what the labels are, and what the definitions are—is available immediately, directly from SEC.gov. With XBRL data, the ability to benchmark and compare financial information across a sector is extremely valuable. A screenshare of Inline XBRL demonstrates how you can immediately compare a company’s financials to others in its industry.
The following graphic shows Delta’s COVID-19 cash position. Ms. Huang calls this “connecting the dots” and notes that a “mere click on one iXBRL tagged value provides the viewer an 11-year time series view, along with instant benchmarking with its peers — all directly from SEC.gov.”
Another use of XBRL-tagged data in a search is this graphic showing Delta’s revenue by destination.
Ms. Huang also used examples from her firm’s Inline XBRL viewer to show how clear a bad XBRL tag or extension is to investors and analysts. “I do believe corporate issuers really care about the quality of their filing,” she said. “But sometimes they do not even know problems exist. The good news is that XBRL validation is available from any of the vendors out there supporting XBRL filings.”
Validate, but verify
Mr. Schlanger explained the validation resource made available to filers by the XBRL US Data Quality Committee. This tool is free and has effectively been sanctioned by the SEC (the Data Quality Committee rules are being embedded into the US GAAP Taxonomy).
“However,” he cautioned, “you have to recognize that not all data in filings can be computer-validated. Human inspection using accounting knowledge and an understanding of how XBRL is properly constructed is critical.”
The question of whether or not to use an extension, for example, is often too subjective for adjudication by a computer. “You need human intelligence. So work with vendors or your team to make sure that you are conscious of what the computer can and cannot do. Have your filing reviewed by human experts who can catch any other tagging errors or needless extensions and suggest improvements.”
Citing, as an example, one common type of XBRL error—wrong signage, Mr. Schlanger noted that the instances of that error detected by the Data Quality Committee’s validation tool has shrunk from some 23,000 to around 5,000. Yet that figure has stubbornly remained at 5,000. “This means a number of companies are still not using the validation tool, or they do not know how to clear the errors.”
He reminded filers that they are liable for errors in SEC-filed XBRL financial data—and that a much bigger concern is also at stake. “The larger issue is how XBRL errors throw sand in the data-consumption engine. You do not want inaccurate financial reporting in your professional position. But if you are making errors in XBRL tagging, that is the consequence. Those errors could lead to bad investment decisions.”
“Additionally, the SEC has emphasized that they view repeat XBRL-quality offenders as possibly having insufficient controls in place, which can lead to SEC professionals conducting a deeper review of a company’s process and controls.” He reiterated the importance of having a team that has your back with expertise in both accounting and XBRL.
Key conditions for realizing XBRL’s full potential
The webinar closed with some hard-hitting truths that must be acted upon for XBRL to achieve its full potential. First, Ms. Seidman said, is lingering poor data quality. “If we do not have accurate data, people will be reluctant to use it—and for good reason. It is a ‘garbage in, garbage out’ situation. If your tags are not correct, you are going to have misleading conclusions coming out of all that beautiful technology.”
She called upon corporate accountants and other filing professionals to deepen their XBRL proficiency. In her view, it is essential for accounting and XBRL knowledge to be integrated so that the people who are doing the tagging know GAAP. “I am very well aware that XBRL tagging is not one of the core competencies of most accountants, including me, and that really does need to change with more training.”
She pointed out the imperatives—compliance, communication, and company reputation—for investing company staff time to ensure that XBRL disclosures are right, instead of solely relying on an outside vendor.
All of this comes down to everyday decisions by filers. “When you use a nonstandard tag or an extension when an appropriate standard tag exists, what you are doing is complicating the analytical process for users—as Mike Schlanger said, throwing sand in the gears.”
“The result is that similar things do not look similar between companies, meaning a user can reach the wrong conclusion about one or both of you. This can also signal that your company has poor controls or processes. It may even raise questions about whether you are intentionally mis-tagging.”
To read the full article in Dimensions Vol. 2020, No. 4, click here.
Reach out to jump start a partnership that will bring speed, security, accuracy and efficiency to all of your complex content and communication requirements.