As the use of XBRL expands, staying up-to-date with frameworks and guidelines issued by regulators is key to increasing accuracy. Companies across the board have accelerated their reliance on technology during the COVID-19 pandemic. From remote working tools and cloud-based services to automation and analytics, there’s an urgency to make the right moves — companies to ensure productivity today and relevance tomorrow; and all of us as companies and auditors to build (or renew) confidence in the quality of data available for decision making. In fact, in our most recent survey of CFOs, the number-one driver for their tech investments was growth, ahead of cost reduction, collaboration, and other outcomes they hoped to achieve over the next year.
As you reassess your own organization’s digital priorities and look at your accounting and finance function, one area to pay attention to is XBRL. It isn’t new, as the SEC has required public companies to report data in an XBRL format for more than a decade. But it’s gaining prevalence. Just this year, the European Union issued regulations to require its use when listed companies file annual reports.
As with any aspect of digital advancement that is gaining momentum, it’s important for companies to understand how it works, its benefits and challenges. For businesses and the markets to get the most out of digitization and standardization, like XBRL, it's important to understand the current challenges and how to best overcome them.
Full disclosure: I am a big proponent of XBRL, having seen its potential first-hand in my years at the SEC and now at PwC and in my role as vice chair of the XBRL International board.
The current landscape
XBRL stands for eXtensible Business Reporting Language and is a framework of tags that allows users to digitize data points in a company’s financial statements, creating a machine-readable document. A range of people, including analysts, credit risk agencies, investors and regulators, use XBRL to more easily analyze data within and across different companies.
While more regulators have been requiring XBRL in recent years, its use hasn’t been without challenges: for instance, errors, inconsistent tagging of the same information across companies or mis-tagging tags are ongoing issues. And there are even technology companies that have emerged over the past few years that mine XBRL-public filings, remedy the problematic data and then sell the corrected data back to those that use XBRL data (including back to companies themselves).
While any errors in financial reporting or other processes is cause for concern across the market because of its corrosive impact on confidence over time, with XBRL errors there’s also a potential corrosive effect for individual companies, such as potential negative impacts to stock price, credit ratings, and even reputation.
Market participants make decisions in part from the financial data public companies file and, to keep unnecessary costs out of the system, they need to have confidence that the data is of good quality. And, as a matter of integrity and protecting a brand and reputation, no company wants investors to make decisions based on inaccurate data. Errors are difficult to scrub from the Internet, even after filings are amended. Likewise, if revenue was underreported because of XBRL issues — and was truly higher than what appeared in the interactive data — that, and other similar errors, could pose reputational risks. This becomes compounded if these tagging inaccuracies are unknowingly carried forward period to period.
It’s not just investors and regulators combing through company data: other power users are taking note, such as credit rating agencies and third-party service providers. Erroneous financial data, for example, could bring about errors in the models that rating agencies use to determine a company’s credit worthiness. And here’s the ultimate risk: if faulty data sparks an unjustified decision (such as a lower credit rating or investment decision), costs go up and market confidence goes down.
And yet even with such high stakes when it comes to data quality, there are errors. The XBRL US Data Quality Committee (DQC) publishes errors in SEC filings on its website. So far in September, 34% of Form 10-K and Form 10-Q XBRL filings included errors based on the DQC’s validation rules.
What CFOs and audit committees can do
The first step to tackling XBRL data inaccuracies and the associated risks is awareness. The second step is action. And those steps don't stop at the C-suite or board.
Education and training of staff in corporate accounting, finance, treasury, and investor relations is crucial, enhancing their role in providing quantitative information, insights, and counsel. It’s also up to the company to ensure its XBRL-tagged financial statements are prepared accurately for the benefit of all stakeholders with effective disclosure controls and procedures.
Companies spend plenty of time and devote substantial resources towards preparing their financial statements each quarter, but that effort is undermined if stakeholders encounter XBRL tagging errors in those reports. The rigor (and controls) for preparing financial reports is required to extend to the XBRL tagging of those reports as well.
It goes without saying, robust communication with a company’s external auditors is also important. Auditors are in the business of quality and can be helpful here. In the US and around the world, auditors can be engaged to provide relevant assurance services, such as for an XBRL financial statement or business report. For example, in the EU, the auditors will be required to provide an opinion on whether the financial statements comply with the European Single Electronic Format (ESEF) requirements, which will include consideration of the company's XBRL tagging. As a result, firms are conducting valuable, quality-oriented procedures to support their independent reports on companies’ XBRL-tagged information.
As the use of XBRL expands, staying up-to-date with frameworks and guidelines issued by regulators is key to increasing accuracy. Regulators, just like companies and investors, are strong advocates of proper data reporting practices. XBRL US and XBRL International can also serve as an additional resource for CFOs looking to stay current on XBRL data accuracy and transparency issues.
Driving efficiency and advantage
As digitization of data, and use of XBRL by regulatory bodies continues to grow, companies that have implemented strong quality review processes and controls, as well as governance and outside assurance, will be better positioned to reap its benefits and have comfort that the reports being filed in response to regulatory reporting mandates are high quality. Chief among those is providing timely and useful information to the capital markets to facilitate decision making and enhance market confidence.
Reach out to jump start a partnership that will bring expertise, speed, and accuracy to all of your complex disclosure and communication requirements.