The quality of XBRL tagging in financial disclosures is no longer just an SEC compliance issue. It is an integral part of a company’s ability to tell its financial story, attract investment, raise capital, protect its reputation, and keep a sharp competitive edge. As investors, analysts, and regulators increasingly use financial data in structured format, companies must get their XBRL right or be left behind.
Wes Bricker, the SEC’s Chief Accountant from July 2016 to May 2019, hammered home this theme in a recent article for Financial Executives International: Why XBRL Should Be On Your Radar. Mr. Bricker describes himself as “a big proponent of XBRL, having seen its potential first-hand” at the SEC, as well as in his current roles at PwC and on the XBRL International board.
“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,” he writes. For companies and the capital markets to make the most of the information streamlining offered by XBRL, “it’s important to understand the current challenges and how to best overcome them.”
XBRL tagging errors, inconsistent tagging, and inappropriate custom tag use for the same information across companies are problematic not only for SEC compliance but also for the company’s financial narrative as understood by investors and analysts. Errors in financial reporting or other processes create concern across the market “because of [their] corrosive impact on confidence over time,” Mr. Bricker warns, adding that “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.”
Disclosure mistakes committed through poor quality XBRL can be corrected by amended filings. However, the erroneous filings also tend to live on in the unforgiving digital landscape. “Errors are difficult to scrub from the Internet, even after filings are amended,” he points out. “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.” These problems can multiply if filers unwittingly carry forward these errors from period to period.
More than just investors, analysts, and regulators are watching a company’s financial data. Credit-rating agencies and third-party service providers are also looking at XBRL financial data. Use has grown so much that the SEC is now posting XBRL fileset data on a monthly basis. Mr. Bricker notes: “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.”
Faulty XBRL is not merely a fringe phenomenon. According to the XBRL US Data Quality Committee (DQC), 34% of the Form 10-K and Form 10-Q XBRL filings in September 2020 had errors picked up by the DQC’s validation rules. The rules are freely available, and the DQC website allows filers to check their filings with the data quality rules.
Recommended actions
Many remedies exist to improve XBRL reporting. Mr. Bricker observes that “[e]ducation and training of staff in corporate accounting, finance, treasury, and investor relations is crucial,” and he suggests that companies redouble their efforts to keep internal controls working properly. That includes attention to the proper XBRL tagging of financial reports. The time and resources that companies put into the preparation of financial statements every quarter “is undermined if stakeholders encounter XBRL tagging errors in those reports.”
He recommends that the company maintain good lines of communication with its external auditor. “Auditors are in the business of quality and can be helpful here.” In the European Union, for example, the auditors must state whether the company’s financial statements comply with the European Single Electronic Format (ESEF) rules, including XBRL tagging.
For its part, PwC is teaming up with the Sustainability Accounting Standards Board (SASB) on translating the SASB’s 77 standards into an XBRL taxonomy and on crafting a data-preparer’s guide to tagging nonfinancial information and disclosing it through regulatory and non-regulatory channels. Mr. Bricker views this translation as important for both companies and investors. [For more, see an article on this project from Accounting Today.] PwC is also launching its own application (“ESG Pulse”) for environmental, social, and governance reporting by companies.
To read the full article in Dimensions Vol. 2020, No. 5, click here.
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