As the use of XBRL financial data in the market accelerates, the quality of XBRL tagging in disclosures is no longer solely 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. Eleven years into the SEC’s XBRL mandate, as financial data is increasingly consumed in structured format, the ever-impatient capital markets are signaling that the grace period is over. Companies risk being left behind if they fail to get their XBRL right.
At the very least, errors in financial statements that reflect poor XBRL quality make the company’s financial data difficult or impossible to analyze—discouraging busy analysts and investors with no time to waste. At the worst, errors raise serious red flags about the company as an investment. Investors and analysts may wonder whether sloppy XBRL mistakes in basic financial reporting are the tip of a much bigger and uglier iceberg in the company’s management and internal controls over financial reporting (ICFR).
Companies materially benefit from high-quality tagging
Despite the clear incentives for getting XBRL tagging right, mistakes continue to plague XBRL data in financial reporting. In a July 15th analysis, The Competitive Advantage of Quality XBRL Data, PwC observes that a whopping 46% of Form 10-K and 10-Q filings filed during the first two weeks of July 2020 had XBRL errors, according to the XBRL US Data Quality Committee.
PwC draws a compelling conclusion from this: XBRL problems at other companies present a competitive opportunity for yours. “XBRL data is used by analysts, credit-risk agencies, industry researchers, investors, regulators, academics, and others to gain insights that influence key decisions. A company that consistently provides high-quality XBRL data can differentiate itself in a crowded marketplace with the credibility gained from high-quality XBRL data.”
In other words, companies can materially benefit from high-quality XBRL tagging. Moreover, an XBRL arms race among companies striving to tag XBRL better than their peers could finally elevate XBRL quality to where it needs to be. In that case, everyone wins. As PwC points out, XBRL data does “benefit the capital markets more broadly because it may result in more efficient and effective decisionmaking.”
How does bad XBRL hurt decisionmaking? PwC succinctly conveys a few ways:
(table reproduced from the article)
Getting XBRL right requires specialized expertise
PwC emphasizes that companies should take ownership of their XBRL with dedicated, specialized expertise, not just a cursory review by a data aggregator. “Because only certain data-quality issues are identified by the aggregators,” the firm cautions, “the responsibility for the quality and usability of XBRL submissions rests with financial statement preparers.”
Obtaining expert review, whether in-house or from a service provider, is no small matter. PwC warns that “preparers who rely on data vendors to identify and correct errors within their XBRL submissions may unintentionally cede control of the narrative analysts and investors use for decision-making.”
Filers now need both accounting and XBRL knowledge
Another Big Four accounting firm focuses on both the detailed 2020 updates to the complex US GAAP taxonomy and the ongoing demands of the SEC’s Inline XBRL mandate. Jeff Naumann and Lou Rohman from Deloitte & Touche indicate (see SEC Updates XBRL Rules for Digital Financial Reporting) that the major changes to the 2020 GAAP taxonomy and the related SEC Reporting Taxonomy include 338 new tags and 324 deprecated tags that should not be used in filings; revisions to retirement benefits in multi-employer plans and to variable interest entities and equity method investments; and transition to ASUs and other accounting changes.
The hefty list of updates to the GAAP taxonomy calls for not only traditional accounting and financial-reporting expertise but also extensive XBRL knowledge. Deloitte warns that the risk of errors naturally rises when filers transition to a new version of the GAAP taxonomy, because “changes made in the new taxonomy may be overlooked.” SEC filers can now voluntarily anchor a custom tag to a base taxonomy tag. Anchoring can be useful for giving clarity to custom tags or more easily replacing unnecessary custom tags. (In the European Union, anchoring is mandatory; see further the reporting manual from the European Securities and Markets Authority, covering the preparation of annual financial reports in Inline XBRL).
Deloitte agrees with PwC about the importance of seeking specialized expertise in structured data to ensure high XBRL quality. “SEC registrants may use third-party vendors, but they retain overall responsibility for their filings. It’s important for registrants to understand how adoption of iXBRL will affect the timing and nature of their filing preparation and review processes, and ensure that they have personnel with appropriate expertise to review the iXBRL formatting.”
To read the full article in Dimensions Vol. 2020, No. 4, click here.
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