A PRIVATE advisory committee of the US Securities and Exchange Commission this week voted to recommend a watered down implementation of mandatory XBRL, prompting one member to warn that the move could “invite a chaotic outcome” and delay the technology well into the “next decade.”
In a dissenting statement included in the SEC Advisory Committee on Improvements to Financial Reporting’s draft report, Peter J. Wallison, a senior fellow at the American Enterprise Institute (AEI), paints a picture of committee members lacking a full appreciation for the financial tagging technology and being driven by unfounded fears that accounting firms will use XBRL to inflate audit fees.
|Peter J. Wallison|
In the end, he was in the minority and the committee voted to recommend that the SEC move to mandatory XBRL “over the long-term.” An earlier draft of the report had said the SEC should do so “within a defined time frame.”
Under the committee’s revised draft proposal, the SEC would first have to test the new XBRL U.S. GAAP Taxonomy and upgrade EDGAR to accept and render XBRL filings before phasing in XBRL-tagged financial statements and lightly tagged footnotes as follows:
- The largest 500 domestic public reporting companies required to furnish a separate XBRL document in addition to their usual 10-Qs and 10-Ks, probably starting in 2009;
- A year later “domestic large accelerated filers” (about 1,500 companies) added to the original 500 and be required to furnish XBRL-tagged financial statements to the SEC.
- Once this is done, the SEC should “evaluate whether and when” to move from furnishing to the SEC to the official filing of XBRL-tagged financial statements with the SEC for all reporting companies.
Furnished, not filed or audited
The distinction between furnishing and filing is significant. Furnished materials don’t carry the same liability as filed documents, unless there is proof that the material was intentionally false or misleading.
In addition, the committee did not include a recommendation that companies be required to obtain assurance from auditors for their XBRL filings.
Instead, the proposal asks the SEC to consider a pilot assurance program at the end of the phase-in of mandatory XBRL for large companies. In earlier committee deliberations, at least one corporate member voiced concerns that any audit requirement for XBRL could lead to Section 404-like costs.
All of this was too loosey-goosey for the AEI’s Wallison, who is well-versed in XBRL and related issues and has written and spoken rather extensively on the topic. He wrote a statement to the committee explaining why their recommendation would screw up years of work on XBRL if the SEC felt compelled to follow their advice.
First reliable XBRL 10-K in 2012?
For one thing, he said the committee’s implementation schedule would “delay the widespread use of XBRL for financial reporting well into the next decade.” In fact, he estimated that it would be March 2012 before investors would see the first 10-K with XBRL financial statements filed by one of the 2,000-odd large companies in the initial phase-in.
“When the remaining 13,000 reporting companies will be required to file XBRL financial statements under this ‘mandatory’ phase-in is anybody’s guess,” he added.
Wallison says fears that an assurance requirement will lead to a quagmire of increased audit costs aren’t based in fact. He believes that if companies are only required to provide XBRL to the SEC under the lower furnished standard and do not have to have their XBRL information audited, they will be sloppy in applying the tags. He also believes they will be more inclined to make up their own XBRL extension tags, which will make it impossible for investors to compare figures across companies.
“The Committee’s proposal to allow XBRL financial statements to be furnished without assurance will invite a chaotic outcome, in which it will be possible for companies to add unnecessary or inappropriate extensions to the XBRL tags. This will impair comparability, one of the principal purposes of XBRL, and substantially reduce XBRL’s value to investors and analysts,” he writes in his statement.
Finally, Wallison points out the cumbersome nature of the committee’s recommendation that companies continue to file their traditional SEC forms and separately attach XBRL files. This, he points out, will preclude companies from taking advantage of the new Inline XBRL specification that enables the invisible embedding of XBRL tags in a human-readable HTML document.
Ray of hope
Alas, it was all for naught because Wallison was unable to convince a majority of committee members.
Personally, I think he’s right. Do it properly or don’t do it. There is no reason XBRL should not be mandated for all companies after a one-year phase-in for 500 big companies to iron out the kinks. The benefits for everyone, companies and investors, are just too good to pass up.
There is a ray of hope, however.
Edith Orenstein, writing for FEI’s financial reporting blog, reports that committee member Jeff Diermeier from the CFA Institute asked the SEC staff present if the committee’s recommendations would in any way restrict the SEC.
She writes that the SEC’s Corporate Finance Director John White responded, “I don’t think there are any restrictions here, I do think we could move more quickly, and very well [may].”