WITH financial data providers increasingly using XBRL filings in the numbers they deliver to Wall Street, poor corporate reporting controls are threatening company reputations and raising the specter of investors making trading decisions based on faulty figures.
In one recent case, SEC Data Guy founder Ed Hodder reported that six companies have submitted XBRL instance documents to the Securities and Exchange Commission (SEC) in their Q2 10-Q filing that showed public floats in the quadrillions of dollars.
XBRL errors like these are unfortunately not isolated. According to the SEC’s June 15th Staff Observations, another of the biggest sources of difficulty for filers, and one liable to significantly reduce the quality of the reported data, is what are known as negated values, where positive numbers appear as negatives and vice versa. An example of this is when expenses are reported as credits, transforming “interest expense” into “interest income”.
In reviewing filings submitted during the first two months of 2011, the SEC noted several filers incorrectly entered the standard Revenue element with a negative value and slightly more filers who incorrectly entered Shares Issued with a negative value.
Says the SEC (emphasis added): “Filers entering data this way may have their data misinterpreted by users or will require an extra step to clean the data before it can be used for analysis, and their substandard data quality will be highlighted for regulators and analysts.”
Other humdingers out there?
Of the companies above that reported outlandish public floats, two are “Large-Accelerated filers,” which only just managed to fall under the limited liability “safe-harbor” provisions that form part of the SEC’s Final Rule 33-9002, and this limited liability will cease when they file their Q3 10-Q.
If they got something as basic as the public float wrong, chances are that there are some other humdingers to be found elsewhere in their XBRL instances, so it’s just as well that they’ve got a bit of time ahead of them to get next quarter’s report spot on (and also amend the Q2 filing).
That’s not to say that all the other 6,000 or so reporting companies shouldn’t also be concerned; they should be. Reporting inconsistent or nonsensical information to a regulator is never a good idea, but companies still protected by the safe-harbor provisions may wrongly believe that submitting “perfect” XBRL isn’t an urgent matter.
While the SEC appears to be cutting issuers some slack for now, that will change. More pressing in the near term, however, is that companies should be worrying about the market and public relations implications of having erroneous XBRL data released into the public domain and relied upon to make buy, sell or hold decisions.
Big market-players such as Thomson Reuters and EDGAR Online are actively promoting specialist products such as I-Metrix, a toolset that includes detailed XBRL-tagged financials for over 12,000 companies, to a growing institutional investor client-base.
For public companies, this means their financials may already be flowing through a whole host of different channels, unbeknownst to them. Once a company’s XBRL data is filed with the SEC, it takes on a life of its own and companies must accept a loss of control, which is why getting the XBRL tagging done right the first time is of prime importance.
When data filed with the SEC can be integrated and acted upon by third-parties almost instantaneously, and often without human intervention, errors that may be blatantly obvious to human eyes can now travel all the way up the financial information supply chain before a company’s external reporting and IR teams have even had a chance to blink.
What IROs should do
XBRL errors can easily slip through because, in the absence of an in-house safety-net, the SEC’s EDGAR validation only checks the technical conformity of submitted data with the XBRL specification and the EDGAR Filing Manual, but not “if the numbers reported are reasonable.” The SEC’s myriad XBRL rules and guidance talk generally about how to report, and almost never about what to report.
Being involved in the internal tagging process at a meaningful level is the inevitable first step for the IRO that wants to keep any XBRL-related trouble at bay. Don’t assume that the Finance department or SEC Reporting team have got it covered. To be able to trouble-shoot, the IRO needs to understand what needs to be done and have a firm grasp on how the company is to go about it.
In the absence of formal auditor assurance, an integral part of that process must be a cross-functional quality-assurance review that is assisted by efficient software applications but relies heavily on skilled human judgment, because there will always be some inconsistencies that computer software won’t pick up on.
In addition, Emily Huang of Denver-based Rivet Software suggests that companies also choose vendors that are involved in the data consumption market rather than those that only provide data tagging services to issuers.
“If the vendor understands the data consumption market as well, most likely they will pay more attention to data quality and comparability,” she says.
At the end of the day, however, if something goes wrong and trades are made based on a company’s faulty XBRL data, it won’t matter which vendors you use or who prepared the filing because it will be the investor relations department that investors will look to for answers and accountability.