The SEC says small companies have more problems than bigger companies with its eXtensible Business Reporting Language (XBRL) reporting rule. If the trend doesn’t improve, the agency may ease the rule’s requirements for them. At the same time, regulatory officials believe large companies simply needed a few years to refine their XBRL reporting, and some think small companies, given enough time, will resolve their reporting problems.
The SEC’s chief economist, who also heads its SEC Division of Economic and Research Analysis (DERA), said the agency may consider exempting smaller public companies from submitting financial statements in the eXtensible Business Reporting Language (XBRL) if they continue to make a lot of reporting errors.
Some regulators are concerned that the costs of the interactive data rule may outweigh its benefits.
In July 2014, the staff of the Division of Corporation Finance sent out a Dear CFO Letter, Sample Letter Sent to Public Companies Regarding XBRL Requirement to Include Calculation Relationships, highlighting some XBRL filing issues.
“We are going to see what we can learn from that,” said DERA Director Mark Flannery, during a question-and-answer session at the Data Transparency 2014 conference in Washington on September 30. Staffers are trying to determine if some of the mistakes they uncover are avoidable.
The 2009 rule in Release No. 33-9002, Interactive Data to Improve Financial Reporting, required large companies to begin filing in XBRL in 2009, mid-size companies in 2010, and smaller companies in 2011.
In a July report, Staff Observations of Custom Tag Rates, regulators found that smaller companies continue to develop tags for items they believe are unique to their business at a higher-than-average pace. XBRL has a standard set of more than 10,000 tags, called the taxonomy for U.S. GAAP. While companies can use custom tags, the more companies use tags from the standard set, the better it is for investors and analysts to do comparisons.
DERA’s analysis also showed a higher incidence of errors among smaller companies, said Flannery, who’s been on the job for just over three weeks.
To improve XBRL reporting, some observers said the SEC should step up its supervision and enforcement of compliance, while others say the smaller companies should be exempted from XBRL so that their financial burden of compliance would be eliminated.
“My view is that the commission is already taking the most prudent course, continuing its efforts to monitor filing quality and educate filers,” he said. “As for all new compliance experiences, time is required for sufficient learning to overcome the inevitable start-up problems and costs that companies incur. It is very encouraging that large and midsize companies are demonstrating continuous improvement. Smaller companies have had less time to comply. We should not be surprised at this point that their improvement is slower, given their more limited resources.”
Flannery said that there has also been significant innovation among XBRL service providers, and the software and service offerings should continue improving.
“We should expect to see tangible benefits among all sized filers,” he said.
Flannery’s staff will continue to analyze XBRL submissions periodically, he said, and work with the Division of Corporation Finance to provide guidance to companies based on the observations. Much of the focus is expected to fall on small company compliance.
In the meantime, Flannery said SEC staffers will continue to educate companies through seminars, webinars, conferences, and other educational programs.