The head of an advisory committee charged with finding ways to simplify and improve financial reporting says the panel will issue interim recommendations at its next meeting in January, including its views on XBRL.
Robert Pozen, chairman of the Securities and Exchange Commission’s financial reporting advisory committee, says his group wants to express its views on XBRL because SEC officials clearly want to move ahead with mandating the interactive filing language for financial statements.
Pozen
“We were told by [the SEC Division of] Corporation Finance … that the train is leaving the station,” Pozen said at the Current Financial Reporting Issues conference last week sponsored by Financial Executives International. “We hope to come out with our position on XBRL in January and push the SEC in our direction.”
SEC Chairman Christopher Cox, an XBRL enthusiast for years, said earlier this fall that he now wants to make the filing language mandatory and hopes the SEC can approve a rule to that effect sometime next year. Pozen said his committee therefore wants to move quickly also, so its recommendations can inform any action the SEC may take. “Clearly there’s a lot of momentum at the SEC for making XBRL mandatory,” he said.
Regardless, many questions about exactly how to implement XBRL remain unclear. For example, Pozen said, nobody knows whether a full audit would be necessary to give assurance that a company’s XBRL taxonomy (its classification of financial data) is accurate. “The last thing we want to do is create another 404,” he said, evoking the specter of Sarbanes-Oxley and the notoriously expensive efforts companies had to undertake to comply with its Section 404.
Pozen listed other recommendations he would like to see his committee approve by the time it issues its final report to the SEC next August: a proposal to allow issuers to set up a Web page to provide investors an overview of their financial information that would include hyperlinks to more detailed information; a better roadmap for auditors, issuers, and preparers on where to obtain guidance on various accounting rules; support for narrowing Generally Accepted Accounting Principles to a few authoritative sources; a rebuttable presumption against industry-specific standards; and the replacement of some bright-line standards with some sort of proportional approach.
In addition, Pozen hopes the committee can develop a procedural approach that regulators at the Public Company Accounting Oversight Board can use to evaluate how auditors exercise professional judgment. Such a framework could “help educate investors that there’s no [single] right answer to many accounting questions, but that there is a disciplined process for deciding among reasonable answers,” Pozen said. “We can bring back judgment to its rightful place in accounting.” Such a process could require auditors to document all of the alternatives they considered in choosing a particular approach and to explain why they believe the approach they chose was appropriate.
Pozen noted that his committee may also suggest a two- or three-year implementation period after any new accounting standard is adopted to allow time for a cost-benefit analysis and to “get the kinks out,” as part of an effort to reduce technical restatements that have no material impact.
“It’s hard to do a good cost-benefit analysis in advance, because until a standard has been applied and people have experience with it, we don’t know much about what the costs and benefits are,” he said.
SEC: XBRL ‘Coming Down the Pike Fast’
In related news about XBRL, top SEC officials have given more details about the Commission’s plans to ramp up its staff devoted to easing the move to the financial reporting language.
Hewitt
SEC Chief Accountant Conrad Hewitt, also speaking at FEI’s financial reporting conference last week, said the Commission has expanded its new Office of Interactive Disclosure to four staffers and wants to hire another eight in short order. “Stay tuned on XBRL,” Hewitt said. “It’s coming down the pike fast.”
The SEC created its XBRL office only last month, shortly after Chairman Christopher Cox announced that he wants to approve a rule sometime next year mandating the use of XBRL. The office is headed up by Standard & Poor’s veteran David Blaszkowsky.
One lynchpin to the success of XBRL is its new taxonomy, which will serve as a classification system for financial data; companies will submit financial statements “tagged” in XBRL, and the public will then be able to assemble, view, and compare financial data using XBRL “reader” applications. The new XBRL taxonomy has roughly 16,000 terms in U.S. Generally Accepted Accounting Principles and is expected to be ready for public review by Dec. 5 at the annual XBRL International Conference in Vancouver, British Columbia.
Cox
Cox has asked the staff to prepare a proposal to mandate the use of interactive data for financial reports filed with the Commission for consideration in the spring. Speaking at the FEI conference, the SEC’s director of the Division of Corporation Finance, John White, said the rule would likely apply to the largest issuers first, with a phase-in for smaller filers.
“I envision some sort of phase in by company size over some number of years,” White said during a panel discussion on recent SEC developments. “Before we recommend a final rule, we’d have to see successful real use of the taxonomy in quarterly filings by voluntary filers so we would know it worked.”
When asked whether the SEC might consider initially requiring XBRL reporting for certain parts of corporate filings but not others, White said: “Our plan is not to separate the financial statements from the footnotes. That could change.”
Cox wants to have a final rule in place on XBRL next fall.
U.S. Chamber Repeats Call for 404 Delay
Perhaps hoping for a Christmas miracle, the U.S. Chamber of Commerce has repeated a call to delay the deadline for small companies to comply with Section 404 of the Sarbanes-Oxley Act and urged Congress to hold hearings on the issue.
Currently, non-accelerated filers (companies with less than $75 million in market capitalization) must begin providing a management assessment of internal controls over financial reporting with their annual report filed for the fiscal year ending on or after Dec. 15, 2007. They must comply with the external auditor attestation requirement for annual reports starting one year later.
The Chamber has said, numerous times, that small companies lack the expertise and accounting help to manage Section 404 so quickly. The SEC, however, has held fast to the Dec. 15, 2007, kick-off date. Legislative attempts earlier this summer to push back the deadline also stalled.
Michael Ryan, a senior vice president at the Chamber, says non-accelerated filers should be exempt from Section 404 right now because the SEC and the Public Company Accounting Oversight Board issued relaxed compliance rules only this spring, and “small companies complying for the first time with SOX 404 should not be the guinea pigs for the improved rules adopted by the SEC and the PCAOB.”
“We continue to support strong internal controls and believe that the improved rules, if implemented as intended, will address the challenges companies face,” Ryan says.
Among 177 respondents to a Chamber of Commerce survey conducted in October, 84 percent say they have already engaged an auditor to comply with the management assessment requirement to be filed in 2008; two-thirds said they’ve engaged an auditor to comply with the auditor attestation requirements to be filed in 2009.
The majority of companies (64 percent) expect an increase in costs in 2008 and 2009 due to compliance with Section 404. Almost half of those expecting an increase in compliance costs expect a punch of more than $100,000. Nearly 90 percent expect the costs will “greatly exceed” or “moderately exceed” the benefits of SOX 404 compliance.
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