SEC Wants Quick Action on XBRL

The Securities and Exchange Commission has released the details of its proposal to mandate XBRL technology for financial filings and begun a full-court press to get a rule passed as quickly as it can.

The 143-page release was published May 30 and is now open for public comment until Aug. 1. The SEC included dozens of questions in the proposal and will host a half-day roundtable discussion on XBRL today, June 10, to hear the latest thinking on the subject from the financial reporting community. (Compliance Week will provide extensive coverage of that roundtable in our June 17 edition.)

The SEC hopes to have a final rule on XBRL, or eXtensible Business Reporting Language, in place this fall. As proposed, the 500 largest public companies in the United States would begin including XBRL-tagged statements with their financial reports starting next spring. Other large filers would follow in 2010, and all other registrants in 2011.

Blaszkowsky

While Corporate America may disagree, the SEC insists that the proposed timeframe will give issuers ample time to comply with the mandate. David Blaszkowsky, head of the SEC’s Office of Interactive Disclosure and the agency’s point-man on the technology, spoke last week at the Compliance Week 2008 annual conference and said even only six months for the largest filers will be “abundant time” to implement the technology and tag their financial data. He urged corporate executives to “get smart” on interactive data and to raise the issue internally.

“This will be on your company’s agenda now, or next year, or the year after,” Blaszkowsky said. He also reiterated a point companies are likely to hear repeatedly from the SEC and others as the proposed start date draws near: Don’t wait for a final rule before getting started.

“Unless you’re planning a significant transformation of your financial statements in the coming year, there’s no reason you can’t start doing this now,” he told Compliance Week 2008 attendees. “What you do today will be usable.”

Whether companies will take that advice to heart remains to be seen. Blaszkowsky spoke to a room of several dozen compliance and financial reporting executives about the rule; when he asked how many had already tried tagging their financial data in XBRL, only one hand went up—belonging to an executive whose company has been participating in the SEC’s pilot XBRL program for years.

A major concern among issuers has been that auditors might be required to attest to the accuracy of XBRL tagging. That would send compliance costs through the roof, much like Sarbanes-Oxley compliance did several years ago. But the SEC rule proposal does not require auditor attestation, so those fears may be overstated.

Blaszkowsky noted, “there’s nothing that stops a company form choosing to get assurance,” but also stressed: “Our feeling was that [assurance] wasn’t necessary at this time.”

“The idea here is not to create a significant burden or possible expense,” Blaszkowsky continued. “There are other forces in place within our liability structure and intrinsic to the technology itself to provide high-quality information.”

Don’t Panic

Stantial

Similarly, John Stantial of United Technologies Corp. (the lone person who raised his hand to answer Blaszkowsky’s quick audience poll) said his company’s experience with XBRL so far has left him assured that, “This is not another Sarbanes effort.”

Blaszkowsky also noted that the rule proposal provides 30-day grace periods for a company’s first XBRL filing and its first filing with detailed tagging of footnotes (which would be required in the company’s second year of compliance with the final rule).

Stantial, whose company has submitted 14 tagged reports using XBRL, did the tagging in-house. At first UTC used Rivet’s Dragon Tag software and a rudimentary XBRL taxonomy of accounting terms (a newer taxonomy that encompasses almost all terms in U.S. Generally Accepted Accounting Principles is now available). The initial effort took 80 hours from start to finish. Subsequent efforts usually take about eight hours per periodic filing, Stantial said.

Based on estimates from participants in the voluntary XBRL pilot program, the SEC figures that companies would spend an average of 125 man-hours to tag financial statements the first time around and 17 hours for subsequent filings. Average out-of-pocket cost for software and filing agent services would be an extra $6,140 for each filing.

“Unless you’re planning a significant transformation of your financial statements in the coming year, there’s no reason you can’t start doing this now.”

— David Blaszkowsky,

Director of the Office of Interactive Disclosure,

SEC

The best way for companies to get past their XBRL fears, says Stantial, is to “go get some software and just do it. It will make a very esoteric concept very simple.” Companies can opt to outsource the tagging to an outside provider, but Stantial recommends doing it in-house. “You learn more doing it yourself,” he told conference attendees.

To ease companies’ liability fears, the proposed rule would limit liability for the tagged information in the exhibit submitted to the SEC. Blaszkowsky, however, noted that a higher liability standard would apply to tagged information as seen through a “viewer” software program investors would use. And of course, he added, “Any errors will need to be corrected.”

According to the proposing release, the underlying XBRL-tagged data itself “generally would be subject to a liability regime under the federal securities laws similar to that governing the voluntary [XBRL] program,” while “viewable interactive data as displayed through software available on the Commission’s Website … would be subject to the same liability under the federal securities laws as the corresponding portions of the traditional format filing.”

That means companies “will have to take XBRL tagging responsibilities as seriously as other parts of their disclosure, and since it’s new, at the outset they’ll have to spend more time on it,” says Laura Richman, counsel in the law firm Mayer Brown.

Richman

“From the proposing release, it’s clear they’re wielding possible Rule 10b-5 liability intentionally as a tool to ensure accuracy,” she says. “They’re going out of their way in the proposing release to say that this is a meaningful enforcement mechanism and people need to take care.”

In particular, she says companies that choose to outsource their tagging will have to double-check work by vendors, because liability for any mistakes ultimately rests with the company.

One thing companies may want to ponder, Richman says, is the tagging of their executive compensation disclosures.

The SEC isn’t currently proposing to require that compensation data be tagged, but “They are soliciting comment on whether it would be useful for investors to have interactive data on executive compensation. So even if it isn’t addressed in the final rule, it wouldn’t surprise me if that comes up at some point,” she says.