XBRL Financial Reporting Matures, Accuracy Becomes a Focus

Experts say the importance that investors and the U.S. Securities and Exchange Commission (SEC) place on the accuracy of eXtensible Business Reporting Language (XBRL) data should not be underestimated.

XBRL is a standards-based method for sharing business information between systems. It originated in the late 1980s and was adopted by the SEC in 2008, allowing public companies to tag data in their financial reports, improving transparency and accessibility through the use of a standardized format.

The SEC requires public companies, mutual funds, and credit rating agencies to submit financial statements in a machine-readable format. The Federal Deposit Insurance Corporation (FDIC) also imposes the same requirement on the institutions it regulates.

Companies submit XBRL data as interactive data files, which are included as exhibits to their reports and published on company websites. However, according tonew SEC rules, tagging will eventually be embedded directly in the text of HTML documents, and the website posting requirement will be eliminated. The new requirements will be phased in over three years.

However, enforcement of standards for tagging accuracy is currently limited. Rob Blake, product management director at automated accounting software company BlackLine and an early supporter of XBRL, hassaidthat the SEC needs to "take some tough action on truly bad XBRL submissions."

Howard Kaplan, data analyst at the SEC's Center for Risk and Quantitative Analysis,saidsaid XBRL is embedded in most of the tools used by data analysts in SEC enforcement.

He noted that XBRL metadata is useful in analyzing peer groups of companies, covering various metrics such as the number of times a company changes its auditor or amends its filings.

He said that because tagging has been used by public companies for at least 10 years, XBRL is increasingly useful in SEC enforcement efforts, as it helps analysts identify patterns during investigations.

Availability depends on quality

Stock pickers (retail and institutional) also benefit from XBRL because it provides generally good quantitative information that they can access directly or through third parties. Ken Bertsch, executive director of the Council of Institutional Investors, the largest pension fund industry association, told CFO Dive.

Bertsch said: "XBRL clearly makes financial statements more usable for more investors in more situations."

Kaplan said that finding errors in a company's XBRL reports could lead analysts to believe that other financial filings by that company may contain inaccuracies and prompt them to look for those errors.

According to financial disclosure software and consulting firm Toppan Merrill, certain errors, such as incorrect tagging, can be detected by computers before an XBRL filing is sent to the SEC, but other errors can only be found by humans.

"Whether from inside or outside the company, XBRL preparers and reviewers should have a deep understanding of accounting disclosures, experience with XBRL specifications, familiarity with the EDGAR Filer Manual, knowledge of U.S. GAAP or IFRS taxonomies, and awareness of the XBRL US Data Quality Committee rules,"the Merrill blog post stated。

XBRL US's Data Quality Committee (DQC) sets standards outside of government, consisting of securities analysts, filing agents, and public company preparers. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) serve as observers. FASB and IASB set accounting rules in the U.S. and outside the U.S., respectively.

To help companies identify and resolve errors before submitting XBRL filings to the SEC, the DQC has developed a set of rules.

These rules cover a variety of errors, from incorrect dates to incorrect calculations, and improper use of axes when creating financial tables. They have been incorporated by FASB into the2020 U.S. GAAP Financial Reporting Taxonomy。

Louis Matherne, FASB's taxonomy development lead, said: "These rules... along with implementation guides and other applications developed by FASB, are important tools that preparers can use to improve quality and consistency, and we encourage their use."

Tagging becomes a board-level concern

As XBRL's importance grows, it has reached board-level attention, said Ami Beers, CPA, CGMA, senior director of assurance and advisory innovation at the Association of International Certified Professional Accountants.

"Boards don't need to understand the underlying technology," Beers, an XBRL expert at AICPA, told CFO Dive. "What they need to do is ensure that management controls and procedures are in place."

She warned that even if companies outsource XBRL creation to a service or software provider, they are still responsible for fixing errors.

Beers noted that outsourcing can be complete or a hybrid model where company employees are involved.

She added that while ERP systems have built-in tagging features, company employees need to work to incorporate new accounting standards and new company events.

AICPA offers XBRL fundamentals courses for company employees responsible for financial reporting, whether the XBRL tagging process is performed in-house or outsourced to a service provider.

John Turner, CEO of XBRL International, told CFO Dive that in Europe and Asia, there is increasing use of artificial intelligence (AI) to help management prepare digital disclosures that are lower cost and more comparable with other companies' filings.

He said the obvious difference in XBRL reporting internationally is that Europe uses International Financial Reporting Standards (IFRS), while the U.S. uses Generally Accepted Accounting Principles (GAAP).

He said there is a global trend toward IFRS.

XBRL is used in financial reporting requirements in more than 50 countries.

Campbell Pryde, CEO of XBRL US, said one of his organization's goals is to standardize XBRL filings for financial regulators to avoid the time and money companies spend creating duplicate and different reports for regulators.