SEC Issues XBRL Alert – Custom Tag Rates and Missing Calculations in XBRL Files

XBRLNewsBrief

On July 7, 2014, the SEC posted two items of new XBRL guidance to their website:

1. Observations about Custom Tag (Extension) Rates 

http://www.sec.gov/dera/reportspubs/assessment-custom-tag-rates-xbrl.html#.U7sgOCjLPDo

2. Sample letter sent to select filers regarding Missing Calculations

http://www.sec.gov/divisions/corpfin/guidance/xbrl-calculation-0714.htm

What is included in these observations?
Custom Tag (Extension) Rates – The SEC performed an assessment to help define a baseline of the usage of custom tags. They called out custom tag rates of more than 50% as being a high level of custom tag rates, and noted that these were unusually and unexpectedly prevalent with smaller filers.

Note: For the purpose of their analysis, the SEC focused only on line item tags and excluded tags that are abstract, text-block, member, or domain item types. They also excluded custom tags used for document and entity (dei) information. Further, they excluded certain industries which consistently have a higher than average custom tag rate, such as real estate and insurance companies.

Missing Calculations – With regard to calculations, the SEC emphasized the requirement to include calculation relationships as specified in the EDGAR Filer Manual.

Are these new issues for the SEC?
No. These issues have both been addressed previously by the SEC. Custom Tag (Extension) Rates – Beginning with the first staff observations that were issued in October 2009, the SEC commented on the high level of extensions included in XBRL files and provided several examples of extensions that had been created when an appropriate standard element existed. They expanded on this topic in the observations that were issued in November 2010 and in all subsequent releases.

Missing Calculations – This issue was first mentioned in the staff observations that were issued in June 2011. The SEC noted that missing calculations cannot be detected by validation software, but are considered useful for the consumption of the data. There is further information on this topic in the frequently asked questions included on
the SEC’s website. (www.sec.gov/spotlight/xbrl/staff-interps.shtml)

Have any preparers been identified as particular offenders?
Yes. The SEC observations on the prevalence of custom tags notes that there is a strong correlation between third-party provider selection and XBRL exhibits with above average custom tag rates, with one third-party provider accounting for 33% of all filers with a high custom tag rate. They further note that smaller filers currently have an average custom tag rate almost twice that of larger filers.

How can Merrill help if you have concerns about your XBRL file?

Filers who have concerns about these or other issues in their XBRL files should speak with a Merrill XBRL Consultant at 800.688.4400, or via email at inquiries@merrillcorp.com

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Insource, Outsource, or In-between? How to Choose the Optimal Approach to XBRL Preparation for Your Company – and Why It Matters

XBRL_Insource_Outsource_HybridizeTo file accurate, SEC-compliant financial statements in XBRL, your company needs to be in the right place on the XBRL-preparation continuum. The approach to the preparation of SEC filings must be realistic and appropriate for the company’s XBRL abilities and resources; and if external resources are required, they must come from the right provider.

Many corporate filers are currently evaluating the best approach to preparing their SEC disclosures in HTML and XBRL. A common misperception is that a company must prepare XBRL files either wholly in-house (with a web-based solution) or completely outsourced to a service provider. This view oversimplifies what is really a continuum of choices between those two extremes. The key is to find the optimal balance between internal and external XBRL resources.

Find your company’s best approach

When the SEC first required companies to submit XBRL exhibits with their periodic financial reports, filers generally relied on outside expertise from service providers such as Merrill Corporation to prepare their XBRL documents. Now in 2014, some companies can prepare their XBRL filings Precise use of XBRL is essential for your company’s XBRL_In_Out_Hybrid_1communications with the financial markets. themselves, although others choose to continue engaging outside parties to produce their XBRL documents or at least to help with the XBRL preparation. Although the movement toward in-house XBRL preparation was anticipated, the easy availability of disclosure management software – which lets a filer produce traditional EDGAR HTML and XBRL documents from the same platform – has accelerated the trend toward do-it-yourself XBRL.

For every filer, finding the optimal approach to the preparation of XBRL disclosures is absolutely crucial. Why does the choice of preparation approach matter? The safe harbors are gone: most filers now bear full liability for mistakes in their XBRL disclosures. Moreover, producing high-quality XBRL data is not just a compliance exercise. Ensuring accurate financial disclosures in XBRL is a matter of pragmatic, market-driven importance for any company that makes SEC filings – as vital as the accuracy of traditional EDGAR filings. Precise use of XBRL is essential for your company’s communications with the financial markets.

Yet filers continue to make XBRL mistakes, which may not only expose them to scrutiny from the SEC and Congress but also may mislead investors or alienate analysts because of inaccurate financial data. In many cases, these errors persist because the companies that are making the mistakes have not found the optimal approach to preparing their XBRL documents.

XBRL_Insource_Outsource_Hybridize_2The continuum of XBRL preparation: Insource, Outsource, and Hybridize

The corporate approach to XBRL preparation ranges along a continuum of differing levels of involvement. Filers generally are one of three basic types: insourcers, outsourcers, or hybridizers.

Insourcers
At one end of the XBRL-preparation continuum are the insourcers: companies that use their own staff and resources to map, tag, and review their XBRL disclosures. The staff gains technical XBRL knowledge from various sources, including seminars and research. These companies do not seek outside help for XBRL preparation, review, or advice.

Outsourcers
At the opposite end of the continuum are the outsourcers: companies that rely solely on external experts to prepare their XBRL documents. The outside service provider prepares the XBRL files and explains the XBRL preparation to the outsourcer’s accounting team. The technical details summarized for the outsourcer will include information about the proper mapping and structuring, the current best practices, and the applicability of changes in the US GAAP taxonomy and the SEC’s XBRL rules. The outsourcer’s staff reviews the XBRL-tagged disclosures, provides feedback to the outside preparer, and asks questions about the XBRL preparation.

Hybridizers
Between these extremes are the hybridizers: companies that apply a combination of internal and external resources to prepare XBRL filings. There are many possible permutations in the allocation of work between the internal and the external preparers. At a hybridizer, selected parts of the XBRL preparation are handled by in-house staff while the remaining portions are completed by an outside service provider. Alternatively, the filer prepares all of the XBRL filing and seeks advice from the outside party when issues arise. In that case, the outside party reviews the XBRL files after their completion.

How does (or should) your company prepare its XBRL filings?

Where is your company on the XBRL-preparation continuum? Does its position match its ability to prepare XBRL filings that are accurate and in compliance with SEC rules? Most importantly, where should it be? Each company has distinct, observable attributes that help determine whether it should be preparing XBRL documents on its own or whether it needs outside expertise to ensure that its XBRL disclosures comply with SEC rules.

When insourcing XBRL preparation is the best choice At the company that is well-suited for insourcing, selected members of the accounting staff have a deep understanding of XBRL_In_Out_Hybrid_2the US GAAP taxonomy and its annual updates, the EDGAR Filer Manual, the SEC rules for interactive data, the structure and specifications of XBRL files, and the proper way to apply XBRL to financial statements. These team members are up to date and aware of modifications in the US GAAP taxonomy and FASB implementation guides, and the proper application of these changes to the company’s XBRL filings. They stay current on best practices for XBRL, as recommended by the FASB and XBRL US. The insourcing filer also has a well-designed transition plan in case the staff members with XBRL expertise leave the company or transfer to other roles.

When outsourcing is the best choice
At the company that should outsource, the accounting staffers are familiar enough with XBRL to understand and interpret the output from the XBRL files, but they also respect the level of expertise and judgment that outside service providers bring to the process of creating XBRLinstance documents. These in-house team members can determine whether the XBRL version of a financial statement is disclosing the same information as XBRL_In_Out_Hybrid_3its traditional HTML counterpart. However, the typical outsourcing filer is comfortable with its current processes and wants to focus staff time and attention on the company’s core business and not on XBRL preparation (beyond what is necessary to review XBRL filings each quarter). It may have limited resources, and its accounting department may undergo frequent staff turnover because of promotions or transfers.

When a hybrid approach is the best choice
At the company for which a hybrid approach is the best choice, members of the accounting staff have at least some of the knowledge needed for accurate XBRL preparation that complies with SEC rules. These staffers understand what it takes to have error-free, SEC-compliant filings in XBRL format. Crucially, they know enough to determine that some of the filer’s XBRL challenges are beyond the expertise and experience level of the in-house staff, whose time and resources may be consumed by other responsibilities. In other words, the company has employees who can ask the right questions about XBRL mapping and tagging but need help with the technical execution and with matters requiring human judgment – especially in the more complex areas of XBRL structures, new disclosures, annual taxonomy changes, and the EDGAR Filer Manual’s instructions on XBRL.

XBRL_Insource_Outsource_Hybridize_3

Errors in XBRL filings reveal that many companies are misplaced on the continuum

From our observations of XBRL filings to date, many companies are in the wrong place on the continuum. In the first wave of XBRL filings during 2009–2011, many of the errors in disclosures submitted to the SEC were, quite clearly, made by people who did not understand the rules for XBRL tagging – generally through a lack of familiarity with new SEC rules and the US GAAP taxonomy. In fairness, some mistakes happened simply because SEC guidance had not yet evolved to cover all of the taxonomy, leaving filers uncertain on how to tag particular disclosures. The SEC rules therefore provided a two-year period of limited liability to allow time for companies to adjust to the XBRL requirements and to work these types of errors out of their systems.

XBRL_In_Out_Hybrid_4Many filers did in fact eliminate errors of the kind that had marred early XBRL filings and did not repeat them in later XBRL disclosures. However, serious mistakes continue to appear in XBRL filings – and they occur for new and different reasons.

Failure to revisit initial mapping
One observable trend in XBRL mistakes now is overreliance on the initial mapping. Once the initial mapping of the face financial statements and the detailed footnotes is completed, some filers do not scrutinize the mapping of these disclosures adequately during subsequent business quarters. However, the initial mapping must routinely be reviewed for necessary changes. Modifications may be prompted by the filing of corporate disclosures that are different from those the company submitted earlier, or they may stem from annual changes in the US GAAP taxonomy.

False sense of confidence
A more disturbing category of errors involves misguided or excessive reliance on software-as-a-service (SaaS) solutions for XBRL preparation. Many filers – companies whose XBRL knowledge and resources would naturally put them in the hybrid or outsource range of the continuum – are still making egregious XBRL mistakes because they have moved too far across the XBRL-preparation continuum. They are doing XBRL preparation in-house with do-it-yourself or SaaS resources instead of seeking some type of outside assistance for their XBRL filings. Staff members at these companies have a false sense of confidence that they can prepare the XBRL properly, using software alone – without appreciating the critical role that human judgment plays. By positioning themselves as insourcers with do-it-yourself software, their XBRL disclosures may contain errors that will mislead investors, alienate analysts, and irritate the SEC.

Inadequate service provider
We have also seen companies that, knowing outside XBRL guidance was needed, moved across the continuum from insourcing to a hybrid approach. Unfortunately, some of them still submitted poor-quality XBRL simply because the outside party they engaged did not serve them well. Not all XBRL service providers are alike. Obtaining the right expertise is as important as being in the right place on the continuum. Many filers did in fact eliminate errors of the kind that had marred early XBRL filings and did not repeat them in later XBRL disclosures. However, serious mistakes continue to appear in XBRL filings – and they occur for new and different reasons.

Filers must be realistic about their XBRL expertise

The question of whether to insource or outsource is more than a choice between an in-house web-based solution or outsourcing (Merrill provides both). Many companies are realizing that they need help from experienced, knowledgeable, CPA-qualified consultants, such as those at Merrill Corporation, to play some role in preparing or reviewing their filings if they are to produce XBRL of the highest quality – no matter what platform or approach they use for the creation of their disclosure documents.

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Corporate Use of Social Media on the Rise, but Not Without Caveats

Abstracted from: Using Social Media To Report Financial Results 

Raqual Alexander - James GentryBy: Prof. Raquel Meyer Alexander and Prof. James Gentry, Washington and Lee University (RMA); University of Kansas (JG) Business Horizons, Vol. 57, No. 2, Pgs. 161-167

More use of social media. Companies are increasing their use of social media for business and financial communications. Although originally viewed as an additional channel for communications with financial professionals and investors, social media has become an important and immediate way to communicate with interested parties. Those parties can also provide rapid feedback to the company and to other investors. Accounting professor Raquel Meyer Alexander and journalism professor James Gentry report that two-thirds of large companies participate in StockTwits; 77% of the Fortune 500 companies now have Twitter accounts; 70% appear on Facebook, with almost as many placing videos on YouTube. Other major social media platforms for companies are LinkedIn, SlideShare, Reddit, Pinterest, Instagram, and Google Plus, but Twitter leads the pack, both in numbers of companies and widespread use for investment purposes. In particular, this may be because it draws an older demographic than many other sites.

Rules apply to social media. The SEC includes social media in its rules on fair disclosure and specifically states that the individual accounts of corporate executives also fall under the aegis of Regulation Fair Disclosure (Reg. FD). Most personal social media activity by an executive, the authors warn, could violate Reg. FD. Remarks made by executives in response to other people’s remarks on non-company-sponsored sites fall under the regulation. If an executive even clicks “like” for a remark made by someone else somewhere in cyberspace and if that remark in any way impacts the company’s business, both the company and the executive can be liable. Although Reg. FD specifically applies to communications with financial professionals and investors, when one viewer of a site falls into either category, the communication is subject to the regulation. Social media communications, however brief or casual, should thus be considered formal communications that must follow SEC regulations and company guidelines.

Extremely effective if used well.  Used properly, social media can be a boon. Companies should develop social media strategies as part of their financial reporting and public relations strategies, the authors suggest. Social media communications should be synchronized and overseen by a single authority who coordinates the messages on all channels and changes them simultaneously. Companies with an effective social media presence have greater stock liquidity than those that do not, and less well known companies benefit disproportionately. In addition, the audience mood on these sites is an accurate predictor of upcoming market response. In the event of bad news, immediate response (including apologies, if necessary) can help turn public opinion in favor of the company. Failing to use social media well, however, can make matters worse.

Communications must be planned and monitored. While social media can add significantly to public relations and build positive sentiment, these communications should be taken as seriously as other forms of disclosure. Using social media will increase staffing needs and legal costs. Companies need to create clear responsibility for controlling social media content in tandem with other communications and reporting channels, and establish who has authority to issue social media communications, who reviews them for compliance, and how they coordinate with other communications. Since off-hand remarks by top executives can be interpreted as representing company conditions, it may be advisable to limit executive activities, even on personal social media sites. Of the CEOs studied by the authors, only 1.8% use Twitter, and only 7.6% use Facebook, while 70% avoid all social media. Beyond problems with potentially damaging casual remarks, liability might arise from improperly securing electronic sites sponsored or controlled by the company. To the degree that executives use personal social media, they should be trained in what may and may not be said about any facet of their work.

Abstracted from Business Horizons, published by Elsevier ScienceDirect, 360 Park Avenue South, New York NY 10010. To subscribe, call (877) 839-7126; or visit http://www.journals.elsevier.com/business-horizons.

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© Merrill Corporation 2014

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An Update on the US GAAP XBRL Taxonomy (Part 1)

Johaneman-MatherneAn interview with J. Louis Matherne and Donna Johaneman, Financial Accounting Standards Board

Dimensions spoke by telephone with J. Louis Matherne, Chief of Taxonomy Development at the Financial Accounting Standards Board (FASB), and Donna Johaneman, XBRL Project Manager at the FASB. Mr. Matherne heads the team responsible for maintaining and updating the US GAAP Financial Reporting Taxonomy. On Mr. Matherne’s team, Ms. Johaneman leads a group that updates the taxonomy for new accounting pronouncements, common reporting practices, and ongoing taxonomy architectural developments. An earlier interview with Mr. Matherne and Ms. Johaneman appeared in Dimensions December 2012 and February 2013 issues. 

Here is Part 1 of this interview; Part 2, with more details on future changes in the taxonomy, will appear in the August 2014 issue of Dimensions.

What are the important changes in the GAAP taxonomy for 2014?

Mr. Matherne: Since the Financial Accounting Foundation (FAF) and the
Financial Accounting Standards Board (FASB) took on responsibility for the taxonomy in 2010, we always anticipated that the volume of changes resulting from common reporting practices would drop. After three Taxonomy Releases and with all filers in the 2014 US GAAP Taxonomy Update-system, we concluded the time was right to focus on stability. The 2014 Release is a result of this revised approach.

Ms. Johaneman: Given our focus on keeping the taxonomy stable, there were fewer changes in this release. Some of the changes made were Accounting Standards Updates [ASUs] related specifically to offsetting [Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities], based on what we were seeing as filers adopted the ASU. We revised maturity schedule definitions to clarify how they should be used, which did affect about 500 elements. We created a Tax Period Axis, removed industry entry points, and added changes from our industry resource groups such as insurance, oil and gas, and the FHLBs [Federal Home Loan Banks].

2014 US GAAP Taxonomy - 1We also revised the calculation hierarchy, removing redundancies and conflicting summations. This revision is expected to help consumers of the data better understand how the elements are related to each other, but it should also help preparers with element selection.

What is the best way for filers to become familiar with the taxonomy changes?

Ms. Johaneman: There are several resources to download from the FASB website. The Release Notes provide a summary of changes, as well as details by element. There is an Excel file, which is helpful if you want to sort and filter the data by keywords. Within the online review-and-comment system, you can filter for the 2014 changes – either by all of the changes or by types.

2014 US GAAP Taxonomy - 2We also have a tool called the Taxonomy Change Application, or TC App. You can download it for free from the FASB website. Simply by pointing TC App at an SEC XBRL filing, it will show you the changes in the elements as a result of the new taxonomy release. You can save the results to Excel, then filter and sort as needed.

Mr. Matherne: The primary purpose of the TC App is to help filers easily identify changes in their XBRL documents when they are migrating from an earlier taxonomy to a current release. That is when we see the most use. Many filers do get a lot of support from their service providers, and TC App is not intended as a replacement for that support. However, some filers do not always have that support, so we felt that it was important to provide [some assistance] to help filers understand how to move from one taxonomy release to the next. TC App is also helpful for data users, as it can help them better understand the taxonomy changes.

How can filers submit comments on the US GAAP taxonomy and implementation guides?

Ms. Johaneman: For the taxonomy, comments can be submitted through our online taxonomy review-and-comment system. Our website has a guide that presents the steps. Once you are in the taxonomy in the system, you will see a green plus sign next to different parts of the elements. Clicking on that opens a dialogue box. You do have to register to submit comments, but registration is free. For the implementation guides, it is a little bit different. Each guide has an electronic feedback form. There is an e-mail address that you can use to provide more information than the form allows, or you can still snail-mail comments to the Chief of Taxonomy Development.

2014 US GAAP Taxonomy - 3Mr. Matherne: I should point out that, for a number of reasons, we cannot respond directly to the comments we receive. Nonetheless, we consider constituent feedback critical to our efforts to improve the taxonomy. All comments are programmatically entered into our internal tracking system, never to be lost, and are then addressed by staff. Comments are reviewed by at least two members of the team before a taxonomy change is made or otherwise cleared. Even though a comment may not result in an immediate taxonomy change, they still help us identify problem areas for consideration at a more appropriate point in time.

It is also worth noting that our comment-solicitation process has evolved such that we have more direct contact with our regular contributors – parties who are much more actively engaged in the use of the taxonomy. These are typically service providers like Merrill, because they are working with many XBRL filings every day. These channels provide a more effective way for both the service providers and the FASB to gain a clearer understanding of what is required to address any particular issue. These exchanges have been very constructive.

Ms. Johaneman: It’s really a dialogue. It goes both ways. We will reach out to them with questions, and they will reach back to us with questions.

What are your observations about the comments that you are receiving?

Mr. Matherne: In general, the comments continue to improve. There is always a bit of noise in the background, but the comments we receive today are demonstrating a more informed constituent, and they are providing us feedback that is more valuable. The comments tend to be more targeted – particularly in light of the more targeted approach we have adopted at the FASB.

Ms. Johaneman: With the communication that we have been providing – whether through the implementation guides, the FAQs, or regular dialogue with some of the contributors – hopefully the information is getting out there and will answer some of the questions that we might have received previously through comments.

Mr. Matherne: From the beginning, we opened the doors and said “Provide us all your feedback.” We still welcome that. But our message internally is shifting toward being more like the standard-setting process for accounting standards, in that our solicitation of feedback and our consideration of feedback is in the context of the various topics that we are focused on, as opposed to just receiving any feedback and trying to address it all right then and there.

You mentioned implementation guides. Which guides have you developed so far?

Ms. Johaneman: We have final guides on Subsequent Events, Segment Reporting, two for the insurance industry on reinsurance and concentration of credit risk disclosure, and one for Liquidation Basis that resulted from an Accounting Standards Updates (ASU) finalized last year. We are currently in the process of updating these for some minor changes in the 2014 release – they are final but need a couple of tweaks. We proposed a Notional Amount Disclosures guide, which we are finalizing and hope to soon get out as final.

We are working on the Other Comprehensive Income (OCI) guide, which was again a proposed guide based on an ASU. We do have some potential revisions for that and hope to finalize and get that out soon as well. We are also working on updating the Disposal Groups and Discontinued Operations guide. The one that was out there was an exposure guide based on the exposure draft of the ASU, and now that the ASU has been finalized, we are working on the final guide and final changes that we will implement in the 2015 release. There are some items within that guide which we will probably pose as questions for feedback and solicit input from our advisory group. We are evaluating how to best communicate some of the information as to what the type of disposal is and how it is disposed of; for example, whether it is a discontinued operation or not, how it was disposed of – by sale, spinoff, or abandonment. Given that there are different impacts to cash flows based on those, it seems that this is relevant information to investors and consumers of that data.

We have an offsetting guide and stockholders’ equity guide in the works, as well as one to coincide with the final revenue ASU. We plan to issue guides on targeted topic areas as well as any other Accounting Standards Updates that may be finalized this year. While we recognize that the revenue ASU which is in process has an effective date that is farther out, we hope it can be used to assist preparers in their disclosure implementation and to help users understand how that information may be provided.

What has been the response to the implementation guides? How do you think filers will use them?

Mr. Matherne: The response has been very positive. Qualitatively, we have received feedback, largely from service providers and accounting firms, indicating that the guides are very helpful and being used. Feedback from filers is less clear…

Ms. Johaneman: Some of them, anecdotally – just to say that they have used a guide and that it has been helpful.

Mr. Matherne: On a quantitative note, we do monitor download activity from our website, and the implementation guides have high download counts, second only to the taxonomy releases. The Other Comprehensive Income Implementation Guide is our most obvious example. It has been downloaded over 5,000 times. Others have been high but that one stands out.

What have you learned from developing implementation guides and from getting feedback on them?

Mr. Matherne: The two things we have learned about these implementation guides speak to their relevance. Some of the guides were created as useful collateral to a special project – whether segments or something else – and we realized we should publish the knowledge gained from the project that could not be baked into the taxonomy. A lot goes into a project, and when you reduce it to a final result in the taxonomy, you are effectively leaving a lot on the table. We realized we should publish that to maximize the benefit to our constituents. That has worked out really well. But something like segments, which was among our early guides, was not a changing topic. We do not have new accounting standards for segment disclosures. Preparers were interested in that guide, but it did not have the same impact as the OCI guide, which was published alongside a new accounting standard. The window and time sensitivity for preparers and users is when a new accounting standard becomes effective. That was an important message for us.

The other thing that we learned from this process stemmed from our taxonomy exposure drafts. Our objective is to get those out as early in the process as possible with the Accounting Standards Updates. These are really just the modeling choices that we bake into the taxonomy. Frankly, they are a bit abstract. For a preparer or a user, those changes in the taxonomy might or might not be relevant – it is really hard for a preparer to understand how the changes affect them. The implementation guides, however, are things that they can read and apply to their situations. We are finding that they are a much more engaging way to present proposed changes. Collectively, it is in our interest to get implementation guides out as early as we can, and we are putting more effort behind that.

2014 US GAAP Taxonomy - 4Ms. Johaneman: Another side benefit is that as we are implementing the disclosure part of this standard – particularly in a draft format, before it is finalized – it allows us to inform the standard-setting side to clarify certain areas or answer questions that help them make changes in the standard. That then might trickle down to the preparers, to help them understand it as well when they implement it.

Mr. Matherne: We just had a recent example in Disc Ops [Discontinued Operations] where we were modeling the disclosure for our purposes and recognized an issue in the Accounting Standards Update itself. That, in fact, resulted in a change in the illustrative disclosure. Our methods are frequently demonstrating benefit to the standard-setting process.

How has the relationship evolved between the implementation guides and the yearly taxonomy changes?

Ms. Johaneman: For any significant changes that we make within the taxonomy, we want to generate a guide – particularly if the change is complicated or potentially confusing, whether it is the result of an ASU or a targeted topic area that we are focusing on. As Louis has said, we want to provide the benefit of the work we have done in researching and making a change – communicating how we intend it to be used.

Mr. Matherne: In general, over time, those guides will gravitate toward new Accounting Standards Updates. For the current year, we have other projects, such as pensions and fair value. Those are not current accounting standard projects. They are just areas that we know have problems from an XBRL-tagging perspective. Those will result in guides. But if there is a longterm trend, it is going to be around new accounting standards.

What led you to add the taxonomy-related FAQs on the FASB website?

Ms. Johaneman: These FAQs came about because there were some topics that did not need a whole guide but were still sources of recurring questions. As in the guides, we wanted to communicate what we intended with the modeling or why we did things in a certain way. The FAQs gave us a way to do that in a short timeframe. That’s not to say that FAQ topics may not be incorporated into guides in the future. For the time being, however, a particular targeted question that we keep hearing is likely to become an FAQ, to get the answer out faster.

For filers, how should all of these – the FAQs, the implementation guides, and the taxonomy – work together?

Mr. Matherne: We are mindful of the fact that filers have several sources of information and guidance that they need to consider. They get guidance from us, from the SEC, from XBRL US, from the accounting firms, from their service providers. All this guidance could be viewed as helpful, but filers have to rationalize all of this. Frankly, filers just do 2014 US GAAP Taxonomy - 5not have the time, so data quality suffers. To address this, we work closely with all of these parties with the goal of delivering a consistent message. We participate in the XBRL US best-practice calls to be sure we are not publishing anything inconsistent with their published guidance, and likewise they are mindful of what we are doing, to be sure they are not publishing anything inconsistent with our work. Several service providers participate in the XBRL US best-practice calls, and many of them participate in our FASB Taxonomy Advisory Group. And the SEC is an observer in all of these efforts. Hopefully, through all of that, we are getting out a consistent message that is helpful to the preparers. At the same time, if in five years we have 30-plus different Implementation guides, it might be a challenge for preparers and users to have to deal with all of guidance. We are now considering how to integrate all of that into a more effective medium.

Apart from taxonomy revisions for Accounting Standards Updates, are there other types of changes that the FASB expects to make in the taxonomy every year?

Mr. Matherne: The ASU changes are mandatory, of course, but we are taking on special projects for identified problem areas that will result in Implementation Guides and, most likely, some changes to the taxonomy. The disclosures we are focused on in 2014 for the 2015 Release are Pensions and Fair Value, as they have been particularly troublesome.
The other changes we would make are for issues identified as fatal flaws, but the bar for what constitutes a fatal flaw is pretty high. If some aspect of the taxonomy is identified as fatally flawed – a basic attribute of an element that makes it unusable – it would be reasonable to conclude that we would need to fix it. At this point, however, preparers would have found a way to work around it, either through extensions or other mechanisms. So we would have to look at that usage and consider whether the flaw is really fatal relative to overall taxonomy usability. In the end, we would perfOrm a careful cost benefit analysis before making any changes of this sort.

In the end, every taxonomy change we make or implementation guide we publish, is with the aim of helping to improve the quality of XBRL tagged data.

NOTE: The views expressed here are entirely Mr. Matherne’s and Ms. Johaneman’s, and they do not necessarily reflect those of the FASB or any other organization.

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What’s Really Driving the SEC’s Renewed Focus on Accounting Irregularities and What to Do about It

Merrill Disclosure Solutions - Featured ArticleBy Christopher L. Garcia and Paul Ferrillo of Weil Gotshal & Manges LLP, and Matthew Jacques of AlixPartners

Garcia-Ferrillo-JacquesChristopher Garcia is a partner and Paul Ferrillo is of counsel in the Securities Litigation practice at Weil Gotshal & Manges LLP in New York, where they focus on complex securities litigation and investigation matters. Matthew Jacques is a Director in the Corporate Investigations practice at AlixPartners in Boston. Versions or excerpts of this article have appeared elsewhere.

SEC Initiatives
The United States Securities and Exchange Commission on July 2, 2013, announced new initiatives aimed at preventing and detecting improper or fraudulent financial reporting. As we noted in the February 2014 issue of Dimensions, one of these initiatives – a computer-based tool called the Accounting Quality Model (the AQM; often known as “Robocop”) – is designed to enable real-time analytical review of financial reports filed with the SEC, intended to help identify questionable accounting practices. Mandatory financial reporting using XBRL is what allows the AQM to be possible, making high-quality XBRL filings more important than ever and not a secondary consideration when preparing SEC disclosures.

What is really driving the SEC renewed focus on accounting irregularities - 1

What is really driving the SEC renewed focus on accounting irregularities?

The SEC also announced the creation of the Financial Reporting and Audit Task Force, comprising 12 selected lawyers and both forensic and GAAP accountants from the SEC Division of Enforcement. Its mission is “[to] concentrate on expanding and strengthening the Division [of Enforcement’s] efforts to identify securities-law violations relating to the preparation of financial statements, issues of reporting and disclosure, and audit failures.” To fulfill its mission, the Task Force will be responsible for “closely monitoring high-risk companies to identify potential misconduct, analyzing performance trends by industry, reviewing class action and other filings related to alleged fraudulent financial reporting, tapping into academic work on accounting and auditing fraud, and conducting street sweeps in particular industries and accounting areas,” as Andrew Ceresney, then Co-Director of the Enforcement Division, has explained. In carrying out these tasks, the Task Force will be aided by other critical offices and divisions within the SEC, including the Office of the Chief Accountant and the Division of Corporation Finance. Together, the Task Force and those assisting it constitute a veritable A-Team focused on rooting out accounting improprieties and fraud.

Why Directors And CFOs Must Take Note Of The Task Force
What is really driving the SEC renewed focus on accounting irregularities - 2There is little question that corporate directors, CFOs, and financial reporting staff should take note of this substantial deployment of SEC resources. In 2010, the SEC created five specialized units in areas of market abuse, structured and new products, asset management, foreign corrupt practices, and municipal securities and public pensions. In the succeeding years, each of the units has utilized the very strategies that the Task Force has now been asked to exploit, including monitoring high-risk companies, analyzing performance trends by industry, and conducting street sweeps in particular industries. The result was an increase in inquiries made by the SEC, not to mention several significant enforcement actions, including a withering assault on insider trading; settled actions against banks, including most notably Goldman Sachs, relating to complex structured products; and a high-water mark in FCPA-related enforcement actions.

We anticipate a similar result in the area of financial reporting and disclosures, as a consequence of the Task Force’s creation. Indeed, in a speech in September 2013, Director Ceresney explicitly noted that the goal of the Task Force will be to “focus on case generation” and “generat[ing] new accounting fraud investigations for staff in the Division to pursue.” In the same speech, he went so far as to describe the Task Force as the SEC’s “Apollo 13 moment”: “Often, when you get a group of smart people in a room focused on a problem, you can find the answer. Kind of reminds me of that scene in Apollo 13 where they bring all of the disparate tools available on the space capsule into a room, dump it on to a table in front of a bunch of smart people, and say find a way to fix the problem. And so we created the Financial Reporting and Audit Task Force … .” The problem the Task Force solves for the Enforcement Division is how the SEC can better marshal resources to identify accounting issues; the result, if past is prologue, will be increased engagement by the Commission with public companies concerning such issues.

Potential Areas Of Emphasis For The Task Force
While it may be prudent for directors and CFOs to attempt to ensure that their organizations steer clear of financial reporting deficiencies, it may also be important to What is really driving the SEC renewed focus on accounting irregularities - 3pay particular attention to the areas of the Task Force’s focus in order to stay out of its crosshairs. Based on our study of comments made by various SEC officials, we believe that the Task Force will be focused on a few key areas:

  • Not just fraud. It is easy to look back at certain headline-grabbing frauds of the past (Adelphia, Worldcom, Enron, etc.) and think “Well, that’s not our company.” However, recent SEC actions demonstrate that the SEC is not interested solely in pursuing cases that rise to the level of fraud; the Enforcement Division has brought a number of non-fraud actions against companies and individuals. For example, in June 2013 the Commission brought a settled action against PACCAR Inc. for having ineffective internal controls over the financial reporting process – without any allegations of fraud or intentional wrongdoing.
  • Getting caught with a hand in the cookie jar. Accounting guidance requires companies to record expenses when they are probable and estimable through the establishment of an accrual (or reserve) on the books. Setting these reserves, and reversing them, requires professional judgment. The SEC has indicated that the AQM will be used to detect potentially problematic accrual and reserving practices. The Task Force will similarly be focused on identifying such practices.
  • Valuation questions. Management judgment plays an important role in determining the value of assets or securities on a company’s balance sheet. As Director Ceresney noted in his 2013 speech with respect to losses and reserves: “We recognize that accounting requires that management (and auditors) use their professional judgment but we will not tolerate decisions that are reached in bad faith, recklessly or without proper consideration of the facts and circumstances.” He also indicated that the SEC’s focus on such accounting errors extends beyond management to audit committees: “We have brought actions against audit committees in the past for failing to recognize red flags and we intend to continue holding committees and their members accountable when they shirk their responsibilities.”
  • What is really driving the SEC renewed focus on accounting irregularities - 4Revenue recognition issues. Reserve issues and valuation issues play into the broader question of whether a company is taking measures to “smooth earnings.” As Task Force Chair David Woodcock has observed, “revenue recognition is always an issue.” With the recent growth of social media companies and cloud-based computing services, many companies are faced with difficult questions about how to account properly for these new technologies.
  • Material weaknesses and internal controls. Material weaknesses and internal controls present another area of renewed emphasis for the SEC. In remarks before the AICPA National Conference in December 2013, Brian Croteau, Deputy Chief Accountant of the SEC, indicated: “I continue to question whether all material weaknesses are being properly identified. It is surprisingly rare to see management identify a material weakness in the absence of a material misstatement. This could be either because the deficiencies are not being identified in the first instance or otherwise because the severity of deficiencies is not being evaluated appropriately.”
  • Multiple revisions of financial statements over a short period of time. Though sometimes multiple revisions of financial statements happen with good reason, the SEC considers this area to be a “warning sign” that the company involved might not be maintaining appropriate books and records; thus this will likely draw the scrutiny of the Task Force.
  • Watching the gatekeepers. The SEC has stated several times over the past nine months that it was renewing its focus on the “gatekeepers” of financial reporting: the auditors and public company audit committees. Though they likely were not Task Force cases because of their age, the SEC has been true to its word, filing cases against the gatekeepers. The SEC announced charges against Big Four accounting firm KPMG, alleging it violated certain auditor-independence rules by performing prohibited services for some audit clients. More recently, the SEC charged Agfeed Industries Inc., a Chinese animal-feed company, and four of its top executives with participating in a massive accounting fraud involving faking revenues from its Chinese operations. Among those charged was the US-based chair of Agfeed’s audit committee, who, after allegedly learning that the company was keeping two sets What is really driving the SEC renewed focus on accounting irregularities - 5of books, “failed to conduct or prompt the company to conduct any further meaningful investigation into the misconduct.” In the release announcing the charges against the executives, Enforcement Division Director Andrew Ceresney stated: “Agfeed’s accounting misdeeds started in China, and US executives failed to properly investigate and disclose them to investors…. This is a cautionary tale of what happens when an audit committee chair fails to perform his gatekeeper function in the face of massive red flags.” Though the facts of Agfeed seem pretty egregious, this case is still an example of the SEC ‘talking the talk, and walking the walk.’

Making Good Use Of Peacetime

What does all of this mean for corporate directors and CFOs? It means that there is no better time than the present – during peacetime, before any inbound inquiries from the SEC are received – to have tough discussions with management around the areas of focus we identified above, as well as the areas with which directors normally concern themselves. Audit committee members should have detailed discussions with management and the company’s auditors regarding these issues, not only to make sure that practices are appropriate but also to identify “red flags” or “warning signs” in their financial statements that might attract SEC attention, whether by the Division of Corporation Finance, the Office of the Chief Accountant, or the Division of Enforcement.

Similarly, companies should take proactive measures to ensure and encourage full, candid internal reporting and communications up the ladder, so potential issues are not overlooked, ignored, or missed; and should also revisit their whistleblower practices to make sure internal reports of potential wrongdoing are dealt with efficiently and effectively (and without fear of retaliation). Indeed, dealing effectively and appropriately with whistleblowers alleging accounting irregularities is more important now than ever before. More of the whistleblower complaints the SEC received in fiscal year 2013 were in the area of financial reporting and disclosures (557 complaints, which equates to 17.2% of the total complaints) than in any other area.

In sum, renewed attention to accounting issues on the part of directors, CFOs, and financial reporting staff – to match the renewed attention being paid by the SEC – will undoubtedly pay dividends if the SEC ever comes knocking, which seems increasingly likely in the current environment.

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Why the SEC Decides to Issue a 10-K Comment Letter

AbstractAbstracted from: Reviewing The SEC’s Review Process: 10-K Comment Letters And The Cost Of Remediation
By: Prof. Cory Cassell, Lauren Dreher, and Prof. Linda Myers
Sam M. Walton College of Business, University of Arkansas
Accounting Review, Vol. 88, No. 6, Pgs. 1875-1908

What is the SEC’s duty as a critic?  How do the factors considered by the SEC – when it does its triennial review of public companies’ 10-K filings – affect the probability of it issuing a comment letter? To answer this question, accounting professors Cory Cassell and Linda Myers, with doctoral candidate Lauren Dreher, focused on comment letters issued in 2004-2009 to companies with assets of at least $1 million. Under Section 408(a) of the Sarbanes-Oxley Act, the SEC must review every registrant’s Form 10-K at least every third year and send a comment letter if the 10-K is either materially
deficient or unclear. Although the SEC does not divulge its standards for choosing review targets, Sarbanes-Oxley Section 408(b) specifies factors to consider. It also allows the SEC to add any others the regulators deem relevant.

When does a 10-K review lead to a comment letter?  Three of the factors specified in Section 408(b) – the issuance of a financial restatement, higher stock volatility, and greater market capitalization – increase the likelihood of receiving
a comment letter, the authors discovered. Having an auditor that the Public Companies Accounting Oversight Board must inspect yearly – a Big 4 or a second-tier firm – and using outside financing decrease the likelihood. There is some correlation between receiving a comment letter and showing several corporate traits: weaker corporate governance, greater age, disclosure of losses, greater chance of bankruptcy, and greater M&A involvement. Of the companies in the study, anywhere from 23% to 37% annually did not receive a comment letter during the three-year review cycles that ended in their 2006-2009 fiscal years.

How do the metrics pan out?  A number of comment letters correlated with one Section 408(b) factor, i.e., the need for a restatement. Several of the discretionary factors – having an auditor other than a Big 4 firm, a briefer auditor tenure, disclosure of losses, a more complex corporate structure, weaker corporate governance, more M&A involvement, and more business segments – also triggered comment letters. The authors used two proxies to evaluate the costs of remediation after receiving a comment letter: the company’s response time (the number of days between receiving the first comment letter and the final “no further comment” letter from the SEC); and the number of rounds (the number of letters received between the first and last). Response time correlated with several of the Section 408(b) factors (such as restatement issuance, higher stock volatility, and greater market capitalization), but the number of rounds correlated only with greater market capitalization. Response time and number of rounds both correlated with an auditor other than a Big 4 or second-tier firm, disclosure of losses, and weaker corporate governance.

Who might face higher costs?  The authors also looked at how the cost of remediation might differ depending on the topics in each comment letter. Both response time and number of rounds are highest for accounting topics; among accounting topics, the costs are highest for questions of classification and fair value. The harshest result of an SEC review is finding a material deviation from GAAP or a disclosure violation, either of which require a restatement. This result is more likely when the company is smaller, is closer to bankruptcy, operates in a more litigious business, has a CEO of longer standing, or uses an auditor other than a Big 4 or second-tier firm.

Abstracted from Accounting Review, published by American Accounting Association, 5717 Bessie Drive, Sarasota FL 34233. To subscribe, call (941) 921-7747; or visit http://aaahq.org/pubs/acctrev.htm.

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SEC Financial Disclosure Management Platforms

SEC disclosure rules and filing procedures are complex, and companies must make filings in both EDGAR and XBRL formats. These pressures have prompted the development of disclosure management solutions or platforms, generally software-as-a-service (SaaS) products that companies license for in-house use. In the SaaS model, the vendor’s applications and the client’s inputted data and text are centrally hosted on the service provider’s website (i.e., “in the cloud”).

ConsistencySaaS products allow for collaborative document-drafting, integrate the preparation of the EDGAR and XBRL documents, and facilitate filing both documents with the SEC. For its clients, Merrill Corporation offers a choice of approaches, solutions, and levels of service in the preparation and filing of accurate EDGAR and XBRL documents, along with the printing and distribution of the paper copies. Merrill Bridge is the company’s new disclosure management platform for SEC Financial Disclosure Management PlatformsSEC filings.

Key factor: the need for control

For its XBRL outsourcing services, Merrill is very flexible in setting deadlines. Its teams understand that companies sometimes need to make edits and additions at the last moment. With the internal control that a disclosure management platform provides over the financial reporting and disclosure process, companies can make changes themselves right up until the time of filing with the SEC. Any changes made prior to filing will automatically appear in the XBRL, HTML, and PDF versions. Consistency is ensured because the various outputs stem from the same source file, which is collaboratively generated online by staff who are often in different locations.

Demand for expedited delivery a top motivation

Cloud-computing platforms are the “next evolutionary step in the XBRL journey,” according to Ankita Tyagi in Taking XBRL And Financial Disclosure Management
To The Cloud, a report published by Aberdeen Group two years ago. Aberdeen Group’s survey, which included C-level executives at 88 companies, found the following to be the top drivers for adopting a disclosure management platform:

Motivation

The best approach depends on the company’s needs

Given the imperative need for accurate financial reporting, effective management of the SEC disclosure process is clearly crucial, whether the filer out-sources, in-sources, or uses a combination. Whether to use an XBRL and SEC filing solution depends on a company’s requirements, level of XBRL expertise, staffing, and desire to manage the process. The goal for filers is an approach that helps them feel they can more smoothly complete the financial reporting and disclosure cycle while preparing accurate, compliant SEC filings. According to Kristine Brands, a professor at Regis University and the author of a monthly column on XBRL in Strategic Finance, for the right type of company, disclosure management platforms enhance how fast, effective, accurate, and efficient the process can be for financial reporting and disclosure.

A filer that uses a disclosure management system must be willing to commit the in-house resources needed for its staff to learn the licensed system and stay current on the SEC filing rules and the XBRL taxonomy. The process of preparing financial statements starts with journal entries and – after many stages and with the involvement of staff from many departments – finishes with earnings releases and SEC filings, all under the pressure of SEC filing deadlines.

“While companies have manually managed the process with word processing and spreadsheet documents,” Prof. Brands explained to Dimensions, “disclosure management systems can cut down the errors and automate various parts, such as
account reconciliations, testing controls for SOX filings, and some aspects of XBRL tagging.”

Accurate Financial Reporting“Companies that outsource the SEC filing process do not often have the in-house knowledge and the staff to take on more of that responsibility and prefer to use a service-provider,” explains Patrick Sheridan, Product Manager for Merrill Bridge. Even when a company has such a knowledge base, it may reside in just one person at the company, and the loss of that individual would mean the loss of that specialized knowledge. Given such a concern, the company would be better served by an outsourced solution.
Another reason companies give for not adopting a SaaS solution lies in how they work and set priorities. Preferring to focus on their core business and outsource other tasks, they favor a high-level service organization like Merrill to handle more of the process.

Making accurate, timely filings remains the primary goal

With the pressure for accurate and timely SEC filings, companies must continue to assess the best approach for them. Disclosure management systems generally work best for companies that have larger financial and external reporting teams and that want to develop internal expertise in XBRL and the related web-based programs.

“In the next five to ten years,” Prof. Brands explains, “I expect disclosure management platforms to become an automated, integral, and seamless part of the business-reporting supply chain. By streamlining the corporate reporting and disclosure process, the CFO’s Disclosure Management Platformsstaff will be able to shift focus from transaction processing and manual analysis to performing high-value-added activities such as business analysis, strategic planning, and business intelligence.”

Yet SaaS solutions for SEC document preparation and filing do not fit all companies. Even companies that use these programs may need independent review to assure quality XBRL tagging, for example. “Our goal is not to move all of our clients into a SaaS solution,” said Merrill Bridge’s Product Manager. “Our goal is to broaden our suite of financial disclosure services to include a SaaS solution for those clients where it makes the most sense.”

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Merrill Bridge Changes the Market for SEC Disclosure Management Programs

An interview with Patrick Sheridan, Product Manager for Merrill Bridge.

Patrick SheridanPat Sheridan leads the development of Merrill Bridge, Merrill Corporation’s software-as-a-solution (SaaS) product for managing SEC disclosures. He is a CPA and has also held many positions in the areas of finance and financial reporting, including as a CFO. During an interview with Dimensions, Mr. Sheridan discussed the growing corporate trend toward the use of software solutions for managing SEC disclosures. He also explained why Merrill Bridge stands out in the market of SaaS offerings for disclosure management.

What are SEC disclosure management programs and platforms?
First of all, let me differentiate between programs and platforms. An SEC disclosure management program (or piece of software) is a SaaS or web-based solution that a client can use to manage, prepare, assemble, and file its required SEC filings. That would include 10-Ks, 10-Qs, 8-Ks, and a variety of other required disclosures for public companies, as well as EDGAR HTML and XBRL, if warranted. A platform, such as what Merrill presents as Merrill Bridge, is software wrapped in a suite of services. It is how a company gets from the blank page to being successfully filed with the SEC, when the client requires some level of service above and beyond simply software.

PrintHere at Merrill, we use Merrill Bridge a bit interchangeably, as both a program and a platform. The Merrill Bridge program, from the client’s viewpoint, is a SaaS solution for meeting compliance-filing requirements with the SEC – whereas the Merrill Bridge platform, which is a little more invisible to the client, is what’s happening from the Merrill view behind the scenes to fulfill the client’s expectations. Our clients will range from being fully self-sufficient on the SaaS tool to clients who take advantage of the collaboration features and having that control of their filing in their hands – but then are not interested in completing any of the complex tasks around, let’s say, formatting for HTML or XBRL tagging or construction of a taxonomy.

Why have these programs become popular? Surveys show an increase in their use?
I think the answer falls into a couple of areas. From what we’ve found in our survey feedback, as well as from talking to existing clients and prospects, we have distilled down to what we’re calling the three Cs: Control, Collaboration, and Confidence.

MerrillBridge_1What we’re hearing out there is, number one: “I want to take control of my filing.” Right now, what’s happening in the full-service arena is that our that their complex XBRL file sets are developed appropriately. And so by subscribing to a program like Merrill Bridge, they actually decide when they’re going to leap into their peak period, and they can decide to go in even earlier to smooth out the peaks and valleys of the hours that are required to get their filings done.

Under collaboration, Merrill Bridge provides a true Microsoft® Word-based collaboration tool set, so that the filers working in teams, whether the team has 2 members or 100, can have everyone working on the same document at the same time. The process becomes much more efficient, saving both time and money.

MerrillBridge_2As for confidence, clients want to be confident that, for example, the value they enter for revenue is the value that shows up for revenue everywhere: in their EDGAR document (and that may be in multiple places), in their XBRL file set (where it also may be in multiple places), and in board reports or any other kind of report that relies on that same core set of values. Merrill Bridge, a single-source tool, gives clients that comfort and confidence. We believe that Merrill, as a service organization, adds to that confidence, because of the world-class service set we’ve wrapped around Merrill Bridge.

How will these programs change the future of financial reporting?
Overall, what these programs are doing is creating a more cost-effective, more efficient approach to complying with SEC requirements. It’s going to reduce the costs to get filings done. It’s also going to smooth out, as I mentioned, the peaks and valleys of a client’s time. There will still be peak filing periods, but the peaks will not be extremely different from the valleys in between. That is going to change the face of the job called external financial reporting – making it a more attractive job in the accounting and finance industry because it is going to allow flexibility in how one works.

I think the other change coming to financial reporting is the single-source document, which is getting closer and closer. What everyone believes is going to happen eventually is that there will be one filing type that is electronically filed with the SEC. The way people will view that is in how they assemble the data that is filed. Years ago, we went into EDGAR; now we’ve added XBRL; the next step is a combined document; and then ultimately it will be data that’s being filed that can be extracted either for viewing in different methods or for comparing to other companies or to the company’s own past filings.

Why do some companies use these disclosure management programs while others outsource the preparation of their EDGAR and XBRL documents?
There are various reasons why a filer may choose to outsource the disclosure process; for example, a company might not have the knowledge and the staff to take on more of that responsibility and might prefer to use a service-provider. We believe there will always be companies that prefer the service-provider approach. Merrill will retain the world-class systems and professionals necessary to ensure that those companies are served. Those companies may have a knowledge base, but if the knowledge base is in one person in a company and that person were to leave, that knowledge base exits pretty quickly. So that company will determine that the best thing to do is to stay with an outsourced provider of all those services. For other companies, it is just a preference for the way they like to work. They prefer a high-level service organization like Merrill. In the feedback we get from clients, we can identify those clients who regularly tell us how important the service level is and the team that provides services to them. We do not imagine that many of those clients will be standing in line to adopt a SaaS solution for filing.

Merrill has a full suite of financial disclosure services. How does Merrill help a client decide whether outsourcing, insourcing, or some combination of the two is best for the company?
Understanding the client experience is paramount in determining with the client what is the best approach to filing. Many filers have already decided they prefer to move to a SaaS solution. We work with them to understand their in-house process fully, ascertain the level of independence they desire, and assess what level of professional services is appropriate.

What are some of the features of Merrill Bridge?
There are several key features integrated into Merrill Bridge, which is programmed as an enhancement to the Microsoft product suite. With Merrill Bridge, the user experiences a more stable and powerful integration of the Microsoft Office suite, which allows for improved data-linking, better styling for EDGAR and print, and presentations in PowerPoint®.

Merrill Bridge is a single-source tool, as are some of the other SaaS solutions out there. In a full-service offering, instead of developing an EDGAR HTML document as well as an XBRL file set, the Merrill Bridge client has one source of data that is presented in EDGAR HTML, XBRL, and many other output formats.

MerrillBridge_3Merrill Bridge also offers the multi-user collaboration mentioned earlier – the ability for all team members to have access to the report so that a person can work on one section while somebody is working on another section. This is a team approach, with review features. What companies do in-house now is that one person generally owns the Word document; all the edits go to that person, who must manually update the Word document.

Users of Merrill Bridge will find they have simplified their roll-forward process. This is a huge time-saver for our clients. Currently, we are getting feedback from clients that rolling forward their financial documents from one quarter to the next is measured in hours. With Merrill Bridge, the roll-forward process can be measured in minutes.

Merrill Bridge employs a robust data- and text-linking capability. We are using Microsoft Office and enhancing the linking capabilities between Excel® and Word. The numbers are captured in an Excel workbook, and the words are managed in Microsoft Word. Linking allows the user to easily update values, dates, and text strings that are presented repeatedly throughout the document.

Finally, Merrill Bridge leverages the power of ongoing innovation by Microsoft. For example, upon launch on March 31st, Merrill Bridge will have been fully tested and verified for use with Windows® 8 and Office 2013. We will then continue to keep pace with the enhancements that Microsoft brings to its products.

What has been the initial reaction to Merrill Bridge from clients?
Overwhelmingly positive. We anticipate continuing to bring on board not only new Merrill clients but also full-service clients transitioning to this platform – some of them have been considering SaaS solutions for quite some time and are very excited to see this offering from Merrill.

How are you positioning Merrill Bridge, considering that its success could affect the sale of your full outsourcing service?
Merrill offers a full suite of financial disclosure solutions, which includes Merrill Bridge. We do not think that all of our existing clients will want a SaaS solution, so we consider Merrill Bridge to be an expansion of our existing offerings. It will be a new way to connect with Merrill for our existing clients who do want a SaaS solution, and it will attract a much larger audience of clients who are considering a SaaS solution for their financial disclosure needs.

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Craig Lewis: Reflections Upon Leaving the SEC Division of Economic and Risk Analysis

An interview with Craig M. Lewis, SEC Division of Economic and Risk Analysis

Craig M. LewisCraig M. Lewis is Director and Chief Economist of the SEC’s Division of Economic and Risk Analysis (DERA) and is on leave as a professor of finance at Vanderbilt University. In the April 2013 issue of Dimensions, we interviewed Dr. Lewis about some early details about the SEC’s Accounting Quality Model (AQM) and the role of XBRL in the application. Under development by DERA, the AQM is a quantitative analysis tool that will search corporate financial disclosures and flag apparent anomalies for further consideration by a human examiner. In the December 2013 issue of Dimensions, we reported on Dr. Lewis’s keynote address about the AQM to the 2013 XBRL US National Conference.

When Dimensions spoke with Dr. Lewis for the interview published here, he was preparing to leave the SEC and return to his position at Vanderbilt University. We asked him for his thoughts about his achievements during his time at DERA.

What accomplishments are you most proud of during your tenure at the SEC?
The most important accomplishment is the way that economic analysis has been incorporated into the rulemaking process – beginning with the release of the guidance almost two years ago. There has been a major transformation in the way that economic thought and data analytics have been incorporated into rulemaking. The second-largest accomplishment is the effort that DERA has made to bring data analytics into the risk-assessment space, through a number of models like, for example, the Accounting Quality Model. Thirdly, I would say that it is the ability to promote the research mandate of the SEC – the development of the working paper series and the white paper series – as a way of showing the outside world that the SEC is a place where legitimate academic-style research takes place.

Are those papers peer-reviewed before publication, as academic papers are?
Actually, yes. We have a set of standard operating procedures that we have developed Craig Lewis - 1around the working papers. The paper goes through a series of checks, which include a review. The idea is to make sure that the papers appropriately discuss the results. Also, every working paper has to be cleared by the SEC’s Office of the Ethics Counsel. That’s true for any paper that our staff writes, regardless of whether it gets posted or not.

Is there anything you wish you had gotten more of an opportunity to do?
Things always go slower than you would like. I would have liked to have had more opportunity to explore ways to think of alternative risk-assessment tools. While the Accounting Quality Model is one example, I believe that there are significant opportunities to develop other types of risk-assessment tools. One of the initiatives that Chair Mary Jo White has asked us to lead is a risk-assessment-oversight committee, in which we bring together principals from the divisions and offices to talk about the current landscape of risk assessment at the agency as well as to present ideas and look for opportunities to collaborate on these types of projects. What I’ve been working on recently is trying to build an infrastructure that will enable DERA to become involved in these risk-assessment opportunities. I really think the place for these to develop is within the operating divisions and in places like the SEC Office of Compliance Inspections and Examinations.

Has your time at the SEC influenced your ideas for future academic research and teaching?

That is one of the great things about being at the SEC: the exposure you get to different ideas and economic problems. Probably the area I have been most intrigued by since I Craig Lewis - 2have been here is text analytics and how to apply text analytics in my own research. We have been making progress in that area. Once you see what you can do with text analysis, it makes you rethink a lot of the approaches you have been using to tackle problems with purely quantitative data analysis. This is really interesting to me – probably one of the areas I will be focusing on.

By text analysis, you mean looking beyond numbers in financial disclosures and analyzing the way companies use words to describe their financial performance.
Exactly. In a 10-K report, you have the base financial-statement information, but the vast majority of the report is how the company decides to describe its performance. I believe there is significant incremental information in the way companies actually discuss their results.

What guidance will you give to your successor at the DERA?
The most important thing you can do in this job is to be a good listener – understand what the problem is before you start talking.

Craig Lewis - 3

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Risk of IRS Audit is Growing for Multinational Companies Using Transfer Pricing

AbstractAbstracted from: Transfer Pricing And Its Effect On Financial Reporting By: John McKinley and John Owsley. Cornell University and Ithaca College (JM); Ernst & Young, New York NY (JO) Journal of Accountancy, Vol. 216, No. 4, Pgs. 50-54

Transfer pricing poses special risks for MNCs. Companies of all sizes should pay particular attention to transfer pricing, accounting specialists John McKinley and John Owsley warn, because tax authorities have begun devoting more attention to it. The Internal Revenue Service requires that the distribution of costs and profits between a parent company and its subsidiaries or controlled companies be equivalent to the distribution that would occur if the companies were unrelated. If the IRS believes that this arm’s-length principle has been violated, it can – under Section 482 of the Internal Revenue Code – redistribute the costs and profits so that they better reflect a disinterested allocation of profit and loss. Multinational companies are particularly vulnerable, since MNCs must juggle the requirements of multiple jurisdictions and also of multiple companies.

Disagreement can be costly. Each tax authority wants to collect the highest justifiable revenue, and each company wants to enjoy the lowest tax and highest profit. Even well-meaning companies may disagree with the IRS on transfer pricing. For example, the authors point to GlaxoSmithKline Holdings (Americas). This US holding company took the position that it merely distributes goods for its worldwide parent company, which did the research and drug development abroad. GlaxoSmithKline argued that the resale price method should apply when determining its tax obligations. The IRS objected, asserting that the US market had created the demand and thus was responsible for a higher share of the profits than this transfer pricing method reflected. Conceding the battle, GlaxoSmithKline settled tax bills for the years 1989-2005 by paying $3.4 billion (the largest settlement the IRS had ever obtained).

Uncertain tax positions affect financial reporting. The FASB’s accounting standards codification on income taxes (Topic 740 Income Taxes) states that if a tax position does not have a greater than 50/50 chance of surviving an audit, the tax benefit falls into the category of UTBs (“unrecognized tax benefits”). On the company’s financial statements, UTBs must be reported as liabilities, which can significantly and materially affect the statement. Before filing its financial reports, the company must determine what portion of any tax benefits resulting from transfer pricing might become liabilities in the event of litigation with the IRS. Unless the company has an advance-pricing agreement with the IRS or other tax authority, the authors caution, transfer pricing is always questionable. In view of the difficulties that surround transfer pricing, companies have steadily increased the number and length of their footnote disclosures relating to it.

IRS audits of transfer pricing are increasing. Companies are reporting more audits and more penalties from their use of transfer pricing. In 2010, two-thirds of the multinational companies in one survey responded that they had been audited for applying transfer pricing. Multiple international jurisdictions have indicated that they will focus on transfer pricing, while the IRS’s Large Business and International Division will be examining international tax issues with growing fervor. The IRS has also decided to increase its auditing of smaller companies ($10 million in assets) for transfer pricing concerns, the authors note.
The asset threshold for filing Schedule UTP (introduced in 2010) drops from $50 million to $10 million for the 2014 tax year. This means that many smaller companies will have to grapple with the conflicting views of what arm’s-length pricing means for parent companies and their foreign subsidiaries.

Abstracted from Journal of Accountancy, published by AICPA, Harborside Financial Center, 201 Plaza Three, Jersey City NJ 07311-3881. To subscribe, call (888) 777-7077; or visit http://www.aicpa.org/pubs/jofa/index.htm.

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Press Release: Merrill Corporation to Offer Clients a Custom Version of Rivet® Crossfire Disclosure Management Software

Integrates industry-leading disclosure management software with Merrill’s premier service and XBRL expertise

St. Paul, Minn. — Merrill Corporation (www.merrillcorp.com), a leading global provider of technology- enabled services for the financial, legal, health care and other corporate markets, announced today it has entered into an agreement that provides Merrill with its own custom and internally managed version of the popular SEC disclosure management platform Crossfire®, developed by Rivet® Software. This provides Merrill a SaaS-based financial reporting platform used for SEC reporting requirements, including EDGAR and XBRL interactive data files.

Merrill will integrate its custom version of the Crossfire software into its suite of financial disclosure solutions under the name Merrill Bridge™.

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Merrill Bridge gives clients complete control over their financial disclosure and SEC reporting with full integration to the Microsoft® Office suite, including Word®, Excel® and PowerPoint®. All Merrill clients, including those who use Merrill Bridge, have full access to Merrill’s extensive XBRL expertise, review capabilities, superior customer service and an array of additional Merrill services and disclosure solutions. Merrill will manage all client information on Merrill Bridge in a highly secure data infrastructure, giving clients additional confidence in the security and privacy of their data.

“We are extremely pleased to announce the addition of this software to Merrill’s suite of financial disclosure solutions,” said Rod Johnson, Chief Operating Officer at Merrill Corporation. “Crossfire has proven itself in the marketplace, with capabilities that other SEC disclosure management software can’t match. Combining this best-in-class software with Merrill’s world-class EDGAR service, composition and XBRL consulting teams with deep subject matter expertise, we are now able to provide our customers with the premier suite of financial disclosure solutions available in the market today.”

About Rivet Software

Rivet Software, founded in 2003 and headquartered in Denver, Colo., has a strong relationship with the SEC that stretches back to the voluntary launch of the 2006 XBRL program. During that launch, 40 percent of public companies that participated used Rivet’s flagship desktop XBRL product, Dragon Tag, to file. Many of the XBRL products in the market today were built using Dragon Tag.

About Merrill Corporation

Founded in 1968 and headquartered in St. Paul, Minn., Merrill Corporation http://www.merrillcorp.com is a leading provider of outsourced solutions for complex business communication and information management. Merrill’s services include document and data management, litigation support, language translation services, fulfillment, imaging and printing. Merrill serves the corporate, legal, financial services, insurance and real estate markets. With more than 5,000 people in over 40 domestic and 22 international locations, Merrill empowers the communications of the world’s leading organizations.

Rivet is a registered trademark of Rivet Software. Microsoft and its related Microsoft Office suite products are the registered trademarks of Microsoft Corporation. Merrill Bridge is a trademark of Merrill Communications LLC.

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XBRL Mistakes Really Hurt: Why Accuracy is Crucial for Your Company’s Communications with Financial Markets

Incorrect XBRLPreventing XBRL mistakes is not just a compliance exercise. It is in fact a pragmatic necessity for telling your company’s financial story to analysts, shareholders, potential investors, and others in the market. All publicly traded US companies now file their SEC financial disclosures in XBRL. With XBRL implementation complete, the focus has shifted to the quality of the XBRL tagging in corporate financial reporting. An XBRL instance document must exactly translate the corresponding EDGAR filing. Most filers face full liability for mistakes in their XBRL disclosures and therefore can no longer risk filing documents with tagging errors that skew their financial reporting.

Of course, the most immediate and obvious motivation for accuracy in XBRL filings is the need to be SEC-compliant. The SEC expressed concern about inaccuracies in XBRL tags in, for instance, a comment letter to Standard Drilling. Item 15 on Page 5 states:

We note that you have checked the Smaller Reporting Company box on the cover of your Form 10-Q. The XBRL Document and Entity Identification Information rendered as part of your filing appears to contain a number of data element errors, including but not limited to, your classification as a non-accelerated filer. Please revise to comply with the requirements of Section 405 of Regulation S-T and the EDGAR Filer Manual.

However, producing high-quality XBRL data is not just a matter of compliance. For every company that files with the SEC, ensuring accurate financial disclosures in XBRL is a matter of pragmatic, market-driven importance – as vital as the accuracy of traditional EDGAR filings. Precise use of XBRL is essential for your company’s communications with the financial markets.

Incorrect XBRL - XBRL Errors Distort

Ouch! Real-life XBRL mistakes that hurt

XBRL represents a great leap forward in corporate communications to the market, analysts, and the media. However, financial reporting in XBRL is only as good as the XBRL tagging that translates the EDGAR document into the XBRL instance document. Mistakes can be painful for filers. In addition to the grave SEC consequences they can provoke, XBRL errors distort – sometimes grossly – the financial story that a company is trying to tell shareholders, potential investors, analysts, and the media.

Here are examples of XBRL mistakes that Merrill experts have detected in actual corporate financials. The errors shown here are not outliers. These types of faults appear right now in the XBRL instance documents of many publicly traded companies, both large and small.

From the Form 10-K of a large filer, here is what the filer intended to convey, and what the erroneous XBRL tagging actually meant:

Incorrect XBRL - Mistake 1

This example shows the potential severity of incorrect tag selection. There is a tag in the US GAAP Taxonomy for the $17.2 billion figure, but the company did not use it. Instead, it created an extension that told the story erroneously. 

In addition, the same filer made a similar mistake elsewhere in the same 10-K:

Incorrect XBRL - Mistake 2

Again, the selection of the wrong XBRL tag profoundly misreported the financial story.

From another company’s 10-Q filing:

Incorrect XBRL - Mistake 3

Although this statement is not necessarily incorrect, it is incomplete. What’s missing? While the right tag was chosen for the 25 million shares, the filer forgot to add the
Subsequent Event member. Moreover, the filer omitted another important piece of information: the fact that the stock was Class A common stock. A member for that exists in the US GAAP Taxonomy, and it should have been selected to tell the whole story.

Yet another mistake in a 10-Q filing:

Incorrect XBRL - Mistake 4

How did this happen? Quite simply, the $39 million was erroneously entered into the XBRL as a positive instead of negative value.

“95% accuracy is not good enough – even 98% is not good enough”

Prof Dhananjay GodeFor the October 2013 issue of Dimensions, we interviewed Professor Dhananjay (Dan) Gode, a Clinical Associate Professor of Accounting at New York University’s Stern School of Business. He teaches corporate financial accounting and pursues research interests in financial analysis. In frank terms, Prof. Gode outlined the importance of XBRL accuracy for a company’s financial communications with the market: “[E]ven if the data is 95% accurate, maybe you can use it in a classroom; but if you are doing any professional work, 95% accuracy is not good enough – even 98% is not good enough.” Prof. Gode told us about some of his bewildering experiences with inaccurate XBRL filings. “Now, I do not analyze the whole [XBRL] database; I’m just a user. If I see [a mistake], I get

annoyed. I do not know how many more mistakes there are in the whole database. Even if you try to do four things and you find mistakes in each of those four queries, it leaves you quite a bit unsettled. That’s [a] problem.”

XBRL quality is about telling your company’s financial story to the market

The SEC’s newly developed Accounting Quality Model demands high-quality XBRL. This quantitative analysis tool uses XBRL data to scrutinize financial disclosures and to select filers for closer review and potential enforcement action. (See Inside The AQM, in the December 2013 issue of Dimensions.)

Yet the SEC is not the only set of eyes scrutinizing XBRL instance documents. Financial data from XBRL filings is being gathered and made available to investors, analysts, and sundry participants in the market. In other words, people want to use XBRL data to do research on corporate performance and make investment decisions.

The market’s use of XBRL was summarized lucidly by Campbell Pryde, the president and CEO of XBRL US, in a recent Merrill webinar on XBRL quality. Citing information
gathered by his company, Mr. Pryde listed the many types of commercial distributors – from data aggregators to media companies – that are collecting and parsing the XBRL data in corporate financial disclosures. The SEC is also working on making XBRL-tagged financial data available to the public in various ways, such as CSV and Microsoft Excel formats. According to Mr. Pryde, in 2013 the number of governmental and commercial entities distributing XBRL financial data more than doubled over the number in 2012. Some are established data aggregators, such as Thomson
Reuters, while others are new vendors. XBRL US is working on integrating XBRL data into Google search results, Mr. Pryde indicated during the webinar, to “get a much
broader audience of people looking at financial-reporting information and being interested in what companies are doing and in how they are performing.”

Analytical tools require error-free data

Anticipation of growing market demand for XBRL-tagged financial data has led to the development of many innovative analytical XBRL tools, but these applications all need errorfree data to produce viable results. The Financial Executives Research Foundation (FERF) recently published a report about analytical tools that pull data from XBRL instance documents (Data Mining With XBRL And Other Sources, by Leena Roselli). “Even though XBRL’s benefits may not seem evident at the present time,” concludes the author, “data mining tools are making the analytical process easier. Whether for internalIncorrect XBRL - Strausberg Quote use or external use, tagging is powerful.” Conversations with personnel at the tool-makers profiled in the FERF report reveal the importance of error-free XBRL filings for their products. For instance, 9W Search makes an application that uses a normalized dataset to provide corporate financials and ratios. Now available at popular investment websites such as TheStreet.com, the 9W Search platform also pulls the information in financial statement footnotes directly from XBRL instance documents. “The footnote data is untouched in our system, and the filing company is responsible for its accuracy,” emphasizes Susan Strausberg, the firm’s CEO.

Another recently created product, developed by Calcbench, enables comparative analyses across corporate sectors or peer groups – for example, how Intel’s balance sheet compares to those of its peers, or how annual revenues fluctuate in the semiconductor industry. “When an individual firm makes a mistake in its data, then the entire [data] universe is affected,” Alex Rapp, the cofounder, president, and CTO of Calcbench, tells us. “We are starting to see our information used more and more by investors, auditors, academics, and lawyers. Filers that cannot get it right are going to develop negative reputations in all of those circles.”

FinDynamics, a developer of applications for financial data, has an add-in tool for use in Microsoft Excel that pulls XBRL data from 10-Ks, 10-Qs, and other SEC filings. Incorrect XBRL - FinDynamics QuoteAccording to Ilya Vadeiko, the firm’s executive director, the tool imports XBRL data to Excel in undistorted form. “Therefore the accuracy of our data is identical to that of the original source,” he asserts. “Obviously, the data quality of the original source is an irritating issue for us and for our users.” Mr. Vadeiko quickly points out another key reason to get XBRL tagging right: Financial data that is inaccurate because of XBRL errors makes it hard for analysts to produce accurate reports about the company – potentially leading analysts to avoid covering the company altogether.

The damage that bad XBRL data can inflict on a company’s relationship with analysts is a recurring theme in our conversations with expert commentators. “One of the benefits of XBRL is for smaller companies to be able to make accessible their financials in a timely fashion, as smaller companies are last on the list of most large data aggregators,” notes Ganesh Rajappan, the founder and CEO of LogixData, an application developer. “Unfortunately,” he informed us, “having errors in XBRL makes this more of a dream than reality.” According to Fuad Rahman, CEO of software developer Apurba Technologies, often the most problematic XBRL data comes from small companies that
outsource their XBRL-document preparation to unreliable service-providers.

It takes more than software: human experience and expertise are vital

It takes more than software to craft the kind of XBRL excellence that Congress, the SEC, and the market are demanding. Review by a human expert is crucial for any company seeking assurances about the accuracy of its XBRL tagging. XBRL submissions in which Merrill is involved are all prepared or reviewed by consultants who are experienced CPAs
particularly skilled in XBRL usage. These consultants know the intricacies of XBRL and the SEC rules thoroughly, and they apply that understanding to XBRL documents. Merrill’s unique expertise allows corporate executives to move forward with confidence, knowing that their XBRL filings do not contain errors.

“Errors that can’t be checked by software… really require the involvement of XBRL-knowledgeable individuals,” emphasizes Lou Rohman, Merrill’s VP of XBRL Services.
“That’s a key point of getting the XBRL right. By knowledgeable, I mean individuals who understand the SEC rules, the accounting disclosures, the intricacies of the XBRL itself, and then are able to apply that experience to the XBRL document.”

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XBRL Data Beats Aggregators and Redistributors for Accuracy

AbstractAbstracted from: The Quality Of Interactive Data: XBRL Versus Compustat, Yahoo Finance, And Google Finance
By: Prof. J. Efrim Boritz and Prof. Won Gyun Nof
University of Waterloo (JEB); Iowa State University (WGN)
Published on Social Science Research Network (www.ssrn.com), 54 pages

Data is not always accurate. The introduction of interactive data for reporting puts investors, analysts, and regulators on the same page when analyzing company financial data. Using XBRL allows multiple users access to the same data. The SEC now posts corporate filings in XBRL, as coded by the issuer. In 2006, Christopher Cox, the SEC chair at the time, estimated that analysts had a 28% error rate when valuing companies. Errors were occurring when filers were incorrectly entering data into their own proprietary systems or trying to fit XBRL into their own longstanding systems. Accounting scholars Efrim Boritz and Won Gyun No wondered whether the data from analysts and aggregators is now as accurate and complete as the interactive data found on the SEC’s EDGAR website.

Analyst and aggregator data is inaccurate and incomplete. The authors examined the degree to which the data published by aggregators and redistributors matched the XBRL data filed with the SEC by 75 companies and posted online in 2009-2012. They found a series of problems. Over half of the data provided in the XBRL filings was simply absent from the information available from the three major aggregators/redistributors considered by the authors. On average, up to 4.8% of the data provided by the aggregators/redistributors did not match the data in the XBRL filing on which it was based (when starting with the XBRL filing and then seeking the same data entry at the aggregator/redistributor). Beginning at the aggregator/redistributor site and trying to find the matching term in the XBRL report on the SEC’s EDGAR website, the mismatch rate was up to 8%.

XBRL filings offer the better data. Data from the statements of cash flow showed the highest mismatch rate, although the rate varied somewhat by data provider. Over half of these mismatched items were material. Where there were mismatches, those made by the least accurate aggregator/redistributor were material 66% of the time. Of the middle performer’s errors, 58.4% were material, and the best performer still made material errors in 45.9% of the mismatches. Generally, 61.5% of the errors in the statements of cash flows were material; in balance sheets, 55.3% of the errors were material; and in income statement, 54.9%. Analysts and aggregators may add perspective to the data, the authors conclude, but the data they provide omits about half of the available information filed by the company, and it is riddled with errors, over half of which are material.

Abstracted from The Quality Of Interactive Data: XBRL Versus Compustat, Yahoo Finance, And Google Finance, published on Social Science Research Network (www.ssrn.com), Social Science Electronic Publishing, 2171 Monroe Avenue, Suite 3, Rochester NY 14618. This working paper is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2253638.

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XBRL Quality: Software Validation vs. Human Involvement

XBRL Quality“I ran software validation on my XBRL files, so they must be right.” Correct? Unfortunately, no.

Although software validation is a key component to getting XBRL right, there are many items in XBRL files that require human involvement. Relying on XBRL software alone to catch errors and produce high-quality XBRL will result in diminished XBRL quality in SEC filings.

Merrill Disclosure Solutions-Software Validation vs Human InvolvementIt is important to understand where human involvement is necessary. Of the seven components necessary for achieving a high-quality XBRL filing, some can be conquered by software; some cannot; and some require a combination of the two. We can examine why this is the case by exploring how either automation or human involvement is needed to achieve each component of XBRL quality.

Key components of XBRL quality: automation or human involvement for each one?

In What Is Quality? Key Components of XBRL Quality in SEC Filings, we explained the seven critical components for XBRL quality:

  1. EDGAR Filer Manual
  2. US GAAP Taxonomy implementation guides
  3. XBRL best practices
  4. XBRL Specification 2.1
  5. US GAAP Taxonomy
  6. SEC Staff Observations/FAQs
  7. Accounting knowledge

EDGAR Filer Manual
Section 6 of the SEC’s EDGAR Filer Manual (EFM) specifies the instructions for properly preparing XBRL submissions to the SEC. Some of these instructions can be automated by software, and some require human involvement. For those that can be automated, software developers have included them in the XBRL validation software
XBRLprograms that exist today. But a significant portion of the EFM instructions cannot be automated for XBRL compliance. For example, an EFM instruction which isn’t included in software validation is the instruction to choose the element with the narrowest definition when there is a choice among elements that have definitions which fit the fact being tagged. This takes human expertise to determine first which elements have definitions that fit, and then which one of them represents the narrowest definition.

Adhering to the EFM requires a strong knowledge of the many EFM instructions, primarily because an individual needs to know not only how to comply with those rules that cannot be automated but also how to interpret and correct the findings of validation software for those rules that can be automated.

US GAAP Taxonomy implementation guides
The FASB’s US GAAP Financial Reporting Taxonomy Implementation and Reference Guides provide insight and guidance on how to use the US GAAP Taxonomy. These guides are easy to read and understand, but they are not conducive to automation because they do not consist of a set of rules; rather, they show items such as the appropriate dimensional structures and elements for tagging specific disclosures. Compliance with these guides comes from reading them, comprehending them, and implementing the concepts where applicable. Each of these steps requires the involvement of XBRL-knowledgeable individuals.

XBRL best practices
The resolutions of the XBRL US Best Practices Committee consist of best practice recommendations, some of which can be written into automated validation rules and some which cannot. For those that can be automated, certain software programs (such as the XBRL US Consistency Suite) have included these rules in the software, thereby

XBRL Best-Practice Recommendations

allowing you to determine if your XBRL is in compliance with those best practices. For best-practice recommendations that cannot be automated, it is important for the XBRL preparer to read, understand, and apply the best practices where appropriate. Complying with many best-practice recommendations requires XBRL-knowledgeable individuals, such as when determining whether a revenue amount pertains to a customer, a counterparty, a disposal group, or a related party, and then selecting and structuring the applicable combination of tags for the specific situation.

XBRL Specification 2.1
XBRL software can determine if XBRL files are in conformance with XBRL Specification 2.1 as well as the Dimensions 1.0 specification. If an XBRL file is not in compliance, most all XBRL preparation and validation software will let you know promptly. No human intervention is necessary, other than to fix any issues identified by the software.

US GAAP Taxonomy
The US GAAP Taxonomy is a dictionary of more than 15,000 tags; consequently, there are many properties of tags and relationships between tags that can be automated into software to determine if these relationships and properties have been applied appropriately. Rules that can be automated include items such as “if Tag A is used, then Tag B should never be used” or “if Tag A is used, then Tag C should always be used” or “the value for Tag A should always be entered as a positive amount.” These rules are currently written into certain XBRL software programs, such as XBRL US Consistency Suite, allowing the user to be alerted to any violations.

Proper application of the US GAAP Taxonomy, however, also has an aspect that simply cannot be automated. There is no replacement for familiarity with the US GAAP Taxonomy by a knowledgeable individual to properly select, apply, and structure the tags. Properly communicating a disclosure, including making decisions on when to create an extension element or whether to use multiples axes, is best handled
by a knowledgeable individual with familiarity of the US GAAP Taxonomy.

SEC Staff Observations/FAQs
Many of the XBRL issues in the SEC Staff Observations and FAQs can be identified by software and, consequently, many are included in XBRL validation programs. Items from the staff observations for which software can check include some—but not all—unit types, positive/negative signs, invalid axis/member combinations, and improper calculations. On the other hand, staff observations that cannot efficiently be checked by software include improper extensions when a GAAP tag exists, improper use of a GAAP tag when an extension should have been created, and improper modeling of tags to represent a disclosure.

Accounting knowledge
High-quality XBRL requires that the preparer of the XBRL understand the accounting meaning of the financial disclosures. In general, this knowledge is not easily automated The Filing Company is Responsible for the Accuracy of the XBRL Filesand, therefore, this component of quality requires individuals with accounting expertise to be involved with the XBRL. Although some basic accounting disclosures can be automated for purposes of auto-tagging, this is very limited. Tagging accounting disclosures requires accounting knowledge and those XBRL files that do not use the knowledge of accounting individuals with XBRL experience are evident, thanks to the poor XBRL quality.

Both software and human involvement are required: the importance of judgment

Getting XBRL right requires both software validation and human involvement. Preventing errors also means realizing that, of all the errors that can exist in XBRL submissions, there are those errors that can be detected by software and—the
difficult ones—those that cannot. Everything from selecting elements to determining proper calculation relationships requires judgment and experience. Of course, to the extent that automation can assist with XBRL preparation and review, it should be used. But most aspects of XBRL preparation require judgment, and for those items that can be automated, judgment is still necessary to determine if the automation has
handled them correctly.

Unfortunately, there are too many cases of over-reliance on XBRL software, which leads to a poor-quality XBRL filing. Understanding the limits of XBRL software validation, and the areas where there is a need for involvement by knowledgeable individuals, is critical to quality results.

How Merrill assures quality XBRL filings
When we handle an XBRL submission, it is prepared or reviewed by our experienced CPAs. With deep XBRL knowledge, we understand the intricacies of XBRL and the
SEC rules, and can apply that to the XBRL documents. Equally as important, we are able to effectively communicate that understanding to the filing company’s personnel.
Since the filing company is ultimately responsible for the accuracy of the XBRL files, it is imperative that meaningful conversations occur between clients and consultants until a
consensus is reached that the XBRL files are correct. These discussions can educate the company personnel on how information translates into the proper XBRL structure and data entry. We have clients who have become quite expert in the requirements of XBRL because they learn through our process and build on their knowledge from quarter to quarter.

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The 7 Keys to XBRL Quality in SEC Filings

The 7 Keys to XBRL QuaityThe quality of XBRL submissions has been in the spotlight recently for the thousands of companies now submitting XBRL financial statements to the SEC. Despite the extensive discussions on quality, there has not been much, if any, discussion of what “XBRL quality” is. Determining whether your XBRL filing is high or low on the quality scale, or determining if the XBRL you are consuming is appropriate or not, requires an understanding of the components of quality. So, what is XBRL quality?

In its most basic sense, high-quality XBRL has two traits: First, it is prepared in a manner that is consistent with other filers; and second, it conveys the same information as the traditional HTML financial statements. Understanding each of these traits is the key to understanding what constitutes XBRL quality.

High-Quality XBRL is Prepared Consistently
For XBRL to be easily consumed by users of the data, it needs to be consistently prepared across all filing companies. We do not know every possible way that XBRL will High Quality XBRL Has Two Traitsbe consumed in the future, but an essential concept to making XBRL consumable is the consistency of the way filers map, tag, and structure the XBRL information. If the XBRL files are prepared consistently, consumers of the data – whether analysts, the SEC, or individual investors – can much more easily understand it and analyze it.

How does a company know if its XBRL files are consistent with the files of the thousands of other companies preparing XBRL? Based on Merrill’s extensive experience in XBRL preparation, this is clear: To produce high-quality XBRL that is consistent with that of other companies, the preparer needs to understand and adhere to various rules and guidelines.

Components for achieving high-quality XBRL filings
Issue OneEDGAR Filer Manual. The filing company must follow the instructions in the EDGAR Filer Manual that pertain to XBRL. Although some parts of a filing can be checked by XBRL validation software, many cannot and therefore require human involvement. Consequently, individuals preparing XBRL files need to have a deep understanding of the EDGAR Filer Manual to create XBRL properly. The Manual covers everything from guidance inselecting tags to the naming of the XBRL documents, and it contains detailed instructions on how to prepare XBRL. Consistency across companies cannot be achieved unless these instructions are followed. Many of the errors currently in SEC XBRL submissions are the result of lack of knowledge or improper application of the instructions.

Critical Issue TwoUS GAAP Taxonomy Implementation Guides. The company should understand and apply the US GAAP Financial Reporting Taxonomy Implementation and Reference Guides, published by the Financial Accounting Standards Board. Providing insight and guidance on how to use the US GAAP Taxonomy, the guides are very practical and promote consistency. To achieve consistency across companies, preparers must apply these guides where applicable.

Critical Issue ThreeXBRL Best Practices. The company should apply the resolutions of the XBRL US Best Practices Committee. This committee addresses many situations in which XBRL is being prepared inconsistently among companies. For example, in a situation where there are two or more ways to structure a financial disclosure using XBRL, the committee determines the best way to structure the XBRL and then issues a resolution on the topic. It is critical that companies follow these resolutions to ensure high-quality XBRL which is consistent with other companies.

Number 4XBRL Specification 2.1. The company must adhere to XBRL Specification 2.1. This fortunately is not something most preparers need to read and understand in depth, since almost all XBRL-preparation software conforms to this specification. Currently, most filers are properly conforming to this standard.

Number 5US GAAP Taxonomy. The company should conform to the format and structure of the US GAAP Taxonomy whenever possible. Seasoned XBRL individuals realize that there is no replacement for familiarity with the US GAAP Taxonomy Companies that keep making basic errorsif high quality XBRL is to be achieved. Proper preparation of XBRL requires a strong understanding of the taxonomy, so that it can be applied correctly and consistently across companies. For each financial statement disclosure, the US GAAP Taxonomy lists the standard tags and shows an appropriate structure for those tags, including the presentation layout of the abstracts, tables, axes, line items, and other elements, as well as the dimensional structures if applicable. Consistency requires that these formats and structures be followed as much as possible. The challenge is that there are in excess of 15,000 tags in the taxonomy. Moreover, annual updates to the taxonomy result in required changes to the format or structure of certain areas.

High-Quality XBRL Conveys the Same Info as the HTML Financial Statements
When XBRL files are analyzed by software, the resulting analytics and conclusions reached should be the same as those reached by analyzing the HTML financial statements. For this to occur, the quality of the data in the XBRL files must be such that it conveys the same information as the traditional financial statements. To achieve this internal consistency requires knowledge and understanding of SEC observations and US GAAP accounting rules.

Components for assuring internal consistency

Issue OneSEC Staff Observations/FAQs. The filing company must understand and apply the SEC Staff Observations and FAQs, which are based on the staff’s reviews of XBRL submissions. These observations present the most common and significant problems that the staff noted in its reviews. Many address situations where the XBRL conveys a different meaning than the traditional financial statement. Examples include incorrect positive/negative signage, improper axis/member combinations, values not tagged, improper calculations, and unnecessary extensions. Each of these errors stems from misapplication of the EDGAR Filer Manual instructions, which indicates the importance of having a deep understanding of the rules and guidance around XBRL submissions if the XBRL is to convey the proper information.

Critical Issue TwoAccounting knowledge. The preparer of the XBRL must fully comprehend both the accounting behind the company’s disclosures and the accounting significance of the US GAAP Taxonomy elements. This is essential to proper mapping of the financial disclosures so that they convey the correct information. High-quality XBRL cannot be achieved without strong accounting knowledge and an understanding of the related US GAAP Taxonomy elements. Too often companies rely on preparers that lack sufficient accounting knowledge, with the expectation that the final reviewer will have the appropriate accounting knowledge to correct any errors. This reliance is problematic because, without sufficient accounting knowledge, the preparer will make tagging and structuring errors, and the reviewer may not have the requisite XBRL understanding (or may not be able to take enough time) to identify the errors. Merrill prides itself on its staff of experienced CPAs with deep XBRL and SEC knowledge. XBRL preparation should be done right the first time, using individuals with the appropriate level of accounting and taxonomy knowledge, thus reducing the risk of errors in the XBRL files.

Components of Quality
Adherence to these components of quality will result in XBRL that is consistent across companies and conveys the same meaning in the XBRL filing as in the traditional Many Errors Cannot Be Detected By XBRL Validation Softwarefinancial statements. Companies that keep making basic errors assume that if they run a software validation on the XBRL files and it shows no problems, then the XBRL files are valid and ready to file. While validation is an important step, it does not mean that the files are free of errors. Many errors cannot be detected by XBRL validation software, leading to a poor quality XBRL submission. Detection and resolution of these errors requires that the XBRL be prepared or reviewed by XBRL experienced individuals who understand these key components of quality.

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What the SEC’s New Financial Reporting and AQM Initiative May Mean for Public Companies

By Christopher L. Garcia and Paul Ferrillo of Weil Gotshal & Manges LLP, and Matthew Jacques of AlixPartners

Christopher L. GarciaPaul FerrilloMatthew Jacques
Christopher Garcia is a partner and Paul Ferrillo is of counsel in the Securities Litigation practice at Weil Gotshal & Manges LLP in New York, where they focus on complex securities litigation and investigation matters. Matthew Jacques is a Director in the Corporate Investigations practice at AlixPartners in Boston. Versions or excerpts of this article have appeared elsewhere.

maryjowhite-secSince her confirmation as Chair of the SEC, Mary Jo White has made it clear that her administration will focus on identifying and investigating accounting abuses at publicly traded companies, a focus that has been echoed by her co-Directors of Enforcement, George Canellos and Andrew Ceresney. This renewed focus is perhaps unsurprising: whistleblower complaints relating to corporate disclosures far outstrip complaints in other popular enforcement areas, such as insider trading and the Foreign Corrupt Practices Act, and yet the last several years have witnessed a steady decline in accounting fraud investigations and enforcement actions.

SEC Initiatives

Accordingly, on July 2, 2013, the SEC announced two initiatives in the Division of Enforcement designed to support this renewed focus on uncovering and pursuing accounting abuses in public companies:

  • The Financial Reporting and Audit Task Force (“the Task Force”), which Ms. White describes as “an expert group of attorneys and accountants” dedicated to detecting fraudulent or improper financial reporting; and
  • The Center for Risk and Quantitative Analytics, which is dedicated to applying quantitative data and analysis to high-risk behaviors and transactions in an effort to detect misconduct.

Merrill Disclosure Solutions-Dimensions V13_Feb 2014While the Task Force portends a new era in accounting fraud enforcement by creating a veritable “SWAT Team” tasked with reviewing financial restatements and class action filings, monitoring high-risk companies, and conducting street sweeps, the announcement that the SEC is employing “data analytics” in order to detect indicia of accounting fraud is potentially the more significant development.

First dubbed the Accounting Quality Model (“AQM”) by the SEC’s Chief Economist Craig M. Lewis [see the April 2013 issue of Dimensions for an interview with him], and later coined “Robocop” by the media, the use of data analytics represents advances in enforcement techniques made possible by the prior SEC compliance initiative on XBRL, which mandated a standardized format for public companies to report their results. This article attempts to bring together all of the concepts related to the AQM in an understandable way for directors and officers of public companies. In short, the AQM may mean that companies might receive more frequent inquiries from the SEC based upon the substantive quality of their financial statements alone. Though just one tool in the SEC’s enforcement tool box, the SEC’s AQM initiative certainly represents how 21st Century information gathering may give the SEC a leg up in detecting accounting fraud.

Importance of XBRL to SEC initiatives

XBRL is like a hyper-advance Twitter hastagXBRL makes the SEC’s AQM initiative possible. In mid-2009, the SEC mandated the use of XBRL (XBRL was voluntary, beginning in 2006) for most companies reporting financial information to the SEC. The SEC vision for the use of XBRL data, as explained on its website, seems to now be coming true:

“ Data becomes interactive when it is labeled using a computer markup language that can be processed by software for sophisticated viewing and analysis. These computer markup languages use standard sets of definitions, or taxonomies,
to enable the automatic extraction and exchange of data. Interactive data taxonomies can be applied – much like bar codes are applied to merchandise – to allow computers to recognize that data and feed it into analytical tools. XBRL (eXtensible Business Reporting Language) is one such language that has been developed specifically for business and financial reporting.”

This “coded” or “tagged” financial information using a standardized process allows the SEC to understand it more readily. For example, an accrual, like an executive compensation accrual, is identified and coded as an accrual, along with other types of accruals. In short, XBRL is like a hyper-advanced Twitter hashtag for the financially savvy that allows financial information reported to the SEC to be categorized and sorted quickly and effectively for further analysis.

XBRL key to AQM

So how does mandatory financial reporting using XBRL make the AQM possible? Through the standardization of reporting, tagging, and coding of terms through XBRL, the SEC is able to quantify or “score” the degree to which a company may be engaged in any number of problematic accounting practices. As the SEC’s Dr. Lewis summed up in December 2012: “[The AQM] is being designed to provide a set of quantitative analytics that could be used across the SEC to assess the degree to which registrants’ financial statements appear anomalous.” Here’s an example: The model analyzes SEC filings to estimate the number and size of discretionary accruals within a company’s financial statements. Discretionary accruals are accounting estimates that are inherently subjective and susceptible to abuse by companies attempting to manage earnings. Once anomalous accrual activity is detected, the model then considers other factors that are “warning signs” or “red flags” that a company may be managing its earnings. The SEC
has publicly provided limited examples of these factors, which include: the use of off-balance-sheet financing, changes in auditors, choices of accounting policies, and loss of market share to competitors. Ultimately the AQM quantifies how a company’s discretionary accruals and red flags compare to those of other companies within that company’s industry peer group. Outliers (those with financial statements that “stick out”) in the peer group possess qualities that indicate possible earnings management.

It is then up to the SEC to take the next step, which could vary from company to company. In some cases, a high score might warrant a letter from the SEC’s Division of Corporation Finance asking for explanations regarding potential problem. More dramatically, a high score, alone or in conjunction with other information, including information provided by a whistleblower, may result in an informal inquiry by the staff of the Enforcement Division, with attendant requests for documents and interviews, or, worse, a formal investigation. Thus, problems for a company could escalate dramatically with cascading effects, including difficult discussions with the incumbent auditor, and, worst case scenario, a full-blown audit committee investigation.

A few years ago, the AQM may have been viewed no differently than any of the laundry list of items that public company officers and directors need to worry about. But arguably in the last 12 months, the world has changed: The SEC Division of Enforcement has announced a renewed focus on rooting out accounting fraud; the Task Force that the SEC has formed is deploying new strategies to detect and investigate accounting irregularities; and whistleblowers are incentivized to bring allegations of accounting improprieties to the attention of regulators.

What the AQM could mean for public company directors and officers

Problems for a company could escalate dramaticallySo is there a silver bullet to the AQM? How should companies respond to the renewed focus of the SEC on accounting fraud and earnings management issues? There are no right answers to these questions, only perhaps some prudent advice:

  • Get your XBRL reporting right the first time. There are many reports that public companies are continuing to make numerous XBRL coding mistakes. It is likely the AQM will not be able to identify an innocent coding mistake. Such mistakes, however, may land a company on the top of SEC’s “Needs Further Review” list. Though the audit firms have apparently steered away from giving advice on XBRL, there are numerous experts and boutique firms that can help provide guidance to registrants. Making errors in this area, even if innocent, is simply not an option in this new era. At a minimum, companies need to study the SEC’s observations on common XBRL errors to avoid these recurring mistakes that bother the SEC. Make sure your internal financial reporting staff that prepares SEC filings is familiar with this SEC guidance, the SEC Staff Interpretations and FAQs on Interactive Data Disclosure, and the most current XBRL taxonomy. High-quality XBRL filingshave become more important and not a secondary consideration in preparing SEC disclosures.
  • Consider all of your financial disclosures. The AQM focuses on identifying outliers. One easy way to become an outlier is to be opaque with disclosures where other companies are transparent. Take a fresh look at your financial disclosures for transparency and comparability across your industry.
  • Listen to the SEC’s guidance. As we have noted above, there are a number of new SEC programs and initiatives focused on detecting financial reporting irregularities. Stay current on SEC activity to avoid surprises.
  • It is not just the SEC. XBRL is available to the public. As a greater library of XBRL financial statement data is created, analysts, investors, other government agencies, media outlets, and others will build their own versions of the AQM. Be prepared for greater scrutiny and inquiries from these groups.
  • Be conscious of red flags. For example, a change in auditor is thought to be a significant red flag that might warrant further attention from the SEC.

Be prepared for new types of interactions with the SEC
Times have changed and the SEC, upon implementation of the AQM that uses XBRL data in your financial statements, is ever more likely to knock on your door. Be prepared for interactions with the SEC, in particular the Enforcement Division, that are
not in keeping with historical experience.

As we advise with the new whistleblower program, be prepared to respond quickly and substantively to any potential SEC inquiry that might have been generated solely by the AQM or one of the many other new tools being employed by the staff. Elevate those Times have changedinquiries, as appropriate, to the Audit Committee and handle them with the requisite diligence. Further, have your crisis management plan ready, just in case there is a genuine and serious accounting issue that needs attention. Given the potential damage an accounting problem can have on a company’s reputation, its investors, and its stock price, have internal and external crisis advisors ready to act, if necessary, to investigate quickly any potential impropriety. Also have your disclosure lawyers and crisis management advisor ready to communicate with the marketplace in whatever ways are appropriate and at the appropriate time. Indeed, in light of the SEC’s renewed focus on accounting improprieties, today, more than ever, a crisis management plan to deal with a potential accounting failures is absolutely essential.

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The Importance of XBRL Quality: Insights From Experts

The age of XBRL has reached a turning point. Now that all publicly traded companies in the United States are tagging their SEC filings in XBRL, the focus has shifted from implementation to quality. Most filers now bear full liability for mistakes in their XBRL disclosures, so public companies can no longer risk allowing their XBRL files to contain errors that would skew their financial reporting.

Merrill Disclosure Solutions-The Importance of XBRL QualityOther factors make XBRL quality more critical than ever. For example, the SEC has developed an analytical model that uses XBRL data to examine corporate SEC filings and flag anomalies for further review. At the same time, Congress is pressuring the SEC to get tough on the pervasive errors that have marred corporate XBRL filings up to now. Financial data from XBRL filings is being gathered and made available to investors, analysts, and others in the market; in other words, people right now are using XBRL data to do research on corporate performance.

Importanct of XBRL Quality 1Clearly, companies must make XBRL excellence a top priority. To help filers, Merrill Corporation assembled three XBRL experts – Mike Schlanger, Vice President of XBRL Business Development & Strategy at Merrill; Lou Rohman, Merrill’s VP of XBRL Services; and Campbell Pryde, President and CEO of XBRL US – for an instructive webinar, XBRL Insights: Critical Issues Facing Filers. As the moderator stated in his introduction: “With [XBRL] usage on the rise, every filer’s XBRL data will be more closely scrutinized than in the past.”

 The SEC’s new command of quantitative analytics

The SEC’s command of XBRL analytics is becoming more sophisticated. Filings that are inaccurate because of careless XBRL tagging will be detected, a point emphasized during the webinar. In particular, Mr. Rohman noted, one of the SEC’s most important new
projects in the XBRL area is the Accounting Quality Model (AQM), ominously nicknamed “RoboCop” by the business media. Created by the SEC’s Division of Economic and Risk Analysis (DERA), the AQM is a quantitative analysis tool that the SEC will use to detect apparent anomalies for further consideration by a human examiner. “It’s not an insignificant thing,” Mr. Rohman stressed. “It’s something that we’ll be hearing about, and it’s something that the SEC is taking very seriously.”

Importance of XBRL Quality 2What exactly does the AQM do? “The Accounting Quality Model takes in 10-Q and 10-K information, and it uses XBRL as the source,” explained Mr. Rohman. “One area of focus is that it looks at the difference between net income versus cash flow, which is really the accrual-basis accounting effect,  and it breaks down those accruals by discretionary accruals and nondiscretionary accruals.” The focus is, naturally, on the discretionary accruals. “It’s primarily looking at to what extent is a company stretching these accruals to manage earnings.” The result of this and other assessments is a risk score, Mr. Rohman explained. “The higher the risk score, the more likely it’s going to be forwarded to the enforcement resources.”

Feeding the AQM

Because the source of the AQM’s analysis is XBRL data, the quality of XBRL tagging is now more important than ever for filers – a point that Mr. Rohman spelled out clearly. “I
know that, from looking at XBRL filings, there are going to be certain filings that won’t be consumed properly by the AQM – simply because they have poor structuring, poor
tagging, poor-quality XBRL. To me, it seems very highly likely and logical that the SEC is going to issue comment letters for those types of XBRL filings with errors that prevent
proper consumption by the AQM.”

There will be cases where certain common and persistent XBRL tagging and structuring mistakes will boost the risk score. Make no mistake: XBRL errors can hurt. A sloppy XBRL filing by a company whose financials are in good order may still be flagged for further review, said Mr. Rohman, “when in reality it shouldn’t be [flagged] – it’s just that the XBRL is bad.” “That’s very unfortunate for the filer,” he added. “Because of the XBRL, they’re getting reviewed when they otherwise wouldn’t have.”

When will the AQM start its patrols? Mr. Rohman reported that Craig Lewis, DERA’s director and chief economist, has said the model will be implemented in 2013, so the model is likely already on the prowl. (For more on the Accounting Quality Model, see the AQM article in the December 2013 issue of Dimensions and the interview of Craig Lewis in the April 2013 issue.)

Both Congress and the market demand XBRL excellence

For a look at the twin beams of scrutiny – governmental and commercial – being focused on XBRL data in SEC filings, Moderator Schlanger turned to Campbell Pryde, President and CEO of XBRL US. Mr. Pryde began by summarizing the pressure Congress is putting on the SEC to enforce a high standard of XBRL quality – a push that is ultimately part of a bigger government drive to lower regulatory costs.

Importance of XBRL Quality 3In particular, Rep. Darrell Issa (R – CA), chair of the House Committee on Oversight and Government Reform, expressed his views on XBRL use and quality in a strongly worded letter to the SEC in September 2013. “One of the things that [the House] Committee  wants to [do] is to make sure that this data is being used far more effectively than it currently is,” observed Mr. Pryde.

Enforcement is a key part of the Committee’s vision. “This is a big issue for the folks in Congress,” Mr. Pryde stressed. “They want to see more efficiency.” (For details on the importance of Rep. Issa’s letter and the related developments since its release, see the December 2013 issue of Dimensions.)

Situated uncomfortably under this Congressional microscope, the SEC seems poised to take meaningful action against corporate filers whose XBRL disclosures are not correctly tagged. As Mr. Pryde pointed out, SEC comment letters have started to include complaints about XBRL errors. (See, for example, item 15 in the SEC’s comment letter to Standard Drilling Inc.: “We note that you have checked the Smaller Reporting Company box on the cover of your Form 10-Q. The XBRL Document and Entity Identification Information rendered as part of your filing appears to contain a number of data element errors, including but not limited to, your classification as a non-accelerated filer. Please revise to comply with the requirements of Section 405 of Regulation S-T and the EDGAR Filer Manual.”)

The SEC is not the only one scrutinizing corporate XBRL filings. The market is amassing and using XBRL data from corporate SEC filings. Citing information gathered by XBRL US, Mr. Pryde listed the many types of commercial distributors – from data aggregators Importance of XBRL Quality 6to media companies – that are collecting and parsing the XBRL data in corporate financial disclosures. TheStreet.com, for example, has developed a tool for its website that lets users access XBRL-tagged data in companies’ SEC filings. The SEC is also working on making XBRL-tagged financial data available to the public in various ways, including CSV and Microsoft® Excel formats.

In fact, as Mr. Pryde outlined, the number of governmental and commercial entities distributing XBRL financial data during 2013 has more than doubled since 2012. Some are established data aggregators, such as Thomson Reuters, while others are new vendors.

Anticipation of growing market demand for XBRL-tagged financial data has led to the development of many innovative analytical XBRL tools. Additionally, Mr. Pryde reported, XBRL US is working on integrating XBRL data into Google search results to “get a much broader audience of people looking at financial-reporting information and being interested in what companies are doing and in how they are performing.”

Importance of XBRL Quality 4XBRL excellence requires more than software

Producing high-quality XBRL data is not just a compliance exercise. For all companies that make SEC filings, ensuring accurate financial disclosures in XBRL is a matter of
pragmatic, market-driven importance –as vital as the accuracy of traditional EDGAR filings. Software can help to reduce the number of mistakes in XBRL instance documents, Mr. Pryde explained. However, as Mr. Rohman emphasized near the close of the webinar, it takes more than software to craft the kind of XBRL excellence that Congress, the SEC, and the market are demanding.

“Errors that can’t be checked by software…really require the involvement of knowledgeable XBRL individuals,” Mr. Rohman asserted. “That’s a key point of getting the XBRL right. By knowledgeable, I mean individuals who understand the SEC rules, the accounting disclosures, the intricacies of the XBRL itself, and then are able to apply that experience to the XBRL document.”

Human involvement and expertise are vital

Since it is the filer that bears the eventual responsibility and culpability for accuracy, it is important that companies seek assurances about the quality of their tagging and verify its accuracy. XBRL submissions in which Merrill is involved are all prepared or reviewed by consultants who are experienced CPAs with in-depth XBRL knowledge. These consultants understand the intricacies of XBRL and the SEC rules, and can apply that expertise to XBRL documents. Merrill’s unique expertise allows corporate executives to move forward with confidence, knowing that their XBRL filings do not contain errors.

Importance of XBRL Quality 5Merrill experts work in teams, and every team has several seasoned members involved with the XBRL files. The team reviews each file to ensure that the tagging is consistent with the current XBRL taxonomy. The experts investigate essential items to ensure compliance with applicable rules, guidelines and best practices, resulting in high-quality XBRL. They also provide training and education for personnel at the filer/company. This equips corporate staff with insight into the crafting of high-quality XBRL documents.

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SEC Pursuing Fraud in Financial Reports With New Aggressive Tactics

AbstractAbstracted from: Public Companies: Back In The SEC Hot Seat?
By: Marc Fagel and Leslie Wulff, 
        Gibson Dunn & Crutcher, San Fran, CA
Wall Street Lawyer Vol. 17, No. 9, Pgs. 1, 4-8

Financial fraud in the crosshairs again. Reversing a trend, the SEC has recently publicized new programs for identifying fraud in public companies’ financial reports. Enforcement cases alleging financial fraud had historically comprised 25% or more of the SEC’s cases annually, peaking at 33% in 2007. Yet for several reasons, explain attorneys Marc Fagel and Leslie Wulff, the figure has steadily dropped since then, reaching less than 11% in 2012. The Sarbanes-Oxley Act of 2002 – passed in response to accounting scandals at Enron, WorldCom, and other companies – enhanced corporate governance and curtailed dishonest accounting, while scrutiny of those scandals by the public, the SEC, and the Justice Department encouraged auditors and directors to monitor financial reporting more strictly. The financial crisis removed much of the inducement to falsify revenue-growth reports and discouraged IPOs (which report financial results before developing proper internal controls). Lastly, the SEC redirected its investigatory resources away from fraudsters and toward financial institutions,
investment advisors, and investment companies.

Despite taking aim, it might find few targets. Change is afoot, the authors indicate. The SEC’s new leadership is using more aggressive enforcement tactics. In a breach of tradition, those named in enforcement actions might not be allowed to settle without confessing to misconduct. The SEC’s recently established Financial Reporting and Audit Task Force will detect – and boost prosecutions for – deceitful or misleading financials and disclosures. The new Center for Risk and Quantitative Analytics and the already operating Division of Economic and Risk Analysis will help by providing software to examine suspect wording in annual reports’ MD&A sections and an analytical tool, the Accounting Quality Model, to scour financial statements for statistical abnormalities. These efforts might fail, however. Very few important cases have ever sprung from industry-wide searches that relied on quantitative analyses. Furthermore, no evidence exists of vast, undetected financial fraud. In fact, the steady drop in financial-fraud cases strongly suggests great improvements in internal controls and reporting. Still, the SEC staff increasingly makes companies perform onerous self-examinations and pass on the results.

Stay out of its sights. Given the SEC’s aggressive stance, the authors advise executives, directors, and lawyers for public companies to take steps now to head off investigations. First, and most obviously, avoid accounting irregularities. Make your internal controls efficient, and enforce corporate-governance policies. Scrutinize off-shore operations and the integration of recently purchased businesses, both of which can present accounting difficulties. Look for anomalies in your corporate disclosures by comparing them to that of peer companies. In conjunction with those efforts, both senior and middle managers, who oversee sales and accounting on a daily basis, should create a culture that makes company-wide ethical behavior mandatory.

Rifle through, but preserve, your documents. Next, if the SEC begins an investigation, conduct a thorough search of electronic records right away – regardless of the cost – to find and save potentially relevant documents. Stop any customary deletion of centrally stored electronic data, counsel the authors. A company could receive a harsher punishment for destroying emails or other documents after hearing about an investigation than for doing whatever triggered the investigation in the first place. Encourage employees to report possible securities-law violations internally, assess their reports transparently and fully, and resolve their concerns. Doing so will minimize the danger of their becoming external whistleblowers and will count in the company’s favor, should the SEC file an enforcement action. Lastly, remember not only the SEC’s frequent assertions that cooperation with inquiries will strongly influence its decisions on sanctions, but also its frequent impositions of harsh sanctions for serious allegations against even cooperative targets.

__________________________________________________________

Abstracted from Wall Street Lawyer, published by West Group, 610 Opperman Drive, Eagan MN 55123. To subscribe, call (800) 344-5008 or (800) 328-9352; or visit http://west.thomson.com/productdetail/127289/37005153/productdetail.aspx.

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Inside The AQM, The SEC’s Analytical Tool For XBRL Data

Dimensions_Dec2013-XBRL ErrorsNow that all publicly held companies in the United States must file their SEC financial disclosures in XBRL, the regulatory focus is shifting to the quality of XBRL-tagged data in corporate filings. Moving toward this goal, the SEC is expanding its internal use of XBRL and the quantitative analysis needed to parse XBRL instance documents for review. This push comes at a time when many voices in Washington are urging the SEC to adopt a more forward-thinking approach to the data it collects. The most notable voice so far has been that of Rep. Darrell Issa (R–CA), chair of the House Committee on Oversight and Government Reform, who expressed his views through a letter to the SEC in September 2013. (See Game Changer: Congress Challenges The SEC Over
XBRL Quality on page 2 in this issue of Dimensions.)

Perhaps unbeknownst to some observers, the SEC’s command of XBRL analytics is already becoming increasingly sophisticated – a fact that filers should remember when considering the quality of their XBRL in disclosures. Given the growing possibility that the SEC will start to issue comment letters and impose liability for filings that are inaccurate because of poor XBRL quality, companies should be familiar with the SEC’s analytical methods for reviewing disclosures.

The SEC’s New Structured Analytic Tool
One of the SEC’s most important new initiatives in the XBRL arena is the Accounting Quality Model (AQM), created while Craig Lewis has been Director and Chief Economist Dimensions_Dec2013-XBRL Errors-SEC Issues Comment Lettersat the SEC’s Division of Economic and Risk Analysis (DERA). The AQM is a quantitative analysis tool the SEC will use to review filers’ financial disclosure with XBRL tags, flagging apparent anomalies for further consideration by a human examiner. Dr. Lewis discussed the details of the AQM, then under DERA development, in an April 2013 Dimensions interview and again during his keynote address to the 2013 XBRL US National Conference, held September 23–25, 2013, in Las Vegas.

A Tool To Assist The Review Process, Not Replace It
Craig M. LewisDr. Lewis began his address by characterizing his DERA division as “the group that houses the economists.” About half of its 110 staffers have advanced degrees in economics, statistics, mathematics, or computer science. He told the conference that development of the new Accounting Quality Model began with the desire not just to build a risk-assessment tool but also to put “a platform in place that could deliver the results from a risk-assessment program broadly throughout the agency to the various individuals [who] would…be responsible for performing the actual risk assessment.” The platform as created will allow examiners throughout the SEC to perform queries and generate reports. Built to feed this infrastructure, the Accounting Quality Model is “a structured analytic model that takes filer information and identifies outliers,” as Dr. Lewis summarized it. He initially saw the AQM as a tool primarily to assist the Division of Corporation Finance in its  review process, but he thinks the tool also has applications for enforcement. “You can see that the Division of Enforcement has actually ramped up its investigations into accounting fraud, and this is one of the tools that is being used by the Division as they try to identify accounting fraud cases.”

However, he indicated, “the real intent of [DERA creating the AQM] was to assist the review process – in trying to improve the actual quality of the financial disclosures that are being made in firms’ 10-Ks and 10-Qs.” The AQM was conceived as a way to help the SEC’s review teams “score firms on a aggregate level on the basis of risk, but then actually have an ability to point to areas in a firm’s financial statement, before [they] actually open the 10-K, that might [free up] a little more time and energy than taking it and starting from scratch.”

Numerical Factors That Feed The AQM
When analyzing XBRL-tagged financial statements, Dr. Lewis told the conference, the AQM attempts to model a company’s “discretionary choices” in its total accruals. Two types of factors feed the model: risk-inducers, reflecting circumstances that might “motivate a firm to manage its income in a particular way”; and risk-indicators, which are elements that suggest a company “may have been actively engaged in some type of earnings management.” If risk-inducers appear in a filer’s score, it does not necessarily suggest untoward accounting practices, he explained, but it may indicate to an SEC review team that the company’s financials are worth examining in greater detail. The risk-indicators are partly informed by any past SEC accounting or enforcement actions against the company, but they may also stem from the company’s recent behavior – for example, a sudden change of auditor. Again, the presence of risk-indicators in a filer’s score does not mean the SEC thinks the company has erred or transgressed in its current financial statements. “It’s part of a broader profile,” he clarified.

Scores derived from quantitative data in the AQM can be used to rank companies according to the degree of their potential accounting risk. “You could think about using that to actually schedule the review process in CorpFin,” Dr. Lewis observed. “The factors that light up, or are important, also point [you] in the direction you might want to take your review.”

Beyond The Numbers: The AQM’s Textual Analysis 
The AQM will eventually reach beyond just numerical data in financial statements. DERA is developing a way for the system to examine the textual information that companies include in their 10-K and 10-Q filings. “The next step in our risk-assessment model,” Dr. Lewis said, “has been to try and use textual analysis – find out what firms are actually saying in their 10-Ks – and try to understand that as well.”

As used for textual analysis, the AQM tries to detect distinctive vocabulary choices in Dimensions_Dec2013-XBRL Errors-AQM Detects Vocabulary Choicesfinancial statements that are known, from past SEC enforcement actions, to be associated with accounting fraud. Research by DERA has shown that companies engaged in accounting fraud “tend to speak to benign elements in their financial statements much more than non-fraud firms [do], and they tend to under-discuss risks – key risks that are facing the industry.” The AQM converts these textual findings into scores like those generated from numerical data.

“The reason why I am particularly excited about the textual-analysis piece,” added Dr. Lewis, “is that as the factors in the quantitative model point to specific elements that are numeric in a firm’s financial statement, the text analysis allows us to point to particular topics…that are either being overreported or underreported.” He cautioned that the textual analysis, like the numerical analysis, is not primarily a fraud-detection device. “It’s not necessarily about finding fraudsters. It’s about identifying areas where firms can improve the quality of their textual disclosure to investors.”

Just The Beginning For XBRL: “The Utility Will Only Go Up”
He closed by explaining that the AQM may eventually be used for more than helping SEC review teams. It may also be deployed to make XBRL-tagged corporate financials conveniently available to the public. To that end, DERA is considering ways to aggregate corporate XBRL data for use by the market. “One of the things that we’re looking at and exploring is the idea of actually putting the base financial statement data out in an aggregated way in a standard data format.” In DERA’s vision, analysts and investors would be able to download this data directly from the SEC’s website. The first stage of this endeavor would focus on base financials (e.g., income statement, balance sheet, statement of cash flows), and the second would make data from detailed footnotes available.

Dr. Lewis is optimistic about the future not only of the SEC’s use of interactive data but of XBRL itself. “I think that there are huge opportunities to do additional academic-style research around footnote disclosures, around MD&A sections, and it will only become more valuable, the utility will only go up, as time goes by and the [XBRL-tagged] database itself grows as more years are added to the database.”

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Game Changer: Congress Challenges The SEC Over XBRL Quality

Dimensions_Dec2013-CongressThe XBRL stakes have been raised for the SEC and corporate filers. In the House of Representatives, the Committee on Oversight and Government Reform is reviewing the SEC’s implementation and enforcement of the Interactive Data Rule, which requires companies to file their financial statements in XBRL. In a game-changing letter sent by Committee Chair Darrell Issa (R–CA) to SEC Chair Mary Jo White in September 2013, Congressman Issa asserts that the SEC should more vigorously enforce high-quality XBRL in corporate disclosures and embrace the use of XBRL data throughout its internal operations. According to Committee staff and XBRL experts alike, this communication (the “Issa letter”) marks a turning point in the establishment of XBRL as a standard language for Dimensions2013-The Time Is RightSEC filings, while it raises new risks for companies whose financial disclosures have errors because of sloppy XBRL tagging.

Issa Letter: Progress Is Stagnating
In his letter, Rep. Issa complains that the SEC’s progress with XBRL is “stagnant.” Citing academic reports, including a white paper from Columbia Business School’s Center for Excellence in Accounting and Security Analysis, along with information from unidentified former SEC staffers, Rep. Issa makes three claims:

  • The SEC does not internally use the XBRL data (or “structured data”) that issuers file.
  • The agency is buying expensive data from commercial providers when it could instead be using the XBRL data it already collects.
  • The SEC has “failed to address” quality control over XBRL filings.

On the topic of XBRL quality, Rep. Issa notes that the SEC has not issued “even one comment letter” on what his letter describes as “1.4 million errors” identified (as of September 6, 2013) in SEC filings by XBRL US. He points out that these “significant errors” threaten to make the data unreliable and therefore unusable. Asserting that XBRL filings should be “as accurate and credible” as EDGAR filings, he criticizes the SEC for not providing adequate guidance or imposing “proper enforcement.” The letter asks the SEC to brief the Committee staff and provide designated documents to help the staff in its review.

Dimensions2013-Issa ResponseThe SEC’s Response
In compliance with Rep. Issa’s demands, a few SEC staff members met with Committee staff in late September, and the SEC sent an initial written response. While the SEC has not yet satisfied the document request, the Committee is working with the SEC on a schedule of production. Hudson Hollister, an attorney who is now Executive Director of the Data Transparency Coalition and formerly was with the SEC and Issa’s oversight committee, believes the SEC is still “evaluating the substance” of its response.

The SEC does not comment publicly on its dealings with Congressional committees. However, Dimensions was able to speak with an unnamed senior Committee staff member who worked on the letter to the SEC and attended the September briefing. In the view of this staff member, “the SEC has indicated it
takes the concerns expressed in the letter seriously.” The Committee sees the SEC’s initial response as part of an ongoing dialogue. It accepts that the SEC is handling many requests from Congress and that the process will unfold over a lengthy period, with more SEC briefings to come.

Nevertheless, in the opinion of the Committee staff member (and Rep. Issa; see sidebar), the SEC is not doing anything to enforce an improvement in the quality of corporate XBRL filings. The Committee wants the SEC to take a “leadership role” by demonstrating that quality matters and to take a more serious view of its responsibilities under the Interactive Data Rule. Despite these concerns, the Committee is “cautiously optimistic” that the SEC will become more assertive about XBRL quality, according to the staff member.

The Bigger Picture
As indicated by the Issa letter and our discussions with Committee staff and other sources, the XBRL requirements for SEC filings are part of a much broader effort to establish the use of structured data throughout the US government. This modernizing vision is a “passion” for Rep. Issa, according to our source on the Committee staff, and has also been expressed in his rebooted push to pass the DATA (Digital Accountability and Transparency) Act. Improving the quality of XBRL filings will help demonstrate the benefits of structured data use in creating a more open, interactive, and automated government – giving credibility to the DATA Act (which passed the House in 2012 and again in November 2013, and as of December 1, 2013, is under consideration in the Senate).

With federal budgets constrained indefinitely, one purpose of the DATA Act is to cut costs by using structured data (such as XBRL) to automate the processing and review of information and increase its transparency. Although structured data automation cannot handle all aspects of the preparation and review of SEC filings, the long-term vision sees this technology as a low-cost way to perform much of the labor-intensive efforts currently done by hand – thereby lowering government expenditures and improving government efficiency.

This vision extends far beyond SEC filings. For example, President Obama, signing an executive order in May 2013 requiring an open-data policy, indicated that structured data formats (which presumably would include XBRL) must become mandatory for executive departments. Clearly, the XBRL requirement for SEC filers is here to stay. Furthermore, it is likely to be expanded to other securities-related disclosure documents, such as proxy statements, as suggested in the recommendations of the SEC’s Investor Advisory Committee.

Dimensions2013-The Time Is RightBecause of this overarching progress toward structured data through the US government, the current and former Committee staff members who spoke with Dimensions emphasized that companies must accept XBRL as the future for corporate disclosure. While change can be difficult, companies (not just the SEC) bear responsibility for the quality of XBRL filings.

“Many companies are taking this step toward digital financial reporting very seriously,” Charles Hoffman, often called the “father of XBRL” and the author of XBRL for Dummies, XBRL Essentials, and the blog Digital Financial Reporting, explains to Dimensions. “Others are not and don’t really get the bigger picture.” Mr. Hoffman finds that apathy and resistance are common when new technologies are introduced. However, he believes that in this case the consequences of foot-dragging are particularly high. “The big loser here if this does not work will be investors and the capital markets,” he warns. “With the amount of information which is bombarding people these days, something like XBRL is absolutely essential.”

FASB Response
The Financial Accounting Standards Board, whose US GAAP Taxonomy is the lexicon for XBRL filings, declined to comment on the Issa letter. A statement to Dimensions from an FASB spokesperson affirmed that the FASB is “continually improving the taxonomy and making it easier to use.” The spokesperson pointed out the series of user implementation guides that the FASB launched this year and the proposed improvement to the calculation hierarchy that is expected to be finalized for the release of the 2014 Taxonomy. The FASB is committed to “helping companies and investors fully utilize the power of the taxonomy so that the capital markets can fully realize its benefits,” the
spokesperson explained.

SEC Enforcement Actions Are Possible
Nobody knows what the SEC, operating with limited resources, will do next to bolster its enforcement of XBRL quality in corporate filings. Some experts believe the time is right for the SEC to strike with a strategic enforcement action – perhaps a case against a chronic XBRL slacker, a company that continually violates the basic XBRL tagging rules and the guidance and observations the SEC has provided. Alternatively, the SEC could target a small number of filers with publicly available comment letters. If other filers, by observing such examples, believe that they too are under the SEC’s microscope, they may bring to XBRL filings the same meticulous approach they use to prepare EDGAR filings.

“A bit of enforcement, even as a symbolic signal, would give investors more confidence that the SEC is serious about the quality of structured data submitted to it,” says the Data Transparency Coalition’s executive director, Hudson Hollister. “It would encourage [investors] to start using the data to make better, faster investment decisions.” According to Mr. Hollister, the Data Transparency Coalition is trying to promote a compromise between the views of Rep. Issa and the differing perspectives of Rep. Robert Hurt (R–VA), vice chair of the Capital Markets subcommittee in the House Committee on Financial Services. Rep. Hurt has considered a proposal to exempt some small companies from the XBRL filing requirement. Mr. Hollister said that the Coalition wants the legislators to achieve a consensus and then pressure the SEC to expand its XBRL requirements and improve the quality of XBRL filings. (For more on that effort, see Mr. Hollister’s blog commentary on the topic.)

Message For Companies: XBRL Quality Matters
The big takeaway for all companies? XBRL is here to stay; the quality of XBRL
filings is of crucial importance; and filers whose financial disclosures continue to
have XBRL-related mistakes risk provoking SEC actions.

“Be prepared to get serious about XBRL,” advises Professor Dan Gode, Clinical Associate Professor of Accounting at New York University’s Stern School of Business. (See his interview in the October 2013 issue of Dimensions.) David Lynn, an attorney in the Washington DC office of Morrison & Foerster, would not be surprised if the SEC’s Division of Corporation Finance began issuing comments on XBRL tagging as part of its regular review of SEC filers. “At this point,” Mr. Lynn tells Dimensions, “I think companies should continue to do what is required and strive to improve the quality of the XBRL data as much as possible. They won’t be questioned on it if the SEC decides to step up its review efforts because of the Congressional prompting.”

“The [Issa] letter doesn’t change the auditor’s roles or functions,” maintains Kristine Brand, a professor at Regis University School of Business and the author of a monthly column on XBRL in Strategic Finance. “But smart filers will take a look at how their auditors, or CPAs working for their XBRL vendor, can contribute to filing quality.” Prof. Brand further explains to Dimensions that all companies now need to evaluate their XBRL filing policies, procedures, and internal controls to “ensure that they are filing accurate and high-quality XBRL filings.” She warns that it is “no longer a question of if, but when, the SEC will enforce filing accuracy.”

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Take Shelter: The Perfect Storm is Rising Over XBRL Quality and Corporate Liability

XBRL Quality Series - The Perfect Storm Heading

The need to verify the quality of your XBRL submissions has ballooned substantially. Now that the training wheels are off for filers and full liability for XBRL-tagging errors is a Take Shelter - The Perfect Storm Is Rising Over XBRL Quality And Corporate Liabilityreality, a crackdown on inadequate XBRL may be imminent. The age of full liability for errors in XBRL financial disclosures is no longer a future possibility: it has arrived. As of September 30, 2013, more than 7,300 public companies in the United States are facing the likelihood of SEC action if their filings are inaccurate because of poor quality in their XBRL tagging.

Three factors leading toward a perfect storm.
Three circumstances are converging, making it imperative for companies to ensure that their preparation of XBRL files immediately complies with SEC rules:

Issue OneThe liability safe harbor that existed during the first two years has expired for most filers, who are now exposed to SEC or other legal action for disclosures inaccurately made in XBRL.
Critical Issue TwoThe US House Committee on Oversight and Government Reform is pressuring the SEC to crack down on the types of XBRL errors that have pervaded many
corporate filings to date.
Critical Issue ThreeThe SEC has developed an analytical tool, the Accounting Quality Model (“AQM”), that searches XBRL-tagged financial statements and automatically flags anomalies for further investigation.

Filers now carry full liability for the quality of their XBRL filings
What does full liability mean for filers? For a start, companies must comply with the SEC’s XBRL requirements to be eligible for using short-form registration statements, such as Forms S-3 and S-8. However, the loss of eligibility to use these forms is perhaps the least of the worries faced by filers that fail to comply with the XBRL rules. Companies risk the spectre of lawsuits or SEC comment letters if their XBRL tagging and instance documents
XBRL Quality Series - The Perfect Storm - Callout 1are inaccurate. Even for filers still in the limited liability phase (such as IPO companies, for which limited liability ends on October 31, 2014), the SEC could still take action, depending on the circumstances. Limited liability applies only to filers that make a good-faith effort to comply with SEC rules and that promptly correct any failures when they become aware of an error.

For a long time now, the SEC has been calling out common mistakes in XBRL tagging – and urging filers to be certain they are not continuing to make errors. The SEC staff periodically publishes its observations on common XBRL mistakes. (See the May and June 2012 issues of Dimensions.) In the view of Commission staff, companies should now have both the tools and the awareness to make compliant filings.

“For those who have not taken ownership of their XBRL, the limited liability provisions expire and the XBRL has the same liability as the financial statements,” cautions Matthew Slavin from the SEC’s Division of Economic and Risk Analysis, speaking at a Dr. Suzanne MorsfieldMarch 2013 XBRL And Financial Analysis Conference. Independent experts outside the SEC agree. “If you don’t take your XBRL filing as serious as your HTML filing, you are asking for a lawsuit,” warns Suzanne Morsfield, Director of Research at Columbia Business School’s Center for Excellence in Accounting and Security Analysis, at the same conference.

Congressional concern over XBRL mistakes puts pressure on the SEC
Some members of Congress are pressuring the SEC to get tough on XBRL mistakes in corporate filings. The loudest and loftiest voice so far has been that of Rep. Darrell Issa
(R–CA), chair of the House Committee on Oversight and Government Reform, who expressed his views in a thunderous letter to the SEC in September 2013. Asserting
that “the SEC’s interactive data filings still contain significant errors, which lead to skepticism about usability of the data,” the letter continues:

Errors in the data and deviations from the designated taxonomy reduce the value of the data, necessitating additional effort to utilize the data for automation…Utilization of the data is limited by concerns of reliability, but the SEC has not issued even one comment letter on any of the more than 1.4 million errors identified.

In conclusion, Rep. Issa insists that the “revolutionary improvements” in financial reporting presented by the use of XBRL “will only occur as the SEC integrates structured data into its existing review processes, enforces the quality of data submitted
under the Interactive Data Rule, and articulates a vision for the transformation of its whole disclosure system from inaccessible documents into structured data.”

The SEC is being strongly encouraged to enforce a high standard of XBRL quality and it is in a better position to do so than some observers may realize. The SEC’s command of XBRL analytics is becoming increasingly sophisticated, making it more likely that corporate filings with XBRL mistakes will be flagged and reviewed.

XBRL Quality Series - The Perfect Storm - Callout 2

Got XBRL errors? Meet the SEC’s Accounting Quality Model
One of the SEC’s most important projects in the XBRL area is the Accounting Quality Model (“AQM”), a quantitative analytics tool for reviewing financial statements, using XBRL tagged data as the source. This is the first significant, largescale, live use of XBRL data by the SEC. The AQM–which the business press has ominously nicknamed “RoboCop”– will search for financial statements that seem to contain anomalies and will automatically flag them for review by an examiner.

The AQM has been developed under the aegis of Craig Lewis, Director and Chief Economist Craig M. Lewisat the SEC’s Division of Economic and Risk Analysis. During an interview in the April 2013 issue of Merrill’s publication Dimensions, Dr. Lewis, also a professor at Vanderbilt University, discussed details of the AQM and about the role of XBRL in this application. In a keynote address to the 2013 XBRL US National Conference in September 2013, Dr. Lewis explained that the AQM is a structured analytic model that “takes filer information and identifies outliers…In my initial vision for how this tool would be used, I saw it as a tool that could be primarily used by the Division of Corporation Finance to assist in their review process. I also think that it has applications for enforcement.”

XBRL Quality Series - The Perfect Storm - Callout 3How can public companies avoid the AQM’s eagle eye? “I would say, check your work,” Dr. Lewis told Dimensions in the April 2013 interview, and continued:

If you make a mistake in how you record an element, that would affect the score you get from the model and might make you more likely to be pulled up for a review – I would argue, correctly so. The model will tell the reviewer which factor was contributing to the score, and if one factor comes out and has a large impact on the score and can be traced back to a recording error in the XBRL data, you will be flagged because you made a mistake in providing us your XBRL data.

Shelter from the storm: careful preparation is key for liability prevention
The first line of defense for liability prevention is, obviously, to get the XBRL tagging right during the initial preparation of the filing. “Many steps are involved to make sure Lou Rohmanthat the XBRL files are conveying the same message as the traditional financial statements, including proper tag selection, accurate structuring of those tags, and appropriate entry of amounts in the XBRL instance document,” observes Lou Rohman, Vice President of XBRL Services at Merrill Corporation. (See Liability For XBRL Filings in the August 2012 issue of Dimensions.)

Even more critical in preventing errors is realizing that there are many types of serious mistakes which cannot be detected by software. To find those problems, it is critical to have experts check over XBRL instance documents. It bears repeating: Many serious mistakes in XBRL cannot be detected by software alone. Since it is the filer that bears the eventual responsibility and culpability for accuracy, it is important that companies seek assurances about the quality of their tagging and verification of its accuracy. XBRL submissions in which Merrill is involved are all prepared or reviewed by consultants
who are experienced CPAs with in-depth XBRL knowledge. These consultants understand the intricacies of XBRL and the SEC rules, and are able to apply that expertise to XBRL documents. Merrill’s unique expertise allows filers to move forward with confidence, knowing that their XBRL filings do not contain the errors that are being received by the SEC.

Merrill experts work in teams, and each team has several seasoned members available to help. The team reviews each file to ensure that the tagging is consistent with the current XBRL taxonomy. The experts also investigate essential items, such as every calculation inconsistency to ascertain its validity; document their review at each stage, to ensure that common errors are detected; and provide training and education for personnel at the filer/company, equipping corporate staff with insight on how to accomplish quality XBRL documents.

Expect SEC action
It is of course impossible to say when the SEC will start singling out sloppy XBRL filers and issuing comment letters or taking other actions over poor XBRL quality. Nobody can predict the regulatory weather at the SEC. However, the clouds of a perfect storm over XBRL quality and corporate liability seem to be gathering. Now is the time for managers to seek shelter. No one wants to be the first executive whose name appears in headlines, called out by the SEC.

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Corporate Filers Beware: New “Robocop” Is On Patrol

By John Carney and Francesca Harker, BakerHostetler

Carney-Harker BakerHostetelrJohn Carney is a partner with BakerHostetler in the New York office and serves as co-leader of its national White Collar Defense and Corporate Investigations Group. He previously served with the SEC on the Mid-Atlantic Enforcement Group and as a member of the Justice Department’s National Securities and Commodities fraud Working Group. Francesca Harker, a litigation associate at the New York BakerHostetler office, focuses on white collar and corporate criminal matters. Shorter versions or excerpts of this article have appeared elsewhere.

It may not be the superhuman robotic police officer who patrolled the lawless streets of Detroit in the 1987 sci-fi thriller, but corporate filers should be every bit as concerned about the SEC’s new Accounting quality Model (“AQM”), labeled not-so-affectionately by some in the financial industry as “RoboCop.” Broadly speaking, the AQM is an analytical tool that trawls corporate filings, particularly the XBRL-tagged financial data, to flag high-risk activity for closer inspection by SEC enforcement teams. Use of the AQM—in conjunction with statements by recently confirmed SEC Chairman Mary Jo White
and the introduction of new initiatives announced July 2, 2013—indicates a renewed commitment by the SEC to seek out violations of financial reporting regulations. This pledge of substantial resources means it is more important than ever for corporate filers to understand SEC enforcement strategies, especially the AQM and XBRL filing rules, in order to decrease the likelihood that their firm will be the subject of an expensive SEC audit.

SEC EnforcementThe Crackdown on Fraud in Accounting and Financial Reporting
In his speech nominating Mary Jo White to take over as chairman of the SEC,
President Obama issued a warning: “You don’t want to mess with Mary Jo.” That
statement now seems particularly true for corporate filers, given the direction of the
SEC under her command. Previously a hallmark of the SEC, cases of accounting and
financial-disclosure fraud made up only 11% of the enforcement actions brought by
the Commission in 2012. Since taking over as chairman, Ms. White has renewed the
SEC’s commitment to the detection of fraud in accounting and financial disclosures.

“I think financial-statement fraud, accounting fraud has always been important to the SEC,” Ms. White said during a June 2013 interview [with The Wall Street Journal]. “It’s certainly an area that I’m interested in and you’re going to see more targeted
resources in that area going forward.”

She has backed that statement up with a substantial commitment of resources. In July, the Commission announced new initiatives, which aim to crack down on financial reporting fraud through the use of technology and analytical capacity, including the Financial Reporting and Audit Task Force and the Center for Risk and Quantitative Analytics (“CRQA”). These initiatives will put financial reports under the microscope through the use of technology-based tools, the most important of which is RoboCop.

Robocop ObjectiveRoboCop: Corporate Profiler
RoboCop’s objective—to identify earnings management—is not a novel one; rather, it is the model’s proficiency that should worry filers. Existing models on earnings management detection generally attempt to estimate discretionary accrual amounts by regressing total accruals on factors that proxy for nondiscretionary accruals. The remaining undefined amount then serves as an estimate of discretionary accruals. The fatal flaw in this approach is the inevitable high amount of “false-positives,” rendering it useless to SEC examiners.

The AQM extends this traditional approach by including discretionary accrual factors in its regression. This additional level of analysis further classifies the discretionary accruals as either risk indicators or risk inducers. Risk indicators are factors that are directly associated with earnings management, while risk inducers indicate situations where strong incentives for earnings management exist. Based on a comparison with the filings of companies in the filer’s industry peer group, the AQM produces a score for each filing, assessing the likelihood that fraudulent activities are occurring. While the SEC will be keeping their factor-composition cards close to the chest, the “builder of RoboCop,” Craig Lewis, Chief Economist and Director of the Division of Risk, Strategy, and Financial Innovation [now known as the Division of Economic and Risk Analysis, or DERA] at the SEC, has offered several clues about the types of information most likely to catch RoboCop’s attention:

“An accounting policy that could be considered a risk indicator (and consistently measured) would be an accounting policy that results in relatively high book earnings, even though firms simultaneously select alternative tax treatments that minimize taxable income,” said Mr. Lewis. “Another accounting policy risk indicator might be a high proportion of transactions structured as ‘off-balance sheet.’”

Frequent conflicts with independent auditors, changes in auditors, or filing delays could also be risk indicators. Examples of risk inducers include decreasing market share or lower profitability margins. This factor-based analysis allows for model flexibility, meaning examiners are able to add or remove factors to customize the analysis to their specific needs. The SEC will be able to continually update the model to account for the moves filers are taking to conceal their frauds.

Next Generation RoboCop
One of the perceived weaknesses of RoboCop is its dependence on financial comparisons Fraudstersbetween filers within an industry peer group. As Mr. Lewis points out, “Most firms that are probably engaging in earnings management or manipulation aren’t doing it in a way that allows them to stand out from everybody else. They’re actually doing it so they blend in better with their peer group.”

To account for this, the SEC’s current endeavor is expanding the model’s capabilities to include a scan of the Management Discussion & Analysis (“MD&A”) sections of annual reports. Through a study of past fraudulent filings, analysts at RSFI have developed lists of words and phrasing choices that have been common amongst fraudulent filers in the past. These lists have been turned into factors and incorporated into the AQM.

“We’re effectively going in and we’re saying: What are the word choices that filers make that maximize our ability to differentiate between fraudsters in the past and firms that haven’t had fraud action brought against them yet?” Mr. Lewis explained during a June 2013 conference in Ireland.

“So what we’re doing is taking the MD&A sections, we’re comparing them to other firms in the same industry group, and we’re finding that in the past, fraudsters have tended to talk a lot about things that really don’t matter much and they underreport all the risks that all the other firms that aren’t having these same issues talk quite a bit about.”

Firms engaged in fraudulent activity have tended to overuse particular words and phrasing choices that are associated with relatively benign activities. They have also tended to under-disclose risks that are prevalent among a peer group. When a filer has engaged in similar behavior, RoboCop will flag these types of unusual choices for examiner review.

How the SEC Uses RoboCop
Although the SEC has cautioned that the AQM is not the “robot police coming out and busting the fraudsters,” [see Dimensions interview with Craig Lewis] filers would be wise to understand the power of this tool. RoboCop is a fully automated system. Within 24 hours from the time a filing is posted to EDGAR, the data is processed by the AQM and the results are stored in a database. The AQM outputs a risk score, which informs SEC auditors of the likelihood that a filing is fraudulent. The SEC then uses this score to prioritize its investigations and concentrate review efforts on portions of the report
most likely to contain fraudulent information.

The results of RoboCop’s analysis will likely become the basis for enforcement scheduling and direction of resources in the near future. A filing’s risk score will determine whether a filing is given a quick, unsuspecting review, or whether it is thoroughly dissected by an SEC exam team, possibly leading to an expensive audit. The SEC has also said it plans to use the risk scores as a means of corroborating (or invalidating) the approximately 30,000 tips, complaints, and referrals submissions it estimates will be received each year through its Electronic Data Collection Systems or completed TCR forms.

Filing Successfully Under RoboCop’s Watch
Robocop is not all bad newsThe implementation of RoboCop is not necessarily bad news for filers. Those companies able to minimize their risk score will be less likely to face unnecessary SEC audits for innocent activity. With the SEC’s new whistleblower program in place, illegitimate tips from individuals seeking a payday are sure to increase dramatically. A low score from RoboCop will make tipsters’ claims less likely to be investigated.  Similarly, an examiner suspicious of particular information in a filing may be less likely to seek a full audit for a corporation with a low risk score

Avoiding an SEC audit in the age of RoboCop means that companies should be sure to:

1. “Check your work.” When asked how companies can minimize the risk that their company is flagged, Mr. Lewis responded succinctly: “I would say, check your work.” Because RoboCop is an automated system looking for oddities, it is unable to account for mistakes made. This is particularly important because the AQM relies on the newly mandated XBRL data, which is prone to mistakes by the inexperienced. These mistakes can range from simple typos to inadvertently submitting a positive number as a negative number. Sloppy entries could land your company’s filing at the top of the list for close examination. The SEC has provided several releases containing common XBRL errors and guidance for filers to avoid these frequent pitfalls. Any company using XBRL should familiarize themselves with the SEC’s guidance in this area in order to avoid an inadvertent AQM alert.

2. Adopt accounting policies similar to those in your industry peer group. A large part of RoboCop’s analysis involves comparison of accounting choices among industry peers. Because there are many industry-specific regulations, companies across an industry tend to make similar accounting choices. This is also true for the risks disclosed in the MD&A
sections of filings. The new path to avoiding SEC investigations is blending in with the competition. When a company diverges from this path, RoboCop rings the alarm bells.

3 Stick with one auditor. Because fraudulent filers of yore have frequently had multiple auditor disputes or frequently changed auditors, RoboCop now flags this behavior as a risk indicator. Last year, 866 (approximately 9%) of the companies that file with the SEC parted ways with their auditor. Of those companies, 66 had two auditors leave and two companies went through three auditors.

4 Reduce off-balance sheet transactions. While there are plenty of legitimate reasons a company may have significant amounts of off-balance-sheet transactions, there are not as many legitimate reasons for this figure to be significantly higher than those in an industry peer group. Famous fraudsters Enron and Adelphia Communications Corp. used massive amounts of off-balance-sheet transactions to conceal their ballooning debt.

5 Conservative decision-making regarding discretionary accruals.
Filers pushing boundariesRoboCop’s “Directive 1” is to identify accounting choices indicative of earnings
management. Chief among those indicators? Questionable choices regarding
discretionary accrual reporting practices. Any filers pushing the bounds of
discretionary accruals should thoroughly explain their decisions in the filing, or
they should expect to explain it to an SEC exam team shortly thereafter.

6 Be prepared to respond to SEC inquiries. The presence of outliers in a filing does not mean your company is automatically viewed as an outlaw. According to Mr. Lewis, a filing flagged as risky “doesn’t necessarily mean the company’s done anything wrong.” Increased reliance on an automated model, even an accurate one, means examiners
will come across filings with high risk scores which have not engaged in any fraudulent activity. Exam teams will be in more frequent contact with filers and will also more readily accept legitimate explanations for filing decisions. This means companies should be prepared to respond quickly to inquiries with a reasoned explanation for their accounting choices.

Closing Credits
Perhaps the comparison of the SEC’s new AQM program to Robocop is a bit too fanciful, but RoboCop’s mantra that “anything you say can and will be used against you” still might be good cautionary advice for SEC filers.

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Interview With An Expert: XBRL’s Potential As A Revolutionary Tool


An interview with Prof. Dhananjay God
e, Leonard N. Stern School of Business, NYU

Prof Dhananjay GodeAt the XBRL and Financial Analysis Conference held earlier in 2013 at Baruch College’s Zicklin School of Business, Prof. Dhananjay (Dan) Gode gave one of the keynote addresses. [For a conference summary, see the April 2013 issue of Dimensions.] In his talk, Dr. Gode praised the purpose and concept of XBRL, but he also emphasized that the SEC and America’s companies, in their  respective ways, still have much to do to improve the accuracy of XBRL data in financial communications. 

Dr. Gode is a Clinical Associate Professor of Accounting at New York University’s Stern School of Business. He teaches courses in corporate financial accounting and pursues research interests in financial analysis, legal liability of firms, valuation, managerial accounting, and performance measurement. In a recent telephone interview with Dimensions, Dr. Gode elaborated on his view of XBRL data—both the current progress in its use and its potential as a revolutionary tool.

Dr. Gode, do you think XBRL tagging by companies is getting better? Are companies making fewer mistakes?

It is getting better. XBRL is the way of the future. It is not going to die or go away. But it is a matter of the SEC making the commitment and saying to companies: “You can’t make mistakes in your XBRL.” There must be consequences for using the wrong tags. If the SEC writes a comment letter that ends up on the CFO’s desk, of course it will get attention. It is a matter of how important you make it. Is this a side thing that companies should do, or is this something that the SEC will penalize you for if you do not?

XBRL is the way of the futureThe first stage is telling companies: “Please provide XBRL data. Do the best you can.” The second stage is saying: “You are required to do this, and you are required to do this accurately. And if you do not do it, that’s a serious problem.” The second stage the SEC has not gone into yet, because they wanted to tread carefully, I assume, and to make sure that they were not asking companies to do something that companies were not technologically
ready to do.

What common problems do you see in XBRL data? Have you noticed trends?
[One problem is] companies using the wrong tag or coming up with too many custom tags, and you don’t know which tag to get. The user interface on tag selection, tag standardization, and enforcement of that whole discipline is simply not there. If I want to get, let’s say, product-warranty data on companies, there are different tags, and I do not know how to search for the tags that I am supposed to pick up. Suppose I just want to find out which companies have the most accrued warranties as liabilities on the balance sheet. I just don’t know which tags to go and look at. That makes it extremely hard. That data is not available from many of the vendors, because data is available only if they think it is important and choose to include it in their standard set of data points. The appeal of XBRL is that you will get far more granular data. But that has not translated itself into something that is directly usable.

Why do you have concerns about XBRL accuracy?
Financial statement data is audited by reputable auditors; XBRL accuracy is not audited. Companies are supposed to follow proven practices, but it’s simply not there in terms of accuracy—and will never get there unless it becomes part of what auditors certify is done properly. It is always given to somebody or outsourced or something. And even if the data is 95% accurate, maybe you can use it in a classroom; but if you are doing any professional work, 95% accuracy is not good enough— even 98% is not good enough. If you’re wondering about the data you are looking at, it is not particularly efficient. The promise is that it will be a lot cheaper than using some of these [data-providing] vendors. But right now it’s not there yet. It’s not audited—that’s the problem.

So XBRL is revolutionary in that senseHow extensive are the XBRL tagging inaccuracies that you see? Do you see them in only a small percentage of filings, or only in particular topic areas?
I have tried to get, for example, unremitted foreign earnings data from companies. One company’s 10-K, which I had read, said $17 billion, but the XBRL tag came out with $4.3 billion. Now, I do not analyze the whole database; I’m just a user. If I see something like that, I get annoyed. I do not know how many more mistakes there are in the whole database. Even if you try to do four things and you find mistakes in each of those four queries, it leaves you quite a bit unsettled. That’s [a] problem.

The plus is that I could not have gotten this unremitted foreign earnings data by looking at the regular fact set from data providers. With XBRL, you get much, much more granular data. So once the accuracy comes in, there will be a tipping point. Right now the tipping point has not been reached because of concerns about accuracy. But this is the way of the future. This is going to lead to all kinds of granular analysis that we simply could not do earlier.

Suppose I wanted to study unremitted foreign earnings among hundreds of companies. The only way I could have done this in the past [was to] wait for some investment bank to hire a bunch of analysts and have them pore through the 10-K, collect all the data, and put it in a spreadsheet. That’s the only way this could have been analyzed—a lot of manual work. Or I would have to wait for data-providers to put it in their database. Without those two ways, I would not have had the time to go through hundreds of financial statements. So XBRL is revolutionary in that sense.

What do you think are the design limitations of the current XBRL taxonomy and document-creation process?
Let’s say I am looking at an XBRL download for unremitted foreign earnings. Suppose I doubt that the company is showing the right number—I think that $4.3 billion is incorrect. I should be able to click on that XBRL number and go right to where the 10-K text description is so that I can read the actual 10-K and see whether the number was accurate. I could then get some comfort from the context. Also, many times you get to that data point and want to read the rest of the stuff that is disclosed with the data point. That does not exist right now. There is no link back to the text in which this data point was embedded.

Now [the SEC is] discussing inline XBRL. If the 10-K and the XBRL document were linked so that I could click between them, that would be great. But it is not there right now.

What can companies do to improve the quality of their XBRL tagging?
Companies talk to their large investors, and large investors have resources and access to data-providers, so companies do not really hear from smaller outfits or academics who could benefit from more accurate data. I’m not sure companies are hearing the concerns that people have with XBRL as much as they might. Once XBRL tools become better and people really start using XBRL, then companies will hear from users: “Hey, your XBRL tag is wrong, and that misled us.” Right now, I doubt that companies get any feedback from end users about XBRL display or choice of tags and inaccuracies in data.

In fact, I remember talking to a CFO who said they put up an XBRL document online, and nobody downloaded it. No small user is going to write their own code to parse XBRL. This has to be done by intermediaries. Those intermediaries may notice some mistakes and get back to companies, but I doubt that the companies really listen. So I do not think this is on the radar screen of CFOs—that their XBRL data has errors. It’s something that lower-level bureaucracy deals with. It does not percolate to the senior management.

Do the data-providers always have accurate data? Are there mistakes in their data?
Fewer mistakes. Of course, they have mistakes. That’s why investment banks, if they are doing a deal, will go to the actual 10-K or 10-Q and double-check data. But to run an initial screen of what the data-providers provide is good enough.

Is this why financial data aggregators and intermediaries play such a crucial role with XBRL data?
They are absolutely essential. XBRL in its raw form requires somebody to write a parser toXBRL is not human readable data make sense of it. It is not human-readable data. You can download an XBRL document, but you cannot really read it. It has to be made more user friendly by somebody who provides a front end.

How can the SEC better encourage companies to produce reliable XBRL data? What further incentives can it provide?
The SEC wields a stick, not a carrot. They do not pay companies; they penalize them. You just have to penalize companies— not financially, but through a letter that embarrasses companies that have XBRL mistakes in their financial statements. If the board of the company or if the CFO hears about it, they will provide appropriate resources. It can be done. But it has not received the priority it should.

It’s a chicken-and-egg problem. If you ask companies to spend lots of money on XBRL, they will say, “Well, who uses it?” But the users say, “Well, I’m not going to really use it unless I know the data is accurate.”

Maybe the push will come from data-providers who will point out to the companies that there are errors in their XBRL data. But I do not see that happening. The SEC has to take leadership and make us believe that this will be done properly—and perhaps even provide their own interface.

I use EDGAR all the time to download documents, and I find it very fast and easy to use. If the SEC itself provided an XBRL front end, that would be remarkable and would really make using XBRL much easier. That would really help people. I think XBRL would be heavily used if the SEC did that.

What progress do you foresee in the XBRL taxonomy and the use of XBRL data during the next ten years?
It depends on what leadership the SEC decides to take. I think this is the way of the future. XBRL is much more efficient. It provides a lot more granular data. If the SEC decides to provide a front end, it will be a lot cheaper. They can do some really good stuff if they decide to do [so].

XBRL is much more efficientI see XBRL getting better. Eventually companies will standardize XBRL. There will be pressure to make it a lot less labor intensive. I think the adoption has been slower than anybody would have predicted six years ago. I do not think it will be a revolution unless the SEC decides to make it happen. But XBRL will get better. The errors keep getting pointed out, and companies will keep fixing them. I expect XBRL to be much more widespread in 10 years than it is now. In accounting standards codification, there is a subsection on XBRL, so the standard-setters are also paying attention. I see more improvement all along.

I think the problems with XBRL are not structural but more procedural. XBRL is a promising technology. The procedures need to be fixed—tagging, consistency, interfaces—but XBRL data is highly useful. You just have to do it right.

The views expressed here are entirely Prof. Gode’s and do not necessarily reflect those of Stern School of Business or any other organization.

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What Filers Must Know About The 2013 US GAAP Taxonomy: Major Changes Raise The Potential For XBRL Mistakes

The 2013 US GAAP taxonomy became effective on May 20, 2013. At a recent webinar panel discussion, experts from Merrill Corporation outlined important points regarding the new taxonomy, which filers must understand to ensure that their XBRL submissions are compliant. Joining moderator Mike Schlanger (VP of XBRL Strategy and Business Development at Merrill) were Joel Stiebel and Joan Berg, who are both Directors of XBRL Services at Merrill. Together, they have six decades of expertise in accounting, finance, and SEC reporting.

Earlier in 2013, the SEC released 10 new FAQs providing tips for XBRL filers. Among the many pointers on workaday XBRL details, one recommendation rings out clearly: Use the latest available taxonomy. According to one FAQ: “The SEC staff strongly encourages filers to use the most recent version of the US GAAP taxonomy release for their Interactive Data submissions to take advantage of the most up-to-date tags related to new accounting standards and other improvements.” In light of this guidance, we consider some key aspects of the 2013 taxonomy.

“Unintended consequences” in the 2013 taxonomy raise the risk of errors
“In the new taxonomy,” panel member Joel Stiebel states, “the FASB changed over 3,200 taxonomy elements. When you make that many changes, unfortunately some of them have unintended consequences.” The Best Practices Committee of XBRL US, in which Mr. Stiebel and Ms. Berg participate, has been addressing some of those unintended consequences. The committee regularly issues resolutions with recommendations on XBRL-tagging issues that may pose problems for unwary filers. Available at the website of XBRL US, the latest resolutions include pointers on aspects of the 2013 taxonomy that may be problematic.

As an example of a potential problem for filers, Mr. Stiebel explored a pitfall in the 2013 taxonomy that involves unrealized gains and losses on investments. In this relatively common disclosure, the filing company takes its amortized costs, adds its gross unrealized gains, subtracts its gross unrealized losses, and thus reaches a figure for the estimated fair value. The graphic below, taken from Mr. Stiebel’s presentation, shows how this would have been tagged under the 2012 taxonomy.

Table 1In the 2013 taxonomy, the tags for the two middle elements—unrealized gains and unrealized losses (shown in red)—have been deprecated and replaced by other elements. (Mr. Stiebel explained that those recycled replacement elements had been in the taxonomy several years ago; after being deprecated, they are being undeprecated in 2013.) The graphic below illustrates differences between the 2012 and the 2013 taxonomies in reporting unrealized gains and losses.

Table 2Table 3“There are two significant changes,” Mr. Stiebel pointed out. “Instead of instants, now we have two durational elements, and what was once a debit is now a credit, and what was once a credit is now a debit.”

Three potential areas of confusion
The changes present three potential areas of confusion for filers. “First of all, we would have to add an instant to a duration to have the calculation that we had before,” Mr. Stiebel observed, “and under XBRL you cannot add an instant to a duration.” Second, whereas before there was an effective calculation proceeding from top to bottom, the flipping of the signs in the new taxonomy requires a calculation going from the bottom to the top: fair value, plus the unrealized losses, minus the unrealized gains, totalling to the amortized cost. Third, the timeframe to be used for these durational elements is not clear. “If you use the current year’s period, January 1st to December 31st of 2012, that’s not necessarily accurate,” he stressed, “because these are the cumulative gains and losses, and, in all likelihood, some of those gains and losses occurred in prior years. So the current year’s date context would not encompass the period over which some of these gains and losses were accumulated.”

What’s the solution to these problems? The XBRL US Best Practices Committee recommends the use of carefully crafted extensions in such circumstances. The suggested extensions are both instants that return to the original debit-and-credit arrangement, permitting an effective calculation:

Table 4Table 5The Best Practices Committee recommends that all filers use the extensions in these circumstances. “It turns out that this error is repeated for a number of other elements—about a dozen elements in which this issue occurs,” added Mr. Stiebel. The Committee is recommending standard extensions for all of those elements.

Another potential pitfall involves comprehensive income Quote 1attributable to noncontrolling interests. Before now, this income was entered as a positive debit (because it is a deduction from consolidated income, to arrive at the income attributable to parent); but in the new taxonomy, the element’s definition and standard label were changed to indicate that income should be entered as a negative debit. Merrill identified this definition and label mistake. “We took it to the FASB, and they agreed with us,” Mr. Stiebel said, “but it was too late for them to change the taxonomy.” The FASB indicated to him that the forthcoming implementation guide will show that filers should continue to enter positive values and ignore the definition and label changes in the 2013 taxonomy.

Multiple significant changes in the 2013 US GAAP taxonomy
As indicated, numerous differences separate the 2013 taxonomy from the prior version. Taking up this theme in her portion of the Merrill webinar, Joan Berg analyzed the differences to identify the major XBRL shifts that filers must recognize. She began
with numbers showing the extent of the changes:

  • 1,006 new elements
  • 955 deprecated elements
  • 1,256 definition changes
  • 673 standard label changes

The 955 deprecated elements are scattered throughout the taxonomy. Ms. Berg highlighted a few noteworthy examples:

  • 106 elements related to business acquisitions were deprecated, with no suggestions for replacements
  • 27 axes were removed, many without replacements
  • 82 elements were deprecated for balance type, period type, or both
  • 29 elements were deprecated for item type
  • 129 elements were removed as redundant concepts

New Quote 2sections in the taxonomy are ASU 2011-11 (Offsetting Assets And Liabilities) and ASU 2013-02 (Amounts Reclassified Out Of AOCI). The FASB also significantly
revised segment disclosures, where it added three axes, deprecated elements, and moved members from one axis to another. Further areas of major change were other comprehensive income, other income and expenses, unrecognized deferred taxes, and insurance.

New taxonomy elements
In addition to keeping up with changed definitions and deprecations, filers should monitor new elements to see whether their prior filings’ extensions are still necessary. “The FASB is responsive to the frequency of extensions in files,” said Ms. Berg. “They look at all the files that are submitted and see if there are themes that recur as to where extensions have been used.

Similarly, they look at comments that are posted on their development taxonomy and try to reflect the ones that they consider worth putting into the taxonomy.” The following topics had a number of new elements added to the taxonomy in 2013:

  • debt redemption periods
  • capitalized exploratory wells aging periods
  • debt covenant terms
  • derivative nonmonetary notional amounts
  • equity section of limited liability companies
  • cash flow elements
  • litigation
  • share-based compensation
  • noncontrolling interest

Quote 3“The case of derivative nonmonetary notional amounts is interesting,” observed Ms. Berg. She explained that just one element had existed for that concept, but in the 2013 taxonomy, six new elements were added with different item types—one for volume, one for energy, etc. Different units of measure must match to the appropriate elements’ item type. That will not appear as the required or preferred element, because the old element has not been not deprecated. Filers may not realize that they should change to one or more of the new elements.

Cash flow elements also present an important issue that requires attention. “They added 30 new elements in the cash flow section this year,” Ms. Berg warned during the panel discussion. “They added 30 last year too. So if you haven’t refreshed the tags in your cash flow statement for the last two years, you may find that you are not using the most appropriate element on your cashflow statement…” Similarly, for noncontrolling interests, elements that used to combine two concepts have been deprecated and replaced by elements expressing the concepts separately. “So some people are going to need extensions
because they in fact are disclosing a combined concept, and other people are going to find that there are new elements that
they can use.”

FASB practice aids
The FASB has provided practice aids to help filers cope with the many changes in the US GAAP taxonomy. There are, for example, 560 pages of release notes, which consist mainly of appendices listing the various elements. “If you have some need for putting yourself to sleep at night, you can read those,” quipped Ms. Berg. (As she noted, the Merrill team has already thoroughly studied the release notes so that Merrill clients need not.)

The FASB’s taxonomy change application (TC App) is a software tool that identifies deprecated elements and changed definitions. However, Ms. Berg urged caution in the use of this tool. “The TC App is less than adequate for [most] filers trying to do their own conversion, in my opinion,” she warned. The TC App is not enough on its own partly because nearly a third of the 955 deprecated elements carry no suggestions about how to proceed now without them. Moreover, even when a replacement element is suggested, it Quote 4does not necessarily fit the disclosure in the way that its predecessor did in prior filings. “There’s an interpretation that goes into some of these elements,” she asserted, “and if it’s been deprecated with a new suggestion, you have to carefully review that.” Another shortcoming to Ms. Berg is that the TC App does not have the ability to look back into the elements used in past XBRL filings and inform filers about new elements that may be helpful in light of past usage.

Help with 2013 taxonomy conversion
Given the limited nature of the FASB’s resources for filers, Merrill’s taxonomy conversion services are a valuable resource for companies that want to ensure their XBRL submissions comply with the SEC’s requirements. Conversion services include analytical tools that analyze all the deprecations and definition changes which impact a particular company’s filings; the remapping of segments; and the remapping of other comprehensive income. If needed, expanded assistance is available. Merrill consultants and sales representatives can work with companies to identify the timing and scope of the appropriate conversion services.

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XBRL Insights: Six Critical Issues Facing Filers (Part 2 of 2)

By Mike Schlanger, Vice President of XBRL Business Development and Strategy for Merrill

Mike Schlanger

Mike Schlanger

Mike Schlanger, Merrill Corporation’s Vice President of XBRL Business Development and Strategy, with input from Lou Rohman, Merrill’s Vice President of XBRL Services, has summarized six considerations that filers must understand before preparing XBRL instance documents. Part 1, which appeared in the June 2013 issue of Dimensions, explains that XBRL is a language, and you are the translator; software does not verify accuracy; and XBRL potholes are everywhere. Part 2 continues here with three more insights: why you need expert help; liability risk has arrived; and XBRL uses are expanding.

Number 4Both internal and external expertise is necessary
Communication and support, both internal and external, are crucial. There must be a dialogue between the company and the vendor. Here at Merrill, the vendor, we know that we must understand the company’s native language, or else we will not be able to craft a proper translation into XBRL. Yet even within the native reporting language of the company, points will remain that we need to clarify with company personnel.

Probably the most important thing we do to prevent errors in XBRL filings is to conduct
one-on-one discussions with the staff at our client companies. Topics of discussion
include unique aspects of the client’s filings and ways to represent those aspects in the correct XBRL structure and data entry. The result has proven serendipitous: At many of Mike Schlanger Quote 1 - Part 2 of 2our client companies, personnel have achieved significant expertise in the requirements of XBRL because they learn through this process and build on their knowledge from quarter to quarter.

Recently, we’ve seen a trend of companies moving to a disclosure management platform based on SaaS (software-as-a-service), before they have undertaken the necessary educational effort to ensure that they “know what they need to know” about how XBRL works. Merrill strongly believes in the value that companies will achieve by moving to this type of integrated SaaS platform, which includes insourcing XBRL and which we will be releasing this year. However, too many filers wrongly believe that transitioning to an integrated, single-source platform (where the source data flows into the XBRL files) will alone ensure high-quality XBRL.

Number 5The honeymoon is over: liability risk is now real for many filers
The key to liability prevention is careful, thorough preparation of the XBRL instance document. Companies need to have similar controls and procedures in place for their XBRL work as they do with their traditional financial disclosures and SEC submissions.

For the first 24 months after a company is mandated to submit an Interactive Data File (but no later than October 31, 2014), SEC rules were protecting XBRL filers from liability for misstatements. Depending on when they were phased in, filers have already lost their liability protection or will lose it in 2013 or 2014. Even for filers still in the limited liability phase, the SEC could take action, depending on the circumstances, since limited liability applies only to filers that make a good-faith effort to comply with SEC rules and that promptly correct any failures when they become aware of an error.

Filers that fail to comply with the SEC’s XBRL requirements may be ineligible to use short-form registration statements, such as Forms S-3 and S-8, and Form 144 (used when an individual resells restricted stock). However, the loss of eligibility to use these forms is not the only exposure a company may have. Filers also face the risk of lawsuits by the SEC and investors that may arise if XBRL tagging and instance documents are materially inaccurate or misleading. [For more details on XBRL liability, see the article in the August 2012 Dimensions.]

SEC staff members urge filers to be certain they are not continuing to make the troublesome errors that the SEC continues to point out. Concerned about the ongoing quality of filings, the SEC feels that filers should now have both the tools and the knowledge to make compliant filings. “We suspect that the SEC’s generally ‘hands off’ approach to interactive data may be about to change,” warn the editors of The Corporate Mike Schlanger Quote 2 - Part 2 of 2Counsel (“Farewell To XBRL Limited Liability For LAFs,” September–October 2012, Page 11). They add that the SEC will start raising “specific concerns with issuers,” either in the traditional review of filings or as a separate review by the SEC’s XBRL experts.

Number 6XBRL is here to stay: the SEC, the FASB, and investors are using it
Many corporate disclosure professionals question whether the SEC is looking at XBRL filings, but the Commission clearly is. It is indeed using the data and has even specified that it applies customized software to parse XBRL data and put it in a relational database for analysis. Sources at the SEC explain that the Commission uses data from XBRL filings both to identify problems with the underlying accounting and disclosures in individual filings and to evaluate the overall quality of accounting and disclosures. It has, for example, used XBRL data to analyze pension discount rates among filers and to help make risk assessments for filings.

XBRL filings do not languish in an unused database. Tools that automatically analyze, compare, and flag financial statements for disclosure problems and accounting fraud are being created by the SEC Division of Economic and Risk Analysis. [EDITOR’S NOTE: Until June 2013, this was named the Division of Risk, Strategy, and Financial Innovation, or RiskFin.] The mining of XBRL data is a key part of these tools. Craig Lewis, director and chief economist of that division, urges companies to check their XBRL work to ensure that their filings are not automatically flagged for examination by the monitoring system. (The Dimensions interview with Dr. Lewis appears in the April 2013 issue.) Mistakes in XBRL elements can affect the score you get from the monitoring model, increasing the chances that your company will be flagged for an SEC review or potential enforcement action.
Additionally, it is important to understand that XBRL-tagged data is living and breathing well beyond the SEC. The market is using it to get information about companies. Investors and analysts have begun to mine XBRL filings to gather, study, and compare information about companies. For example, Jim Cramer’s website, TheStreet, is now offering its users direct access to an XBRL-based search engine from 9W Search. The Financial Accounting Standards Board also uses XBRL data for research. Its post-implementation review process for accounting standards studies XBRL files to gather data about how accounting standards have been disclosed. Information can take just minutes to obtain using the XBRL database.

While still at an early stage, XBRL and the associated software tools for using it are developing very quickly. As the body of data grows over time, the use of XBRL can only increase. The longer the time series of XBRL data, the more useful the data will become. The XBRL data filed with the SEC today is part of that time series, making it just as important as what may be filed five years from now.Mike Schlanger Quote 3 - Part 2 of 2

The SEC’s own use of XBRL data has redoubled its focus on XBRL quality. Investors, analysts, and the makers of software tools are taking XBRL seriously. The time has come for all filers to take it seriously, too.

For the first three insights, see Part 1 in the June 2013 issue of Dimensions.

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© Merrill Corporation 2013

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XBRL Insights: Six Critical Issues Facing Filers (Part 1 of 2)

By Mike Schlanger, Vice President of XBRL Business Development and Strategy for Merrill

Mike Schlanger

Mike Schlanger

Most publicly traded companies in the United States are now filing their financial statements in XBRL. While the first generation of filers has a few years of experience by now in XBRL tagging, the learning curve continues for many professionals involved in corporate disclosure. In this two-part article, Mike Schlanger, Merrill Corporation’s Vice President of XBRL Business Development and Strategy, with input from Lou Rohman, Merrill’s VP of XBRL Services, summarizes the most important underlying considerations that filers must know when preparing XBRL instance documents, some of which might run against the grain for others in the XBRL industry. In Six Critical IssuesPart 2 (which will appear in the August 2013 issue of Dimensions), we explain that along with internal expertise, external expertise is usually necessary; the honeymoon is over (liability risk is now real for many filers); and XBRL is here to stay with multiple uses for the data.

Issue OneXBRL is a language, and you are the translator
The preparation of SEC filings as XBRL instance documents is more complex than most filers realize. XBRL is a language—Extensible Business Reporting Language, in full—that allows a computer to recognize and process the financial information you submit to the SEC. Like any human language, XBRL has rules and protocols that must be followed to ensure the full meaning of your disclosure is captured when translated. While you do not have to become expertly fluent in XBRL, you must be proficient enough to understand more than just what tag to use: you also need to know how the language works, how values must be entered, how select tables need to be structured, and much more, so you can verify that the translation accurately reflects your SEC EDGAR filing.

As evidenced by the SEC’s repeated calls for companies to improve the quality and accuracy of their XBRL filings (see, for example, Dimensions articles on the SEC staff observations, on Page 4 of the May 2012 issue or Page 6 of the June 2012 issue), too many filers appear to be taking translation shortcuts. They are not devoting enough time or getting the proper assistance to learn what they need to know before they can validate the accuracy of their reports. The cost to you of such apathy? You are effectively delegating your job—confirming that your financial statements are being reported correctly—to your XBRL vendor, while the potential liability for a misstatement remains entirely (and painfully) yours.

Mike Schlanger Quote 1The errors we continue to see in XBRL filings are surprising. Financial reporting directors and managers are known for great attention to detail, which is clearly
demonstrated in the quality of their EDGAR filings. Yet many of these same professionals are submitting XBRL filings with glaring mistakes, which include: unnecessary extensions, invalid axis member combinations, missing calculations, values entered incorrectly, and more. These are mistakes that the SEC has repeatedly cautioned companies to focus on and take action to avoid.

It is difficult to learn entirely everything you need to know about XBRL and the
EDGAR Filer Manual; however, the companies that are submitting high-quality
XBRL have conquered the task, and many have used outside help to understand
what they do not know.

At Merrill, we start our client engagements from a simple premise: filers should be taught how to verify that the XBRL translations we produce are properly prepared. Through consultation with our XBRL-fluent CPAs, Merrill clients learn what they need to know
about how XBRL works. This can take time. Our clients’ corporate disclosure teams typically learn as much as possible about XBRL from our consulting team and continue to build upon their knowledge with each passing quarter.

Critical Issue TwoSoftware does not verify accuracy
Software can verify whether certain items in an XBRL filing are compliant with the rules and specifications, but there are a significant number of items in an XBRL filing that cannot be checked by software. For these, it is important to have knowledgeable individuals review the XBRL for errors. Moreover, filers who review only the rendered version of the XBRL document are blind to its structure and therefore vulnerable to mistakes.

The potential for errors in value entry—a common tripwire—illustrates the point. Mike Schlanger Quote 2
A value erroneously entered as a negative in XBRL may appear to be a correct figure in the rendered version, but the value will be consumed incorrectly by users of the data, and any applicable calculation relationships in the XBRL will likely be incorrect as well. Filers need to understand what happens with values as entered. If
you are relying on just the rendered version of the document, you are not assured of your ability to verify accuracy.

Another illustration is incorrect tag selection. As the SEC states in its Staff Observations—Summary of XBRL Information for Phase 3 Filers, “[c]arefully selecting the best tags is likely to be the greatest contributor to the quality of your XBRL submission.” Proper tag selection and proper structuring of those tags are probably the most important steps Merrill takes to make sure that XBRL files meet the needs of the company and the SEC. But there is much more to be done. Filers must adhere to the EDGAR Filer Manual rules and build a company taxonomy that mirrors the US GAAP Taxonomy as much as possible.

Experienced personnel such as Merrill staff provide the valuable knowledge transfer—through consulting and teaching—that a filer needs to verify that the XBRL is both accurate and telling the same story as the HTML EDGAR document. Overall, we perform many steps that focus on the quality of the XBRL information when we prepare and review XBRL files.

Critical Issue ThreeXBRL potholes are everywhere
We see many of the errors that the SEC has mentioned in its Staff Observations when we bring on a new client and review its previous filings. These errors include incorrect positive/negative signs, inaccurate tag selection, incomplete tagging, erroneous unit designation, unnecessary element extensions, inappropriate scaling of amounts, and botched calculations. In an example that shows how extreme some of these errors are, we recently saw a number reported in the XBRL file as $100,000,000,000 when it should have been $100,000. The mistake arose because the company was reporting other numbers in millions but failed to adjust for the lower amount, and the automatic addition of six extra zeros therefore inflated the figure to $100 billion. The company was unaware of the problem.

Other frequent errors, which may not be automatically detected by a software program, include:

  • Improper axes and domains selected for the members that are on a specific axis. We recently reviewed a file that used the taxonomy element “Business Segments Axis” to classify categories of financing receivables. That was an improper axis for the items being disclosed. Given this construction error, there would be inefficiencies in the ability of software to provide a financial analyst with information related to the categories of financing receivables, including comparisons with other companies. In addition, the analyst would probably be receiving confusing information about the Mike Schlanger Quote 3company’s business segments. Most filers are apparently unaware of the axes and domains that are used to construct their data, since these do not render on the SEC website.
  • Inconsistent tagging between text and tabular data. Another common error is inconsistent tagging for values that are displayed in the textual data versus the same information tagged in tabular presentations. Some filers segregate the textual disclosures from the tabular disclosures in the XBRL. This can result in unintentionally tagging the same values with different elements or dimensional contexts.

The most important feature a filer should understand is how amounts in the financial statements map to those in the taxonomy elements, including the underlying dimensional structure that supports the selected elements. Registrants need to have confidence that the files do not have the types of errors repeatedly mentioned by the SEC staff in its observations. It is not adequate to review just a rendering of the XBRL files, or to rely on software validation tools alone, to verify accuracy.

Many filers are unaware that their review approaches are sufficient to ensure that their files are accurate and fully conform to the SEC requirements. It bears repeating: Even if the software validation report shows no problems, do not assume that the XBRL files are prepared in accordance with the SEC rules. While software validation plays an important role in producing high-quality XBRL, it does not guarantee that the files are free of errors.

To be continued in the August 2013 issue of Dimensions.

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© Merrill Corporation 2013

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Liability For XBRL Filings

Merrill Corporation – Dimensions eNewsletter – August 2012

One problem for filers that fail to comply with the SEC’s XBRL requirements is they may be ineligible to use short-form registration statements, such as Forms S-3 and S-8, and Form 144 (used when an individual resells restricted stock), however, the loss of eligibility to use these forms isn’t the only problem they may face. Filers also face the risk of liability, including lawsuits by the SEC and investors, which may follow if XBRL tagging and instance documents are inaccurate.

Initial Limit During Phase-In Period

Fortunately, the risk of liability currently does not begin with the initial XBRL submission. For the first 24 months after a company must start submitting XBRL (but no later than October 31, 2014), SEC Rule 406T (b)(2) protects Interactive Data filers from liability under Section 11 or 12 of the Securities Act of 1933, Section 18 of the Securities Exchange Act of 1934, or Section 34(b) of the Investment Advisers Act of 1940. Under Rule 406T, an XBRL instance document filed during this 24-month period is considered “furnished” rather than “filed” or “part of the registration statement or prospectus.” If a company voluntarily submits an Interactive Data file before it is required to do so, that voluntary submission does not start the rule’s 24-month modified liability period.

Nevertheless, SEC Rule 406T (b)(1) does subject the Interactive Data filer to the antifraud provisions of 1933 Act Section 17(a)(1), 1934 Act Section 10(b) (including Rule 10b-5), and 1940 Act Section 206(1). However, under Rule 406T(c), no liability will result if the electronic filer:

  1. makes a good-faith attempt to comply with Rule 232.405 (i.e., Regulation S-T on the General Rules and Regulations for Electronic Filings); and
  2. promptly amends the Interactive Data file to comply with Rule 232.405 after becoming aware of the compliance failure.

This provision requires a company to file an amendment to correct the material error in its Interactive Data file. Once the filer becomes aware of the error, it must quickly correct the data file to be eligible for the 24-month liability limit under Rule 406T. In the discussion section of the SEC’s rules on XBRL, “promptly made” corrections are those occurring within the later of either 24 hours after discovery of the filing error or 9:30 AM Eastern Time on the next business day (see page 85 of the final rules, at www.sec.gov/rules/final/2009/33-9002.pdf). If the correction is late, the SEC’s determination of whether a filer has corrected promptly depends on the facts and circumstances.

Rule 103of Regulation S-T provides the only liability protection that continues beyond the first two years. This rule provides filers with protection from errors and omissions beyond their control in electronic transmissions. The company must correct the problem by filing an amendment in electronic format as soon as it reasonably can after becoming aware of the error or omission.

Two-Year Limited Liability Period Depends On Phase-In Schedule

After the initial two-year limited liability period, liability applies in the same way as it would with the underlying official EDGAR filing, regardless of whether the problem is an exhibit to a filing or something incorporated by reference. The two-year limited liability period for each XBRL filer begins according to the company’s phase-in schedule.

Image
For each phase-in group, the two-year period starts with the due date of the first quarterly report on Form 10-Q or the annual report on Forms 20-F or 40-F containing financial statements for a fiscal period ending on or after June 15th of the specific year. 

Large Accelerated Filers with more than $5 billion in public float that prepare financial statements in accordance with US GAAP were phased in during 2009; therefore, they no longer have limited liability protection. Large Accelerated Filers with $5 billion or less in public float that prepare financial statements in accordance with US GAAP were phased in during 2010; therefore, most of those that have a calendar year-end will lose the limited liability starting with their third-quarter filings for 2012. All other filers that prepare financial statements in accordance with US GAAP were phased in during 2011; therefore, most of those that have a calendar year-end will lose the limited liability starting with their third-quarter filings for 2013.

New reporting companies are not in a phase-in group. In general, the requirement to submit XBRL exhibits begins with their first Form 10-Q. (To learn the details of the requirements for newly public companies, see the article When XBRL Tagging Requirements Apply To 1933 Act Registration Statements in the June 2012 issue of Dimensions.) Reduced liability then extends until either 24 months from the due date of the first XBRL submission or October 31, 2014, whichever occurs earlier.

XBRL Problems That Can Lead To Liability

After the initial two-year period, a filing error has to be “material” for fraud liability to apply. The company must evaluate whether any errors in the XBRL file that are not in the filed underlying financial statements are material. A question that arises is whether

having the correct information in the official filing makes the XBRL file’s error immaterial. According to David Lynn, an attorney in the Washington DC office of Morrison & Foerster, the company should evaluate the total mix of available information, both accurate and inaccurate, to assess what a court might find material (see the Supreme Court’s 1991 decision in Virginia Bankshares v. Sandberg, 501 U.S. 1083). “I don’t think a court could disregard that a correct financial statement is out there that is readily available,” Mr. Lynn explains. “The court would look at whether it is unreasonable for an investor not to check the official filing.”

Although it remains hard to predict how liability can occur, another former SEC staffer, now in private practice, told us that this is “uncharted territory.” He sees two possible avenues for liability: either an SEC action under 1934 Act Section 13(a) for violation of an SEC reporting or disclosure requirement; or an action brought by an investor under one of the sections currently protected by Rule 406T (i.e., 1933 Act Sections 11 or 12; 1934 Act Section 18).

For Section 13(a) actions, materiality and a showing of fraud are not needed. The SEC merely has to prove that the company violated a filing or disclosure rule. On page 87 of the XBRL adopting release, the SEC indicates that these 13(a) actions are not limited even when Rule 406T modified liability rules still apply. However, given the SEC’s finite resources, the Commission is unlikely to bring a suit unless materiality exists, in the view of the practitioners we contacted.

Although the SEC has published its observations on common XBRL mistakes (see the May and June 2012 issues of Dimensions), it has not indicated what would constitute a material error. Given the published SEC observations, it seems likely that materiality would be found when a filer repeatedly avoids the SEC’s suggestions and makes egregious errors as a result. An example could be significantly inaccurate numbers in the XBRL exhibit (e.g., billions instead of millions).

While the filer could argue that the correct information was publicly available in the underlying financial statement, it is too early to know whether this defense has a chance of success—and no company wants to be a test case of XBRL liability. The SEC’s determination of whether an XBRL mistake is material may also evolve, as investors start to rely more on the raw XBRL data than on the underlying document. This will happen when the XBRL data becomes the key information parsed and used by the aggregators (e.g., Thomson Reuters, Bloomberg, CapitalIQ) that distribute financial data to investors, and as various XBRL applications become more popular. In those circumstances, liability is more likely to lie where the XBRL data is wrong and then broadly relied upon.

Liability Prevention

“The key to liability prevention is careful and thorough preparation of the XBRL instance document,” asserts Lou Rohman, VP of XBRL Strategy at Merrill Corporation. “Many steps are involved to make sure that the XBRL files are conveying the same message as the traditional financial statements, including proper tag selection, accurate structuring of those tags, and appropriate entry of amounts in the XBRL instance document.”

The XBRL submission does not have to be audited, and Sarbanes-Oxley officer certifications are not required. Companies need to have controls and procedures in place related to their financial disclosures and SEC submissions, and this includes accurate, complete preparation of their XBRL filings. “Filers should worry about having controls up front so no discrepancies appear between the XBRL and official filings,” notes attorney Lynn.

Material Errors In The XBRL Filing But Not The Financial Statement

In its Compliance and Disclosure Interpretations (“C&DIs”) for Interactive Data, the SEC addresses the question (see C&DI 115.03) of whether a company must file a Form 8-K when it discovers a material error in its Interactive Data file, even if the financial statements upon which they are based do not contain an error and may continue to be relied on. The SEC explains that this is needed only when the filer determines that previously issued financial statements should no longer be relied upon because of an error. A filer can voluntarily provide a non-reliance disclosure, similar to Item 4.02(a) of Form 8-K, that pertains only to the Interactive Data. It does this by making the disclosure under either Item 7.01 or Item 8.01 of Form 8-K.

© Merrill Corporation 2012

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