SEC could demand transparency

Agency’s new taxonomy for data tagging would make change easier for companies

Compare executive salaries

The Securities and Exchange Commission launched an online tool in December that lets investors easily compare what the top 500 U.S. companies pay their chief executive officers. The application uses Extensible Business Reporting Language to tag executive compensation figures. The Executive Compensation Reader builds on SEC’s requirement that companies must submit clear and complete financial information, said David Blaszkowsky, director at SEC’s Office of Interactive Disclosure.

“The database highlights the power of interactive data to transform financial disclosure,” Blaszkowsky said. “Investors shouldn’t be required to dig through mountains of information to find critical facts like the makeup of corporate officer pay.”

— Mary Mosquera

The recent publication of a draft Extensible Business Reporting Language taxonomy gives companies a new incentive to use XBRL for financial reporting, Securities and Exchange Commission leaders say.
SEC has been allowing Fortune 500 companies to submit financial reports in HTML or text formats, which are not easy formats to use for analyzing financial data.

SEC published the draft taxonomy in December. The deadline for public comments is April 4.

“We have the opportunity for the first time to consider requiring [XBRL] because the complete XBRL taxonomy…is now completed and being publicly tested,” said Christopher Cox, SEC’s chairman, at a Jan. 10 meeting sponsored by the American Institute of Certified Public Accountants.

The taxonomy is a collection of financial reporting concepts and guidelines for creating financial statements. It includes XBRL tags, each representing a unique financial reporting concept. XBRL US, a nonprofit consortium of companies and organizations, developed the taxonomy.

“The only real barrier to getting this used is that it is new and people need to focus on it,” Cox said. “They have been waiting for a thorough taxonomy. Now you can reach into the taxonomy tool box and find what you want of prewritten software.”

After SEC releases a final version of the taxonomy April 28, there will be no technical reason why companies can’t use XBRL, said Corey Booth, SEC’s chief information officer. Financial institutions already use XBRL extensively. The Federal Deposit Insurance Corp., for example, receives reports from 8,800 banks that use XBRL for submitting financial data.

In contrast, only 65 companies report to SEC using XBRL. However, those 65 include large companies, such as GE and Pepsi, Booth said.

XBRL filing is helpful for investors because the format enables greater access to information about public companies. Now SEC needs to educate public companies about XBRL’s benefits for them, Booth said.

If SEC decides to make XBRL mandatory, it should manage the transition carefully, an SEC advisory group said. The Advisory Committee on Improvements to Financial Reporting tentatively recommended that SEC manage the conversion in phases by initially requiring only Fortune 500 companies to report their financial data using XBRL. One year later, other large U.S. public companies would follow suit. The panel will issue a final recommendation in August.

SEC expects to complete a cost/benefit analysis of a two-year voluntary XBRL program by Feb. 29. Data from that program could show that it would not be as expensive to use XBRL as some companies believe, Booth said. 

 “I think what you’re going to see…is that the costs are much lower than what the random CFO stopped on the street would estimate,” he said. “What’s going on in the industry, I think, is less about ‘This is hugely costly’ and more about, ‘Let’s just wait…and see if the SEC makes this mandatory.’” 

In the long term, Booth said, XBRL reduces financial reporting costs and improves internal controls.

However, additional work is necessary to make that happen. “The tools haven’t come all into place yet,” said David Blaszkowsky, director at SEC’s Office of Interactive Disclosure, which the agency created in October. SEC is working with analysts, investors and companies to encourage the development of software, completion of the taxonomy and identification of more uses and benefits of XBRL content, he said.  

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