Feb, 2009

Getting the full picture

XBRL has become a reality for many US companies. And because it automates the exchange of information between information systems and provides for the fast and reliable transmission of data, the needs and expectations of information users are changing.

The advantages for companies, investors and regulators are well established, but beyond those benefits there are several implementation challenges and liability issues that have not yet been fully addressed. Perhaps the most pressing concern for companies is the confusion surrounding the legal standing of XBRL filings.

Kathy Combs, senior vice president of corporate governance, corporate secretary and deputy general counsel at Exelon, and a member of the voluntary XBRL test group, has raised concerns about how documents furnished using XBRL will be viewed by investors and regulators and whether they will be held to the same legal standard as traditional filings.

She explains that what companies are tagging and reporting is not necessarily what investors see. More specifically, companies tag data using the existing XBRL taxonomies and submit the data to the SEC. The commission then makes this information available to investors through its interactive data viewer. But the viewer is not as sophisticated as many issuers and investors would like and the information is not displayed in the same format in which it is submitted, causing companies concern about the potential for shareholder confusion.





Clear views
David Blaszkowsky, director of the office of interactive disclosure at the SEC, explained during a recent webcast that the SEC is aware of these concerns and is working on a solution, but also highlighted that the SEC is not in the software business. He says the first-generation XBRL viewer was released in late 2006 and the commission is working on a new model with additional features.

The more important problem is the question surrounding the legal standing of XBRL filings, which are not as complete as full regulatory filings. Companies, therefore, are concerned investors relying on the interactive data may be less informed, and consequently have grounds for legal action should they feel they have been misled.

The SEC’s solution is to provide two levels of liability for XBRL exhibits: one for information viewable by investors, and one that is computer-readable only.

Reassuring noises
In early 2008 the Committee on Improved Financial Reporting (CIFR), chaired by Robert Pozen, recommended that XBRL filings should not be held to the same standard as traditional filings. The crux of this concept lies with auditor assurance and whether or not XBRL filings require auditor approval.

‘Evidence shows that users, such as analysts, want assurance on the data in many cases,’ says Eric Cohen, global XBRL technical leader at Pricewaterhouse-Coopers. ‘The preparers and users of reports need to gain a greater understanding of this new technology and its implications, both for reporting and for assurance on that reporting.’

Most experts agree this idea of ‘furnished not filed’ does not hold water. ‘The whole furnished versus filed concept is a red herring the plaintiffs bar is going to love,’ says Daniel Roberts, former chairman of XBRL US Steering Committee. ‘The SEC says, You don’t have to get audit assurance on the XBRL portion of the filing, but this is complete nonsense.’

Nearly all XBRL proponents agree XBRL will become the primary source of financial and regulatory information – so is it realistic to say that this source does not require assurance? ‘If you allow the furnished versus filing division to stand up, you are basically undermining the rationale for all filing,’ argues Roberts. ‘You are basically saying the XBRL report, which is likely to be the primary source of information for investors, does not need to be audited and there is no legal need for assurance. If the primary filing does not need to be audited, why should we bother getting auditing assurance over the rest of the financials?’

Standard approach
The risk of not having assurance is not one companies feel comfortable with. Roberts believes what will happen is that ‘no CEOs/CFOs will let themselves be exposed in such a fashion.’ The problem is that the audit companies are not ready or able to provide assurance. In addition to a general lack of understanding of the technology, having XBRL filings audited to the same standard as traditional filings will be very costly.

There are solutions, however. Cohen suggests that companies create a new note in the accounting policies used on the XBRL document and include in that which taxonomy they are using, what level of assurance they are using, and so on. This requires a deliberate and strategic decision from the senior management and a better understanding from all parties.

‘CEOs and the management team must resolve to report externally the same information that is used to manage the business,’ Cohen explains. ‘Boards of directors must determine the optimal level of transparency required to ensure all stakeholders have the information needed to make decisions, and regulators must be willing to trade long-time requirements for more relevant and useful information.’

To ensure investor confidence in XBRL reports, assurance will be necessary. In order to keep costs down, Peter Wallison, a member of CIFR, suggests companies use an internal XBRL method where the majority of the work is done in-house and the focus is on ensuring that all versions of the financial statements coincide. If the company uses an external XBRL method, there is greater likelihood of significant differences between traditional and XBRL filings, making the assurance fee slightly higher.