SEC Commissioner Caroline Crenshaw in a speech said that requiring public companies to use structured data format in certain filings has been beneficial to analysts. But she said there is room for improvement in terms of quality and accuracy of the data.
She said that some have found material error rates in data tagged in SEC filings, including errors in revenues, net income, and asset. Some also found impactful scaling errors.
“Both filers and the SEC have roles to play in mitigating these errors. The primary responsibility lies with filers, of course, and there are many tools available to aid with the submission of high-quality, accurate data,” Crenshaw said at XBRL Investor Forum 2021 with CFA Society New York on November 10.
The SEC in January 2009 adopted rules that require companies to submit interactive data tags using eXtensible Business Reporting Language (XBRL) as separate exhibits to financial statements.
XBRL, which is machine-readable, makes it easier to compare a company’s information across time periods, against other companies, and between data in SEC filings and other agency filings. It also allows for faster and more sophisticated analysis. For example, analysts can access more granular information about the data, such as accounting codifications and guidance associated with it.
In June 2018, the SEC upgraded the rule with a requirement for companies to embed XBRL tags directly into the financial statements to reduce error rates and lower costs. This process is called Inline XBRL.
A tool that preparers can use is validation warnings that EDGAR provides, Crenshaw said.
EDGAR, for example, flags a particular data quality issue, such as the use of outdated tags. And she said that companies should make sure that they address the warnings. EDGAR is short for Electronic Data Gathering, Analysis, and Retrieval filing system.
She said companies can also use XBRL US, which provides data quality validation.
“Use of these is not required but can assist in identifying errors, and I would encourage filers to take advantage of this free resource,” Crenshaw recommended. “XBRL US also publishes information about which filings have data quality errors, as measured against their validation rules – that information is available to the public, and I would encourage filers to take a look.”
Crenshaw also warned companies not to overuse custom tags. While they have information value, she said inappropriate use can increase investor misunderstanding.
“Filers should make an effort to use standard tags, and only use custom tags when appropriate – that is, when no standard tag is applicable,” she suggested.
Moreover, she encouraged preparers to read SEC staff guidance on structured disclosure.
For example, the staff alerted issues like scaling errors on public float data and incorrect period end dates.
While companies are primarily responsible to provide accurate data, she said the SEC still has a role to play.
“In addition to the resources offered by the Office of Structured Disclosure that I just mentioned, the SEC staff has released public comment letters regarding deficiencies in XBRL filings,” she said. “The SEC staff should utilize this tool as much as possible, to help highlight and address common errors. The SEC could also consider expanding the requirements for auditor assurance, to provide for more third-party verification and validation of tags.”
Other Areas Where XBRL Can Be Beneficial
Crenshaw, in her remarks, said that other types of filings that today do not require interactive data should have the requirement. And she pointed to Commissioner Allison Herren Lee’s speech last year when she said structured data could be used for climate change and other environmental, social, and governance (ESG) disclosures.
Lee also talked about the potential benefits of using structured data in Form N-PX, which contains information about proxy voting by investment funds.
“We at the SEC should continue to investigate where else data structuring can improve our disclosure ecosystem. The tagging of narrative disclosures, even just block tagging, could enable data users to more easily extract and compare non-structured disclosures, like management discussion and analysis, earnings reports, and executive compensation,” she said. “This could be relevant in the context of ESG disclosures, SPAC disclosures, and elsewhere.”
