Congress Should Not Undo Progress on Financial Data Reform
A version of this op-ed was published in The Hill.
Financial statements submitted to the U.S. Securities and Exchange Commission (SEC) are used by regulators and investors alike to assess risk and detect fraud, and they are an important tool in promoting corporate transparency. In 2009, the SEC issued rules requiring public companies to submit financial statement information to the Commission in the machine readable, structured eXtensible Business Reporting Language (XBRL) data format, as opposed to just the traditional text-based document formats like PDF of HTML. This XBRL reporting requirement was an important decision as it had the potential to increase the speed, accuracy, and utility of this data. However, companies often submitted data rife with errors, frustrating investors and regulators unable to perform reliable, automated analysis of this information, causing some see the practice as wasteful and unnecessary.
In response to these shortcomings, Rep. Michael Fitzpatrick (R-PA) introduced in January 2015 H.R. 37, the Promoting Job Creation and Reducing Small Business Burdens Act, legislation that would, among other things, exempt small companies from the XBRL reporting requirement. Rolling back these filing requirements would be a large step backwards for public financial transparency, especially for investors who use this data to assess companies, and sound financial oversight by regulators. The data reporting exemptions of H.R. 37 would apply to 61 percent of public companies, and thus a massive amount of financial data would be lost as a public resource. Rather than undo what progress has been made, policymakers should address these concerns by ensuring financial data is managed in the best possible fashion.
The SEC requires submission of financial statements in both the XBRL and text-based document formats. Thus, the burden posed to small companies is the result of a redundant reporting requirement, not simply the use of a modern structured data format. By making XBRL the standard and only required format for financial statement information, companies would spend less time and money on financial reporting. Furthermore, the XBRL reporting requirement itself poses little financial burden to small companies—a recent study by the American Institute of Certified Public Accountants found that for companies that fully outsource their XBRL filings, 69 percent payed $10,000 or less. With XBRL as the required standard, investors and regulators would also see an increase in commitment to data quality, helping to alleviate frustrations about the usability and reliability of this data.
Unstructured formats like PDF and HTML pose significant challenges to usability as it is very difficult for computers to search and analyze this unstructured text, thus making these processes unnecessarily time consuming and resource intensive as they cannot be automated. The benefits of the machine readable XBRL format are impressive, but only if the data submitted is reliable and managed properly. The SEC has done well to invest in improving the usability of this data, making it a focus of its 2014-2018 strategic plan, to allow for more reliable, timely analysis by regulators and investors. However, as this enhanced commitment to good data practices is recent, it has yet to dispel some of the frustrations surrounding the reporting requirement. For example, the SEC only began publishing this data in a consolidated database in December 2014, whereas previously this data was published as thousands of separate files.
Given that it will take time for the benefits of XBRL to be fully realized by stakeholders, attempts to undo these requirements, such as those included in H.R. 37, are very shortsighted. Congress would better serve these stakeholders by requiring more, not less, information be submitted to the SEC in machine-readable formats, and abandoning the redundant requirement for document-based forms. The SEC currently collects over 600 types of submissions, yet financial statements are among the few forms required in a structured data format. In order to reap the benefits to transparency, fraud detection, investor capability, and business overhead, structured data formats should be the norm for all information collected, with high standards for the quality and usability of this data. Eschewing a modern financial reporting environment is not a viable solution to addressing the recent frustrations surrounding the XBRL reporting requirement. HR 3.7. has passed the House and currently awaits consideration by the Senate, though fortunately President Obama has said he intends to veto the bill. Expanding the data reporting requirements and abandoning inefficient, redundant document based information would not only sufficiently address stakeholder concerns, but also provide new and powerful tools that benefit the public, regulators, and the private sector.
Image: Carlos Delgado.