AMERICAN businesses affected by Sarbanes-Oxley legislation still vividly remember the days leading up to the deadline for SOX 404 compliance back in 2004/2005, and the vast army of internal control specialists that were mobilized — at sometimes eye-watering rates — to help filers meet their Section 404 requirements.
The SEC estimated that the average cost to business would be $91,000 to implement SOX section 404, although in reality the bill was often a lot steeper. At the end of the day, the burden on business was seen to be so overwhelming that the requirement was deferred for the smaller filers.
Now, here we are in 2011, Year 3 of the SEC’s phased-in XBRL program, which will see an estimated 8,000+ companies filing their 10Qs and 10Ks for the first time.
US companies have had other priorities
In Susan Kelly’s recent article in Treasury and Risk, Campbell Pryde, CEO of XBRL US Inc., is quoted as saying, “Everyone’s known about [the XBRL mandate] for the last three years, so a lot of the vendors have been ramping up to do it.”
Even if that’s true, let’s not forget the economic backdrop of the past three years: the financial system just about collapsed; the economy was brought to its knees; and a stream of changes in accounting policy came in. The reality is that companies have been largely preoccupied with other things: most have experienced severe difficulty retaining access to the credit markets, and simply surviving has been as much as many have been able to do.
Respectfully, it is not unreasonable to assume that American business has had “other priorities” these past three years, and as XBRL was not seen as a matter of urgency amongst so many other pressing concerns, it simply passed to the back of the mind and all the way out the back door.
But 2011 is now upon us and the Tier-3 companies are staring down the barrel of a mandate that the FEI’s member survey (PDF 437 KB) says will add significant additional effort to the production of 10K/10Q filings, while at the same time adding time after “pencils down” to prepare and review the XBRL filing.
In view of this and other reported findings such as Grant Thornton’s 2010 survey, it is frankly unsurprising to see a definite reluctance to engage and a growing disenchantment with the SEC’s XBRL program amongst registrants. But is this in itself sufficient justification for the SEC to instigate a deferment for smaller filers?
The short answer is “no.”
XBRL important to SEC objectives
The SEC embarked on the XBRL program not purely for “transparency” and improved information access for the investor community. One of the key, though less publicized, reasons behind the XBRL program is the fact that XBRL acts as an enabling technology for the rapid identification of companies that require review by the SEC. After all, while smaller filers managed to escape SOX section 404, the SEC cannot escape its own responsibilities under SOX section 408, which requires a review of all filers not less than once every three years, and every year for filers meeting a pre-defined set of criteria.
Protecting investors and the wider capital markets remains the primary function of the XBRL mandate and given its importance, this effectively trumps filer discontent at the extra burden that XBRL preparation lumbers them with. There is nowhere for filers to hide and they should not expect safe-harbor protection from the SEC when they encounter escalating costs for their XBRL production because the necessary resources have become scarce.
So indeed, Campbell Pryde is right when he says that Tier-3 filers have had three years to prepare for the looming XBRL deadline, at least in theory. Equally, the vendor market has had three years to build the skill sets needed to deliver the services that XBRL preparation demands; and the services market has behaved like all efficient markets should; it has matched supply to demand.
Cost may spike, but less expensive than betting on deferment
However, it is an undeniable fact that demand is about to surge, and the reality is that XBRL supply, in terms of fully-trained XBRL-savvy individuals, is relatively inelastic, implying a longer adjustment phase on supply-side capacity. What this means for filers is that a “supply crunch” is imminent, and it is likely that we will witness a substantial, maybe even SOX-like, hike in prices.
Unfortunately for filers, limited supply of XBRL expertise is not sufficient reason in itself for the SEC to defer the mandate. Visibly, many Tier-3 companies have yet to secure a vendor relationship or to develop internal capabilities for producing the XBRL the SEC mandate requires them to file and post on their company websites. However, any filer betting on a deferment of the XBRL filing requirement for 2011 is taking a very dangerous, and potentially, very expensive bet.
Given the current climate, where investors are demanding that companies be squeaky-clean and über-transparent, can any SEC filer reasonably run the risk of being non-compliant?