Hoping for an XBRL break? Don’t hold your breath

By Anne Leslie-Bini on February 20, 2011

(This is a re-post of an article written by Anne Leslie-Bini for IR Web Report)

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?

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Anne Leslie-Bini

Anne Leslie-Bini is COO of raas-XBRL, a service provider specialized in high-quality, cost-effective XBRL preparation for SEC filers.  With a background in Capital Markets, Anne formerly worked as a consultant, focusing on leveraging technology advancements to optimize the business information supply chain.  Anne has been active within the wider XBRL community since 2009, participating in a number of international working groups and conferences, and is also well-known on Twitter.

Christchurch, again

Our thoughts, best wishes, and prayers go out to all in New Zealand, and especially those in Christchurch. Such a beautiful city, with the lovely Avon River, Cathedral Square, and so many individual places to note. The photos just make me want to cry. 

But just like Napier after 1931, Christchurch will again be a beautiful city. 

Tony and Anne Gibling - wonderful people, Cantabrians, friends, and safe.

I have been to Christchurch many times. In the winter you can see the mountains covered in snow in the distance, while in the summer the hot northeasterly can make the city dry and warm, with wonderful long evenings. While there has been massive damage, and there will be emotional scars to last for centuries, Christchurch is still a wonderful place. 

Lasagna, or where are all the XBRL Experts (II)?

There's nothing like a really good lasagna - well, I think so. So much so that I also like to have it the next day. A nice, thick lasagna with lots of meat, cheese, and tomato sauce. I also like to add onion, and lots of garlic, which goes with just about everything (except creme caramel of course). I've even been known to enjoy my lasagna the next day cold, cut into thin strips. But that was probably too much information.

Sometimes a message can be the same. If it's an important message (with lots of garlic etc) then it may need to be said again.  And again.

Which brings me to the message. Over a year ago I wrote "Where are the XBRL experts? I pointed out that one of the first things I said when I became Chair of the XBRL US Steering Committee was that if thousands of companies were going to produce XBRL, then we would need thousands of XBRL Experts, not the 10s or 100s that existed at the time. Well, it is more than five years later, and we still need the 1000s, not the 100s that there are today.

So what is happening? Simply put, not enough.

This year 8000+ companies in the US will provide XBRL versions of their financial statements and notes to the SEC. Over the past two years approximately 1500 - 1700 companies have provided XBRL to the SEC. Last year the first 500 or so provided additional data in the form of Detail Tagged XBRL. This year, all 1500 - 1700 companies will be providing detailed tagged financial statement and notes.

Anecdotally, the vendors are getting stretched for resources.

What does this mean?

Bluntly it means that filers who wait will pay. And they will pay top-dollar for resources that will be learning on the job, just like in those wonderful SOX days.

Does that mean the XBRL Mandate should be renamed the "full employment in the Accounting Profession Act II"? No. But it does mean that filers need to get active in their selection process.

Also, filers need to be asking the basic questions - how much of our time will this take? do we need to learn XBRL (and if so, where is the "real" training)? How much will this really cost?

In the UK there is such a shortage of resources, and some of the software is just coming on stream, that there has been an almost Cairo-like rebellion against the HMRC (Her Majesty's Revenue and Customs - their IRS equivalent). HMRC has stood firm, and has pointed out that they fully expect the iXBRL provided to be a minimum set of data, and that errors are expected this year.

The SEC has made no such statement, although from the very beginning they have said that companies get a two years window of litigation relief.

Still, the message is clear - there simply are not enough experts. There weren't enough last year when I said this (and was chastised for saying it).

Now the Blame Game

So who is to blame? Well, no one actually. With no demand, there has been no groundswell of training available, few people learning (because there are been few jobs asking for XBRL skills) and confusing messages. XBRL International has been too busy trying to keep itself afloat through under-subscribed conferences and flat jurisdiction revenue, to be running real training or adequately supporting real training. XBRL US Inc has been too focused on the taxonomy and other projects, but finally is beginning to push the importance of training.

So back to the message - where are all the XBRL experts? The unfortunate answer is - they don't exist, yet. Searches for XBRL-savy resources will become more difficult. Software and services that limit the amount of XBRL a filer actually needs to learn will be important. Also important will be the amount of time required to actually create the XBRL - because more time will almost invariably mean more knowledge required, and more work.

Companies will face the choice of building expertise internally, or outsourcing to those firms with world class processes and software - and hopefully finding companies that will do so at a fair price. After all, the trade-off will be in the cost (in dollars and time) of training someone to use what can be complex tools and processes, vs outsourcing where the prices/time/quality/effort equation delivers a more cost effective result than building the skills internally.

A secret - in my lasagna there are only two things I use "pre-made"; the lasagna pasta and sometimes I use a jar of sauce as my base. I know my limitations, and creating a great tomato based sauce is beyond my expertise, so I "outsource" that. It's still a very good lasagna, if I do say so...

Old building, wrong solutions

A friend was telling me about a co-op meeting in his building, quite an old building. The roof needs cleaning. After much to'ing and fro'ing, the building managers came back with four proposals. The first two were to clean to roof. The other two were to put four new windows in the roof that will facilitate future access, for future cleaning and repairs to the roof, oh, and to clean the roof. There's no indication that repairs are needed now, but just in case, here's a proposal to make it easier when they do repair the roof.

It seemed really sensible, until they thought about it, and realised that the requirement was to clean the roof. Certainly future repairs will be required. In fact, as an old building, there is a constant stream of repairs required, the trick being to phase and plan the repairs, not to react to each requirement by trying to solve a different problem.

Now I know the analogy has problems, but it got me thinking about the SEC's XBRL reporting mandate.

In effect the SEC has added a requirement that reporting companies provide a "cleaner" version of their 10K/10Q filings. After all, isn't that one of the core benefits of XBRL, cleaner data, fewer errors, greater confidence that what is tagged equates to a common taxonomy element clearly defined and understood by all.

And now we get to the co-ops options: provide cleaner data in the XBRL format, or replace their existing consolidation and financial reporting software with a new system and environment that will also enable them to provide XBRL to the SEC. Certainly that old building of consolidation reporting probably needs a number of repairs, and I'm willing to bet it is out of date, inefficient, etc etc. Is the new reporting requirement an adequate level of problem to provide the justification and ROI for replacing the roof?

In some cases, absolutely.

In others, maybe a second, or even third (not to mention a first) careful look at the business case would be a good idea.

At the building, they've asked the building manager to come back with a multi-year strategic plan for maintenance and eventual roof repair. They've also accepted one of the two bids just to clean the roof. Seems a sensible approach to me.