Some questions arise about inline XBRL requirement

The Securities and Exchange Commission (SEC) in June 2018 adopted a rule to require public companies to embed interactive data tags directly into their financial statements using a process called the inline eXtensible Business Reporting Language (XBRL).

Release No. 33-10514, Inline XBRL Filing of Tagged Data, was issued partly to solve the problem of tagging errors stemming from the current two-step process requirement to submit XBRL data as separate exhibits to financial statements, but the SEC may have created another problem commonly known as the “investor expectation gap” by not requiring the interactive data tags to be independently examined by an independent accountant.

The expectation gap occurs when there is a difference between what investors believe what should be in the financial statement and the actual contents of the financial statements. Some investors may assume that XBRL data is audited because the tags are no longer separate.

“You see how it is different than how the filings used to be… ‘Well geez, it’s in the financial statements, right? It’s got to be audited, why wouldn’t it be?’” said Mike Santay, an audit partner with an international accounting firm, who is one of many financial professionals who are worried about the possibility of investor confusion.

Financial statements tagged in XBRL can be read by computers and allow investors and regulators to more efficiently analyze and compare companies’ financial information. The rule in Release No. 33-10514, expands the use of XBRL financial information that the SEC engendered in 2009 when it adopted Release No. 33-9002, Interactive Data to Improve Financial Reporting.

The SEC may have had its reasons for excluding an audit requirement despite the potential for investor confusion. To properly examine XBRL-formated financial information, auditors would need specialized training, and they would have to do extra work. Moreover, the audits of XBRL information will occur when auditors are already pressed for time trying to complete the usual financial statement audit.

“That would probably drive some cost, and people are sensitive to that,” Santay said.

There would have also be questions about the level of assurance an auditor should provide – a full-scale audit and attestation of the tagged financial information, some limited agreed-upon procedures (AUPs), or a review of the tagged information on a more lenient “read and consider” basis, Santay said. Currently, the Public Company Accounting Oversight Board (PCAOB) has a research project on the auditor’s role on “other information” outside the financial statements, including non-generally accepted accounting principles (GAAP) measures. But the board has yet to decide whether the standard should be changed.

It may not be possible to audit XBRL data, said Mike Starr, a former deputy chief accountant with the SEC and now vice president for governmental and regulatory affairs at a software company. The company’s products include programs for preparing SEC filings. Starr said there are multiple ways to tag the same information, and the modeling required for tagging footnote disclosures is not standardized.

There are other ways to try to close the expectation gap, but they are not perfect, said Marjorie Whittaker, senior manager in an international accounting firm’s SEC Regulatory Matters Group. The SEC in the final rule said it would allow companies to voluntarily disclose whether the XBRL data was audited, but Whittaker said the option risks creating inconsistent reporting practices.

Whittaker described the risks by citing examples of different pairs of companies. In the first example, two companies have their XBRL data audited, but one discloses it to investors, and the other remains silent. In another example, a company may disclose that no audit procedure was done, while the other member of the pair stays silent about the lack of an audit.

“To the extent that there is kind of diversity in practice, that may over time—as the use of the data increases—just kind of lead to further confusion on the part of financial statement users,” Whittaker said.

Santay said there is also a question of how prominent the disclosure should be if companies were to say that specific data were or were not audited.

“Does that create implications for all the other data in the report,” he said.

Auditors could be required to make a disclosure about what they do or do not do with the XBRL data, but this, too, has flaws, according to Santay.

“We [auditors] hate to say what we are or we are not responsible for because we don’t cover everything,” Santay said. If an auditor includes a statement in its audit report that it did not examine the XBRL financial information, the statement could confuse investors. “What does that mean? Do you audit everything else?”

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