All too often you hear about the cost of doing business and the mountain of compliance exercises that must be undertaken for the privilege of being listed on a public stock exchange. With the seemingly endless array of documents, disclosures, and deadlines by which a public company must abide, it is no surprise that many CFOs feel the same way about the Securities and Exchange Commissions’ electronic data mandate: it is just another compliance exercise that creates no value for the company.
For those who pay little attention to the mandate and their XBRL files, the risk for a big wake-up call and potentially bigger headache is just over the horizon. XBRL documents that were previously considered to be furnished to the SEC and not subject to disciplinary action, as long as a good faith effort was made to file timely and accurate XBRL documents, are now considered to be filed and enjoy the same scrutiny and standard to which forms 10-Q and 10-K are held.
Accounting Quality Model (RoboCop)
Forbes’ article “How SEC’s New RoboCop Profiles Companies For Accounting Fraud” takes a more in depth look at some of the new methods and analyses the SEC will be applying to public company filings. The wealth of information available to the modern consumer has put the issue of accounting fraud in the spotlight. Exacerbated by the recent financial crisis that is still fresh in the minds of the public, the Obama administration has demonstrated that securities fraudsters must be identified and dealt with swiftly. The nomination of SEC Chairman Mary Jo White, a former federal prosecutor who has made it clear that more resources will be dedicated to issues of financial-statement fraud,i serves to reinforce this point. Highlighted in the article is the newly commissioned Accounting Quality Model (AQM) nicknamed “RoboCop,” which will use XBRL-tagged data among other criteria to magnify financial information for SEC examiners and increase efficiency in selecting high-risk filings for further review.
In the article, John Carney and Francesca Harker explain that the AQM “is an analytical tool which trawls corporate filings to flag high-risk activity for closer inspection by SEC enforcement teams.” Mr. Carney and Ms. Harker state that although the objective is still to identify earnings management, the proficiency with which the AQM identifies risky filings should be worrisome. Within 24 hours of a posting to EDGAR, RoboCop’s algorithm scours the XBRL-tagged data along with management’s discussion and analysis for risky behavior and compiles a risk score for the filing. The SEC will then prioritize their investigations based on these scores.
What does this mean for filers?
Confirm that your XBRL documents are correct, now. For most companies, XBRL data may contain numerous errors. To date, there have been nearly 1.4 million errors identified in XBRL filings by XBRL US (a national consortium for XML business reporting standards). RoboCop’s reliance on XBRL tagging means carelessly tagged data could mistakenly set an otherwise compliant company up for further examination. Relying on taggers who are not CPAs or do not have an in-depth knowledge of Generally Accepted Accounting Principles (GAAP), adds significant and unnecessary risk to the XBRL process. Tagging GAAP concepts correctly requires precision and expertise, so it is recommended to involve CPAs in the process.ii
For more information on XBRL tagging, or to learn how Baker Tilly specialists can help, contact our team.
i The Wall Street Journal, Where the SEC Action Will Be, http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-259785/ (August 15, 2013).
ii The American Institute of CPAs (AICPA) is focused on issues encountered by non-CPAs performing attestation work that would be best done by CPAs. Non-CPAs performing services related to XBRL lack the knowledge of GAAP to effectively review and verify the accuracy of XBRL tags in financial statements. See a discussion of these types of issues for XBRL and other service lines in the Journal of Accountancy at http://www.journalofaccountancy.com/News/20137997.htm (May 19, 2013).