Don’t look now, but disagreement may be brewing among Republicans in Washington over the future of XBRL, the data-tagging technology that companies use when submitting financial statements to the SEC.
On one side are Republicans in the House Financial Services Committee, who want to exempt a vast number of smaller public companies from filing financial statements “tagged” in XBRL. On the other side are Republicans at the Securities & Exchange Commission, who want to preserve the XBRL compliance requirement that’s been in place since 2011.
We’re going to see all manner of partisan fights over regulatory reform in months to come, rest assured. But XBRL is one of the few subjects where we may see discord among Republicans themselves—and where, hopefully, House Republicans will see their antiquated ideas die on the vine.
At Issue is Section 411 of the Financial Choice Act, the brainchild of Rep. Jeb Hensarling, chair of the House Financial Services Committee. Section 411 would exempt any company with annual revenue of less than $250 million, as well as all companies that qualify as an Emerging Growth Company (that is, a new filer with less than $1 billion in annual revenue), from compliance with the XBRL mandate. Instead, XBRL filing would be optional.
If Section 411 comes to pass—and we’ll explore momentarily why it probably won’t—that would blow a hole in the SEC’s ambitions for presentation and analysis of financial data. XBRL allows computers to read financial data automatically, free from the errors that happen when junior analysts pore over SEC filings individually and transcribe data into new spreadsheets by hand. In an XBRL-enabled world, software algorithms scoop up financial data immediately, and can then present that data with precision, speed, and sophistication.
Better analysis means you can reach decisions more quickly and at lower cost. Financial analysts can follow more companies, including smaller filers that typically don’t get coverage. Corporate accounting departments can study peers and implement new standards more quickly. Auditors can sulk at lost hourly billables, when said accounting staff present their evidence more completely. Regulators can study financial statements and audits for trouble more efficiently.
The SEC sees this, and hence has been pushing new XBRL adoption. In March, the agency voted to propose “Inline XBRL,” a next-generation version of the technology that eliminates the need for filers to submit a separate set of exhibits with their filings. The agency also voted to require foreign private issuers to start submitting statements in XBRL by next year.
We should also note that both measures were supported even by stalwart Republican commissioner Michael Piwowar, who doesn’t like anything. If Piwowar supports a new requirement, it’s a good requirement.
Back to Hensarling & Co.
So why are Hensarling and his henchmen pushing Section 411? It’s possible that they support XBRL reversal because they don’t even know what XBRL is; language similar Section 411 has figured into conservatives’ regulation rollback fantasies for years.
And once upon a time, compliance costs for XBRL were a nuisance (especially for smaller filers), without much upside because the technology was still finding its footing. Those days are gone. Today compliance is well integrated into your normal SEC filing routines with providers like Donnelley Financial Services, Merrill, or Workiva. The costs will fall even further as Inline XBRL goes mainstream, since that will eliminate the need to prepare and file a separate set of XBRL-tagged exhibits.
All that makes Section 411 seem quaint, another knee-jerk anti-regulatory impulse from a knee-jerk anti-regulatory voice. If Hensarling looked up his history, he would discover that a crucial proponent of XBRL adoption was former SEC chairman Christopher Cox in the 2000s—who previously served in Congress as a leader of, you guessed it, the House Financial Services Committee.
The good news is that no such language ever crept into regulatory reform proposals in the Senate, which (good lord) passes for the grown-ups in Washington these days. The Senate Banking Committee will lead whatever regulatory reform we do see, and neither chairman Mike Crapo, R-Idaho, nor ranking Democrat Mark Warner, D-Va., have shown any interest in XBRL repeal.
Behind the Scenes
XBRL enthusiasts might have seen that regulators are stepping up their attention lately to XBRL’s success. For example, a crucial step in making XBRL work is the annual taxonomy of GAAP terminology published by the Financial Accounting Standards Board: the dictionary that connects GAAP terms to XBRL tags. Well, last week FASB published an invitation to comment on the efficiency and effectiveness of its taxonomy.
Meanwhile, the SEC is rumored to be scrutinizing how it uses XBRL in its own operations, and how efficiently the technology drives its analytics for possible enforcement actions or SEC comment letters on your filings. The SEC also wants to make more progress eliminating errors in XBRL exhibits; errors are still a nagging concern, even if error rates today are far lower than they were in early years of XBRL compliance. And we can’t discount Piwowar’s push for Inline XBRL, which is the biggest boost to XBRL efficiency of all.
One might almost think the SEC is preparing a major cost-benefit analysis—in case, say, staffers in the Senate Banking Committee wanted some evidence of XBRL’s usefulness, to whack down House Republicans once legislation gets close to a final deal. Or perhaps Piwowar and new chairman Jay Clayton will dispatch their own minions to Congress, to convince Republicans there not to make hash of a regulation that actually works.
Indeed, I also can’t help but notice an escape hatch Hensarling included in Section 411: a provision at the end saying Section 411 can be repealed if the SEC demonstrates, through a rather onerous analysis, that XBRL’s benefits to issuers outweigh the costs. That repeal still couldn’t happen until at least three years after the Financial Choice Act became law (if ever), and another part of Hensarling’s proposal would make those cost-benefit analyses almost impossible to achieve—but hey, the escape hatch is there.
The best outcome would be that the Senate ignores Hensarling’s bill, and moves forward with legislation that leaves XBRL in place. Thankfully, the statisticians who analyze these things estimate that Hensarling’s bill has only an 11 percent chance of passage. Here’s hoping that estimate is just the beginning, and Hensarling’s bad idea goes quietly into the night.