Last week the SEC adopted a rule for companies to use Inline XBRL technology with their corporate reports starting as early as next year. The good news for financial reporting executives: this rule will streamlines the technical work necessary in filing financial statements to the SEC.
The more intriguing news for everyone else: The SEC’s approach to this rule offers some glimpses into how the Commission might try to negotiate or pivot around Republicans in Congress, hellbent on deregulating every financial regulation they can find.
First, the rule itself. XBRL is the technology that allows companies to “tag” every piece of financial data in its statements, so software programs can find and display specific financial data more quickly. For example, you would tag the top number in the income statement as “revenue,” the middle ones as “operating income,” “SG&A expense,” and so forth, and the bottom one as “net income.” Humans can then use software that reads those tags, and lets us build much more sophisticated financial analysis models.
XBRL has been standard fare in the United States since 2010 — but companies had to file one set of HTML documents for people to read, and a separate set of XBRL documents for software to read. That’s duplicative, and financial reporting teams have never been thrilled with the extra complexity.
Last year the SEC began to address the problem by launching a voluntary pilot program for filing statements using Inline XBRL, where one set of documents can satisfy both technology needs. Once a company makes the shift to Inline XBRL, filings become cheaper and easier over time, and we still preserve that powerful analysis potential that XBRL brings.
The SEC voted last week to make that shift to Inline XBRL mandatory. Large accelerated filers must comply starting in June 2019; accelerated filers in June 2020; and all other filers in June 2021. Large fund groups with net assets of $1 billion or more must comply in two years, all other fund groups in three.
Commissioner Michael Piwowar, a Republican appointee who is stepping down at the end of this week, has long been a proponent of XBRL. He led this charge with fellow commissioner Kara Stein, a Democrat. They pointed to an AICPA study showing costs of using XBRL have dropped by 41 percent since 2014, and the average burden on smaller reporting companies is just under $6,000 a year. Piwowar said he expects the costs will continue to decrease.
XBRL Rules and Politics
This rule is so interesting because XBRL is one of the few instances where the Republican-led SEC is at odds with the Republican-led Congress. The House Financial Services Committee has been pushing to repeal the XBRL mandate for years. Last month, for example, the committee passed HR 5054, a bill that would exempt a large swath of new or small public companies from the XBRL mandate.
Now, that bill made it through the committee on a party-line vote, Democrats opposed. Even if it passes the full House, the Senate would need to approve similar legislation. The Senate has no such similar legislation, and senators will be too busy strangling each other over Supreme Court nominees for the next few months anyway. No wonder GovTrack.com gives HR 5054 a “prognosis” of only 16 percent.
The SEC faces a delicate act here. The agency itself is a major consumer of corporate financial data, and loves XBRL. XBRL allows it to conduct more sophisticated analysis, which in turn helps the commission with everything from economic analysis to enforcement to rulemaking. It’s worth noting that Piwowar, an economist by training and a devotee of smart cost-benefit analyses, supports XBRL — and Piwowar is also a conservative who generally doesn’t like any regulatory mandate. He likes this one.
I suspect if the House Republicans’ knives come too close to XBRL, the SEC will try kill the idea in the Senate. And moving to a smarter version of the technology, Inline XBRL, shows that the SEC is trying to address filers complaints’ at least somewhat, while also protecting investors’ ability to study financial data in a modern, intelligent way.
Watch Out for the Option
The lone dissenter in last week’s SEC vote was Hester Peirce, a Republican appointee who joined the commission in January. Peirce said the SEC shouldn’t force filers to use a particular technology, especially on an aggressive timeline. She suggested keeping the voluntary program instead.
“I suspect that if we retained the voluntary program, over time — as the technology becomes cheaper, easier to use, and more popular with investors — the number of small participants would rise without a Commission mandate,” Peirce said.
That’s much the same argument House Republicans used with their repeal effort. We only want to make it optional, they said! Companies can still use XBRL if they want, and if investors want it, then they’ll reward companies that use it and more will follow suit. Let the market decide!
Rest assured, we’re going to hear that argument lots more in the future: that we can just make some set of compliance or governance obligations optional, and filers can disclose what practice they use. Then the market can decide which ones are best practice.
Never mind that Republicans in thrall to the U.S. Chamber of Commerce will try to define “some set” of compliance requirements as “all of them.”
I don’t know that the SEC will go that far. It will, however, want to address lots of these issues itself before Republicans in Congress address those issues for it. Compliance with Section 404(b) of Sarbanes-Oxley, compensation disclosure rules, non-financial risk disclosures — take your pick, and they’ll be in the crosshairs.