SEC Nudges Companies on XBRL Quality

The Securities and Exchange Commission published a reminder last week for companies to pay attention to the details of the XBRL “tags” they use in securities filings, rather than risk receiving a comment letter from SEC staff asking the company to explain why its filings aren’t meeting expectations.

The SEC published a sample comment letter about shoddy XBRL flings last week, along with a few paragraphs of guidance. It’s as tepid a warning as the SEC can deliver — but a warning it remains, that blowing off your XBRL filing obligations is not cool and will get a sterner response in the future.

XBRL is the data-tagging language companies must use when filing registration statements and quarterly reports to the commission. Every piece of financial data is tagged in XBRL, which allows other software applications to parse the data quickly and precisely. For example, financial analysts can use applications to read XBRL-tagged statements and pull companies’ financial data into whatever models the analysts have cooked up in Excel spreadsheets.

Companies have had to file their financial statements in XBRL for more than a decade, but the quality of those filings has not always been ideal: for example, companies accidentally tagging a positive number as a negative one, or applying the wrong tag to a certain piece of data. Human eyes reading the filing would still comprehend the written numbers correctly, but software processing the incorrect tags would display incorrect information.

Last year Congress directed the SEC to improve the quality of corporate financial data, as part of the Financial Data Transparency Act of 2022. This sample comment letter about XBRL tags is part of that improvement program.

“The following illustrative letter contains sample comments that, depending on the particular facts and circumstances, and type of filing under review, the Division [of Corporation Finance] may issue to certain companies,” the SEC said in its guidance. “The Division urges companies to consider these sample comments and additional guidance in this area as they prepare their disclosure documents.”

The sample comment letter is standard-issue stuff that any corporate securities team might receive from the SEC. It includes a few examples of common XBRL errors, such as:

• Not including the required “Inline XBRL” presentation, which is a newer version of XBRL that the SEC began mandating in 2018.
• Presenting the same piece of data in several places but using different values, such as presenting the whole amount in one instance and the same amount in thousands in the second. That’s a no-no; you need to be consistent throughout the filing. 
• Changing the tag for a certain piece of data from one period to the next. Yes you can do that, but you need to provide a solid analysis of why the change was necessary.
• Using a “custom” tag (that is, a tag you wrote yourself) rather than one from the SEC-approved taxonomy of XBRL tags. Again, permissible in theory, but you need to state a compelling reason why it’s necessary.

Of course, here in the real world there are plenty more possible XBRL filing errors than the ones mentioned in the sample comment letter. Most companies use a dedicated vendor such as Workiva or R.R. Donnelley to prepare their filings, including the proper XBRL tags. Your VP of external reporting may want to have a catch-up phone call with your vendor just to be sure that everything is done according to Hoyle — or, in this case, according to XBRL.