Twin moves on the technology front late in 2005 were warning shots for any company filing with the SEC. In fact, they’ll have profound effects throughout the securities markets.
In October 2005 the SEC called for an update on the state of XBRL handling mechanisms. XBRL is a software language that makes every number in a document easily identifiable. Unlike a paper document or even an electronic PDF, XBRL lets you find, compare and analyze information at computer speeds. The SEC said it wanted to see what the state of play is on this subject, both to understand the landscape and to uncover new technologies it could put to work.
One of the goals of XBRL – or of an alternative, should one exist – is to give commission staff the ability to analyze company data more rapidly and to identify problems, including fraud, more rapidly and more cheaply. But to get to that point, they have to know what tools are available.
Meanwhile, the SEC has said it is time for a new contract for Edgar, the commission’s database of filings. It was heralded as a major step forward when first brought into play nearly 20 years ago, but is now quite long in the tooth. Fortunately, this is understood by the man heading up technology at the SEC: chief information officer Corey Booth.
Leading the charge
‘Government is usually at the trailing edge: as long as everyone else is doing it, we’ll do it, too,’ notes ex-McKinsey consultant Booth. ‘Now we are a lot closer to leading the charge.’ Booth arrived at the SEC in 2004, just as the commission was showing real interest in what XBRL can do. He is cagey about details of the new SEC push but his boss, chairman Christopher Cox, is far from a wallflower when it comes to using the latest technology.
Cox is new to SEC leadership but he has taken a very active role in promoting and pushing for what the commission likes to call ‘tagged data’: a speech at a fall meeting of the Securities Industry Association urged filers to get into XBRL. Another, at a joint meeting of the American Institute of Certified Public Accountants (AICPA) and the SEC in December praised the accounting industry’s leadership, and even a televised address to technocrats gathered in Tokyo talked the deep mumbo-jumbo of XBRL implementation. This all reveals a technically hip regulator.
‘He sits in on a lot of our meetings,’ says Booth. Having the boss at the table when tech issues are being chewed over is the sort of thing that marks the difference between leading edge and simply riding in the wake of advanced companies in the corporate world. At a government agency, it is almost unheard of.
In addition to ‘getting it’ when it comes to the advantages of using XBRL, Cox knows there is a big bonus for the SEC. Among the onerous rules that grabbed headlines under Sarbanes-Oxley is a requirement that the SEC audit all listed companies once every three years, causing a major drain on staff and the budget. The new automated software processing will massively streamline that.
Freeing up the human and financial capital also means more resources to apply to the task of finding fraud and acting on it. Thus, when fully implemented, a new Edgar with XBRL will mean a commission with more teeth.
Beating the drum
All this makes some observers say a real sea change may be at hand after years of circling the issue. Accountants and some international bodies have been active in pursuing XBRL but the vast majority of US companies have been slow to act. Fewer than a dozen have been involved in the SEC’s test of XBRL filings, begun last April.
But change is in the air. ‘We have spent the last year laying the core technology in Edgar, as well as pursuing the rule-making and beating the drum to get more momentum, increasing the number of filers and getting industry behind it,’ explains Booth.
IR officers may well hear the message from their company secretary or finance department. In December the president of AICPA, Leslie Murphy, told a joint SEC-AICPA meeting, ‘Over the last year we have focused attention on how XBRL actually improves registrants’ communications and connection with their investing public. The question you should be asking yourself is, Why would my company not support making investors better informed? Next year, we should be reporting that hundreds of companies are filing using XBRL.’
Frank Fernandez, chief economist at the SIA, was there when Cox made a call for action at the late fall SIA meeting in Boca Raton. ‘This is a migration that has been going on quietly for years,’ Fernandez says. ‘Yes, I think we will see companies in their hundreds using XBRL for filing by the end of 2006.’
Faster, easier, cheaper
Cox is noted for his can-do work on Capitol Hill. And he knows how to make people sit up and take notice. While his evangelical work on XBRL includes points about speed, efficiency and usefulness of data that can be parsed by computers, he also throws in a line that grabs C-level attention. ‘It can make it easier, less expensive and less time-consuming for companies – and their accountants – to comply with SEC reporting requirements. It is not mere wishful thinking that interactive data would make it possible for a significant part of the 404 work to be automated,’ Cox told a Washington gathering.
At a time when 404 requirements, which companies have complained are very costly to meet, are starting to become somewhat more routinely seen as a cost of doing business, Cox’s pointed comment on savings isn’t likely to be ignored. But just how fast will things get moving? The new contract for Edgar will be awarded by mid-2006. Obviously getting the replacement system underway will take more time. But the SEC could move more quickly on XBRL rule-making, perhaps getting it parallel to the technical development.
In a November news release, Cox said: ‘During the next twelve months the SEC will move beyond the Edgar concept of electronic filing of paper-based forms to an interactive data concept in which investors can have instant access to data that’s ready to use in many software applications on their desktops.’
No-one at the SEC will be drawn on when XBRL filings might become mandatory, but change is in the air. While vested interests often obstruct new initiatives if they fear closer perusal or added costs, the commission says its early feedback is encouraging. ‘I don’t think we have any political problems,’ says Booth. ‘The issue is how to proceed, not whether. The day I will know we have won is the day you have hedge funds making money in trades from SEC filings.’
