XBRL and The Big Stick

On Wednesday of last week PR Newswire sponsored a set of webcast presentations on XBRL. This was part of PR Newswire’s increasing engagement with XBRL. The company is in the business of publishing earnings releases and would like to see more of them arriving tagged in XBRL. To that end, PR Newswire has entered into a number of agreements with technology firms and others engaged in XBRL. last week’s panel discussion showcased an agreement with Rivet Software, in which PR Newswire offers Rivet’s Dragon Tag tool, which can be used to set up XBRL tagging of documents from Microsoft Excel and Word. The panel included Campbell Pryde, Executive Director at Morgan Stanley, Wayne Harding, VP Business Development at Rivet Software, Daniel Roberts, National Director of Assurance Innovation at Grant Thornton LLP and Vice-Chair US Adoption for XBRL-US, and Liv Watson, Vice President of XBRL at EDGAR Online, Inc.

The presentations would be useful for anyone wanting an update on XBRL issues. They are available in an onlinearchive.

As anyone following my contributions on the Gilbane blogs knows, I think that XBRL is an important early-stage standards initiative. I also find myself wondering about the eventual pace and scope of XBRL adoption. In particular, I have been wondering what will drive adoption. Much of the early XBRL activity has been focused around external financial reporting–rather than internal use of XBRL–and I have been wondering where the payoff would be for a company. If the benefits of these early XBRL initiatives go primarily to external users, what is the motivation for the investment?

One common answer is the “Big Stick” theory of adoption–the SEC is going to MAKE companies use XBRL. Well … maybe. I heard Peter Derby, Managing Executive for Operations and Management at the SEC, talk about the SEC’s XBRL initiative at the 11th International XBRL conference, and he sure didn’t sound like he was ready to make XBRL submissions a requirement. (see my blog entry on Derby’s presentation). But, there certainly could be another story behind the official, public assertion that the market, not agencies, should set standards. Does the SEC have strong motivations of its own to push for faster, more pervasive use of XBRL–or something like it?

Daniel Roberts of Grant Thornton used part of his time during last week’s panel presentation to argue that there is indeed such a motivation. Roberts acknowledged all of the official reasons for the SEC voluntary program–testing technology features, uncovering software available for data tagging, finding out how mature the taxonomies are, discovering how deeply data will be tagged, assessing the amount of effort required to tag the data, and–of course–assessing the utility of the tagging for the SEC. However, in Roberts’ view these official reasons leave out the BIG reason that the SEC needs XBRL. According to Roberts, the SEC needs XBRL so that the agency does not end up buried in a mountain of paper (or PDF or HTML — which are largely the same thing when it comes to analyzing financial reports) and with keeping the SEC out of trouble with Congress.

According to Roberts, the SEC now receives a million pages of newly filed information every day. Given this enormous stream of data, the SEC is currently able to review the financial statements from only about 18% of the companies submitting filings each year. Roberts directed attention to the language of Section 408 of the Sarbanes Oxley Act, which reads, “In no event shall an issuer required to file reports under section 13(a) or 15(d) of the Securities Exchange Act of 1934 be reviewed under this section less frequently than once every 3 years.” If the SEC is currently doing only 18% of the companies a year, and they are required to review every company no less frequently than every three years, well … do the math.

Further, given the outcry from companies having difficulty meeting SEC deadlines under the Sarbanes Oxley Act, Roberts said that it was highly unlikely that the SEC would want to report back to Congress with the news that the SEC, itself, was not able to meet the requirements of the Act.

In short, Roberts argued that the SEC needs XBRL more than it is letting on and that companies should expect to find that XBRL submissions are required within a matter of years. Given that outlook, companies would be well-advised to get started on the XBRL learning curve now, while submissions are voluntary, while you can use XBRL for a quarter, skip it for a quarter, upgrade your tools and techniques, and try again.

There is no doubt about it: A Big Stick makes an impressive argument. And there can be no doubt that the SEC does have a Big Stick. The question that remains, given the U.S. discomfort with setting technology standards by regulatory decree and the change to a new SEC chairman who is generally expected to be less aggressive in introducing regulations, is whether the SEC will want to use its Big Stick to answer the question of why companies should adopt XBRL. What do you think?