Congress should not undo progress on financial data reform

Financial statements submitted to the U.S. Securities and Exchange Commission (SEC) are used by regulators and investors alike to assess risk and detect fraud, and are an important tool in promoting corporate transparency. In 2009, the SEC issued rules requiring public companies to submit financial statement information in the machine-readable eXtensible Business Reporting Language (XBRL) data format, as opposed to traditional, text-based formats like PDF or HTML. This decision had the potential to increase the speed, accuracy and utility of this data. However, company submissions were often rife with errors, frustrating investors and regulators who were unable to perform reliable, automated analysis of this information, causing some to see the practice as wasteful and unnecessary.

{mosads}In response to these shortcomings, Rep. Michael Fitzpatrick (R-Pa.) introduced the Promoting Job Creation and Reducing Small Business Burdens Act in January 2015. The legislation would, among other things, exempt small companies from the XBRL reporting requirement.

While there is a legitimate need for reform, rolling back these filing requirements would be a large step backwards for public financial transparency. This would be especially true for investors who use this data to assess companies, and for regulators seeking to enhance oversight of publicly traded corporations. The data reporting exemptions in the act would apply to 61 percent of public companies, and thus a massive amount of financial data would be lost as a public resource. Rather than undo what progress has been made, policymakers should address the concerns raised by ensuring that financial data is managed in the best possible fashion.

The SEC requires submission of financial statements in both the XBRL and text-based document formats. Thus, the burden posed to small companies is the result of a redundant reporting requirement, not simply the use of a modern structured data format. By making XBRL the standard and only required format for financial statement information, companies would spend less time and money on financial reporting. Furthermore, the XBRL reporting requirement itself poses little financial burden to small companies — a recent study by the American Institute of Certified Public Accountants found that for companies that fully outsource their XBRL filings, 69 percent paid $10,000 or less. With XBRL as the required standard, investors and regulators would also see an increase in the commitment to data quality, helping to alleviate frustrations about the usability and reliability of this data.

Unstructured formats like PDF and HTML pose significant challenges to usability, as it is very difficult for computers to search and analyze this text, thus making these processes unnecessarily time-consuming and resource-intensive as they cannot be automated. The benefits of the machine-readable XBRL format are impressive, but only if the data submitted are reliable and managed properly. The SEC has done well to invest in improving the usability of the data, making them a focus of its 2014 to 2018 strategic plan, allowing for more reliable, timely analysis by regulators and investors. However, as this enhanced commitment to good data practices is recent, it has yet to dispel some of the frustrations surrounding the reporting requirement. For example, the SEC only began publishing the data in a consolidated database in December 2014, whereas previously the data were published as thousands of separate files.

Given that it will take time for the benefits of XBRL to be fully realized by stakeholders, attempts to undo these requirements, such as those included in Fitzpatrick’s bill, are shortsighted. Congress would better serve these stakeholders by requiring that more, not less, information be submitted to the SEC in machine-readable formats, and abandoning the redundant requirement for document-based forms. The SEC currently collects over 600 types of submissions, yet financial statements are among the few forms required in a structured data format. In order to reap the benefits to transparency, fraud detection, investor capability and business overhead, structured data formats should be the norm for all information collected, with high standards for the quality and usability of this data. Eschewing a modern financial reporting environment is not a viable solution to addressing the recent frustrations surrounding XBRL reporting. Expanding data reporting requirements and abandoning inefficient, redundant document-based information would not only sufficiently address stakeholder concerns, but also provide new and powerful tools that benefit the public, regulators and the private sector.

This piece has been corrected to accurately reflect the name of the American Institute of Certified Public Accountants.

Castro is director of the Center for Data Innovation and New is a policy analyst with the Center.