Are Your Public Filings Hard to Analyze?

I’m a CPA. So every time I make a large purchase, I do the research first. I didn’t buy my last car on a whim – I looked at various makes and models in order to decide which one was best for me. Fortunately, I could use any of a number of websites that allow consumers to compare vehicles, and I did. I compared horsepower, fuel economy and safety ratings, among other things. The ability to compare vehicles helped to make a difficult decision much easier. I bought a Ford F-150, if you’re interested.

In the business world, the ability to compare one company to another is just as valuable as comparing vehicles before a car purchase. Investors and financial analysts rely on a company’s financials for comparisons. They may process the information differently and use different ratios, but they all receive the same initial data. In 2009, the Securities and Exchange Commission mandated that public companies must use Extensible Business Reporting Language in the reports they file so that financial data would be consistent in comparisons between companies.

XBRL was designed to tag numerical and textual data within a company’s filings, and it allows end users to access financial reporting information interactively. The tags work in much the same way as barcodes and allow users to process information more efficiently. The US GAAP Taxonomy defines how each tagged line item in a financial statement relates to a structure of reporting concepts, and companies are charged with assigning tags within their filings. Some companies tag their own filings, while others hire third-party companies to assign the tags.

Although the SEC recommends that public companies use the standardized tags found in the taxonomy, they have the option of creating custom tags to explain items that may not be covered in the standard tags. If companies overuse custom tags, however, the benefits of standardization can be reduced greatly.

It’s not surprising, then, that custom tagging has already created an issue in XBRL filings. In a review of filings from 2009 to 2013, the SEC found that smaller filers had an average custom tag rate almost 50 percent greater than that of larger filers.  These results are counterintuitive since smaller filers should, in most cases, have simpler financial statements that are easier to tag using the standard taxonomy. But in the group of sample filers who had custom tag rates greater than 50 percent of the total, approximately 96 percent were smaller filers. Many of these small filers with high custom tag rates used third-party companies to create their XBRL exhibits.

An overabundance of custom tags and incorrect tags can render a set of financial statements useless to an analyst – unless the analyst is willing to put in the time to research the tags and pull out the relevant data.  Just like in our everyday decisions, however, these investors want comparability in order to make informed decisions about where to invest their money.

Investors, however, are not the only ones using XBRL data. The SEC is also utilizing XBRL in its analysis of filers. This increased use of XBRL brings with it an emphasis on data quality by the SEC. So while some may think of XBRL as an unnecessary burden or something that isn’t being used, that is not the case. Analysts rely on this information to make informed decisions and regulators are also utilizing and analyzing these filings for their own purposes. Companies, therefore, should take the necessary steps to have their XBRL filings reviewed prior to submission, even if a third party firm is handling the tagging, because in the end the company is responsible for its own information.

The HORNE PMM team reviews filings for clients who have hired third-party companies or who have tagged their own filings, and helps them identify standard tags that can replace custom tags. The PMM team also finds tags that have been incorrectly assigned and tags relevant data that may not have a tag at all.

Custom tags, however, are not the only problems we find. Other errors include negative values, scaling problems and the use of improper dates, just to name a few. In your efforts to attract analysts and new investors to your company, make sure that your SEC filings are as close to standard as possible, using a minimum of custom tags. Whether you hire an outside firm or review your filings in house, make sure your financials are easy to report, easy to analyze and, ultimately, easy to recommend.



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Topics: SEC, XBRL, Taxonomy

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