This week Senators Mark Warner (D-VA) and Mike Crapo (R-ID) sent a letter to Mary Jo White, chair of the Securities and Exchange Commission, asking for the SEC to finally take action on the central reason why its open-data corporate financial reporting has failed so far. This marks the first time a Republican Senator has spoken out in support of open data in financial regulatory reporting.
Although it adopted the XBRL open data format for corporate financial statements in 2009, the SEC has continued, ever since, to require companies to file old-fashioned plain text versions as well. With companies reporting the same information twice – once as open data, and again as a document – the agency treats the document version with more care than the data version. As a result, the quality of the data versions, though now improving, remained poor for years.
In six and a half years since open data reporting began, the SEC has only once issued a public statement calling for better data quality in the XBRL versions of corporate financial statements. It appears that the agency still relies on its staffers’ manual review of the document versions to enforce the securities laws.
Poor data quality has dissuaded large “infomediaries” like Morningstar from using the XBRL versions in the data products they sell to the markets. Poor data quality has increased the costs to enterprising startups like Calcbench who use XBRL financial statements to feed their platforms.
The SEC’s failure to get XBRL right has hurt public companies, too, especially smaller ones. Open data reporting should enable analysts to follow a wider range of companies, increasing smaller companies’ ability to get noticed and ultimately lowering those companies’ costs of capital. Data quality problems have hindered the markets’ embrace of XBRL data, keeping capital costs higher than they should be. And, of course, it’s more expensive for companies to report two versions of their financial statements than to report just one, because checking back and forth between documents and data to ensure consistency costs time and money.
This week, Senators Warner and Crapo have asked Chair White to state when the SEC will stop collecting two versions of every corporate financial statement and just collect one, using the “inline XBRL,” or iXBRL, format. Inline XBRL is both human- and machine-readable. Chair White promised last November that the agency was considering iXBRL but has taken no action since.
Senators Warner and Crapo’s letter can be found here.
If Congress can persuade the SEC to finally fix its open data regime to properly serve investors, companies, and markets, the chief arguments raised by supporters of the Small Company Disclosure Simplification Act (H.R. 1965), which would partially ban XBRL, will be gone. Rep. Robert Hurt, who introduced H.R. 1965, claims that XBRL reporting costs too much and that investors don’t use the data. Moving to iXBRL would reduce compliance costs and ensure that every investor uses the data.
If the SEC takes no action, Congress might force it. The Financial Transparency Act, which continues to gain cosponsorships in the House, includes a mandate for the SEC to move to iXBRL.
The complete modernization of the SEC’s disclosure system hinges on the success of the now six-year-old open data initiative at the agency. Further, what happens at the SEC is important to the overall open data movement — for spending, legislative and nonprofit data, and beyond. So far, the SEC’s rollout has been an example of what not to do.