In 2009, the Securities and Exchange Commission (SEC) began requiring U.S. public companies to submit an open data version, encoded in the eXtensible Business Reporting Language (XBRL) format, of each quarterly financial statement.
The SEC collects the same information twice: once as an old-fashioned document and again as open data. Making matters worse, the agency systematically reviews the document version for potential errors and issues but doesn’t apply the same quality control to the XBRL version.
Open data could bring transformation to our capital markets. The use of XBRL could help investors make better decisions faster; allow the agency to use analytics to find and stop fraud; and permit companies to automate disclosure processes that used to be manual. Because open data is easier and cheaper to analyze than plain-text documents, analysts should be able to use XBRL financial statements expand their coverage, which means smaller companies should get more notice.
Unfortunately, because the SEC has not treated the open data version of each financial statement with the same care as the document version, all these benefits have remained theoretical.
As Calcbench and TagniFi have reported, the quality of the XBRL data set is so bad that investors and analysts have been reluctant to use it, which means there’s not much of a market for the software tools needed for the transformation.
But last week, a change began.
On Monday, the SEC’s Division of Corporation Finance announced it had sent letters to certain companies whose XBRL financial statements had failed to include necessary data. The agency’s requirement for public companies to submit a structured data version of each financial statement, alongside the old-fashioned document version, for each financial quarter has been in place since 2009.
Coinciding with the SEC’s action, four public companies announced corrections to previously-filed open data versions of their financial statements. In the previous five years since the start of open data reporting, only one company had ever amended an XBRL financial statement.
Why did the SEC take this step toward better data quality?
Because, one year ago, Congress started questioning why the agency had been so slow to embrace open data. Members of both parties have kept up the scrutiny ever since.
- On July 17, 2013, at the urging of Rep. Mike Quigley (D-IL), the House Appropriations Committee asked the SEC to explain its plan to improve investors’ access to corporate disclosures through accessible formats.
- On September 10, 2013, at our Data Transparency 2013 policy conference, Chairman Darrell Issa (R-CA) of the House Oversight Committee announced his committee had sent the SEC a letter asking the agency to re-start its stalled transformation from disconnected documents into open data.
- On April 1, 2014, in an Appropriations Committee hearing, Rep. Quigley asked SEC chair Mary Jo White to explain the agency’s failure to enforce open data quality.
- After an April 29, 2014, hearing of the House Financial Services Committee, Rep. Keith Ellison (D-MN) submitted questions for the record seeking similar answers.
Our Coalition has been working with these Congressional open data supporters, and others, to keep the questions coming.
Our campaign isn’t just about the financial statements currently being filed in XBRL. The agency collects hundreds of forms from public companies, financial firms, mutual funds, and other regulated entities. Most of these forms are still filed as documents, not as open data. The documents are hard for investors to understand, difficult for analysts to translate, and expensive for the agency’s staff to use. They create compliance challenges for the regulated entities.
As the SEC’s investor advisory committee recommended last year, the securities disclosure system needs total transformation.
Last week’s action is a positive step, but it is only a first step. The agency must treat the open data version of each financial statement with the same care that it applies to the old-fashioned document version. Ultimately, we hope the SEC will eliminate the current duplication and collect a single submission from public companies – one that is both human-readable and machine-readable.
The SEC should also re-start its stalled transformation from documents to open data by adopting data standards for all the information it collects under the securities laws.