September 26, 2007

What in the XBRL is Going On?

Yesterday, the SEC pulled out all the stops in marketing its “landmark” announcement that the XBRL taxonomy for US GAAP is ready to be tested by third parties (but not the general public quite yet), with an intended completion date of December 5th. It certainly is quite an achievement for the team that has worked closely with the SEC Staff to get this project moving faster than imaginable. This development follows last week’s announcement that the SEC has made the source code for its Interactive Financial Report Viewer available for free use by the market.

This is all to the good. However, I get a little worried about the Chairman’s remarks that rules could be proposed in the Spring and adopted as early as next Fall – and that these final rules could have include a schedule mandating XBRL. Something this big – and this technical – takes time based on historical experience with Edgar, etc. [Perhaps an omen was the fact that the SEC’s press conference yesterday was delayed half an hour due to technical glitches. They were breaking out the duct tape!]

It is comforting to know that – for the last year – 8,300 U.S. financial institutions have been using XBRL to submit their quarterly Call Reports to the banking regulators. But my faint memory of Call Reports is that they are fairly simplistic compared to US GAAP – but it’s still comforting to know that there is some XBRL experience out there beyond the several dozen pilot volunteers.

During his remarks, Chairman Cox waxed about a mythical Sally Q spending more time with her kids because XBRL saved her research time. I understand the point, but I don’t really view XBRL as a substitute for reviewing SEC filings. We all know that two companies with identical situations might well report completely different numbers for a particular line item because each selected a different accounting treatment. Reading the financials in their full context will continue to remain important. [Here is an old article about putting together a form on the fly; I’m not sure how this could work and keep numbers in context – maybe someone could explain that to me?]

In the end, I think the bigger impact of XBRL will be on the ability for companies to internally put together their financials. Yes, there might be cost savings – but there also will be implementation costs. But the real change here might be a streamlined and quicker process for gathering the data that makes up a company’s financials. It’s gonna be an interesting ride for Captain XBRL

Misreporting Results: More Than One Way to Do It

From Lynn Turner: People often wonder ask why there are restatements – corrections of errors – in financial statements. Of course, fraud – such as the multitude of companies in a list as long as your arm such as Enron, Worldcom, Parmalot, Adelphia, Lernout and Hauspie, Tyco, etc. – has been one reason for restatements have wrecked havoc on shareholder portfolios.

But the fact that financial statements were just flat out done wrong the first time can also be a key reason. As noted in this 1998 article citing two surveys, a very high percentage of financial executives acknowledge themselves that they had done their financial statements wrong. And many more were using flexibility in accounting rules to present a less balanced, but more favorable view, of the company.

No wonder since the corporate scandals began to break in 2001 and 2002, and new reforms have subsequently been implemented, that there has been plenty of restatements necessary. If people in a survey were willing to say the books were cooked, one can only imagine how much cooking was actually going on. You can’t have the high percentage of books being cooked that are cited in these surveys and avoid a wave of restatements. In the culture evidenced by the surveys, getting it done right the first time was not rewarded. As a result, a lot of companies are getting a chance to get it right the second time.

Ten Compensation Disclosure Fixes

The Sept-Oct 2007 issue of The Corporate Counsel – which has just been sent to the printer – includes important analysis and guidance regarding fixes companies will need to make to their proxy disclosures next year given the SEC’s recent wave of comment letters – and much more.

We have posted this blurred issue so that non-subscribers can get a sense of it before trying a 2008 no-risk trial, under which you can get this issue and the rest of 2007 for free. The issue includes pieces on:

– Ten Compensation Disclosure Fixes
– Disclose Performance Target Levels Whenever Possible
– Make Benchmarking Disclosure Meaningful
– Provide the Whole Termination and Change-in-Control Picture
– Maximize the Utility of the Compensation Tables
– Staff Affirms “No-Sale” for Restricted Stock
– Use of S-3ASR instead of S-8 to Register Stock Plan?
– Rule 14a-8 Proof of “Record” Ownership—Staff Says No to Investment Advisor Affirmation
– Filing Form T-1 After S-3 Effectiveness—Don’t Use Form 8-K
– Updating the Exhibit 5 Legality Opinion at Each Shelf Takedown
– California’s Listed Issuers/Securities Exemptions Updated
– Rule 144—Acting in Concert Under a 401(k) Plan

– Broc Romanek