September 11, 2009

A Different View: “Early Problems for XBRL? A Mismatch with FASB’s GAAP Codification”

Michelle Savage of XBRL US weighs in on my recent blogs expressing concerns over the SEC’s mandatory XBRL deadline and the mismatch caused by the FASB’s new codification of accounting standards:

There seems to be some confusion about the FASB codification as relates to XBRL and how it is used with the XBRL US GAAP Taxonomies. I wanted to see if I could help set the record straight – some of the recent blogs appear to imply that because of the FASB codification extension files, companies that reference it risk having their XBRL submissions rejected.

Here are a couple of points that will hopefully clear this up: the FASB codification is there for public company preparers simply to help them have as much information as they need to select the right element to match up with their financial statement captions. Typically a public company will first look at the taxonomy element label, then at the definition and then if they’re still not sure, they’ll look at the references to check the authoritative literature. It’s not needed as part of the EDGAR submission, it doesn’t even have to be used to complete an xbrl document.

Second, when a company submits their XBRL document to the SEC’s EDGAR system, they submit the XBRL files plus any extension taxonomy that they created (essentially, if there were line items in their financial statements that were not in the US GAAP taxonomy, they have the ability of creating a new one and they need to send their company extension taxonomy which gives end users the label, definition, etc. so they know what the data means). Anyone using the 2009 US GAAP Taxonomy has no reason to send anything else. And this will be the same in 2010, 2011, etc.

Therefore, there’s no reason for a preparer to submit the codification extension as part of their filing. To try to clarify this a bit further, we’ve revised the FAQ to explain further.

By the way, Dominic Jones recently gave kudos to Michelle for her remarks on the true meaning of XBRL for investor relations officers in this blog

High-Frequency Trading: What’s the Board’s Fiduciary Duty to a Computer?

With AIG, Fannie and Freddie shooting to unpredicted heights in recent weeks – weeks when the volume of trading in their stocks represented a sizable chunk of the overall market’s volume – I’ve begun to wonder whether the high-frequency trading craze is the latest innovation by Wall Street that poisons our financial system. Computers trading with each other certainly is not new – program trading has been around for many years and now accounts for roughly half of the market’s daily trading volume. Even HFT has been around awhile; it’s not something that has sprung up over the past year.

But has HFT reached a height of popularity (eg. NY Times article) where it’s causing the market to be divorced so much from reality that it will scare retail investors away forever? AIG going to $50 makes me want to take my last dollar out of equities. The SEC and Congress recently have been delving into these concerns, including considering a ban on a subset of HFT, flash trading (see this “Zero Hedge” Blog).

I don’t know much about high-frequency trading, so I did some research (here is a WSJ primer) and there is a divergence of opinion as to its value – just like most things. Some argue it makes the market more efficient (or in simpler terms, enables investors to analyze real-time data faster, see the “Electronic Market Microstructure” Blog). Others argue that it’s a computer arms race that will just make the computer companies wealthy (eg. Rick Bookstaber).

Regardless of one’s opinion of whether high-frequency trading is a good thing, there are some governance issues to consider. One is whether it makes sense for boards to have fiduciary duties to a shareholder who essentially is a computer? Another is what happens if a voting record date happens to fall on one of those days when the computers are battling it out to move your stock price – does it make sense for 30% or more of your vote to fall in the hands of those that run these computers and don’t have a long-term interest in a company? Put another way, will high-frequency trading purposedly occur on voting record dates to gain leverage over a company? It may argued that this strategy already is employed by some.

Short-termism is growing by leaps and bounds as the “buy and hold” philosophy recently has taken its lumps. What that means for public companies and shareholder activism surely must be a prominient part of the governance reform debate. Let me know what you think.

More on “The Mentor Blog”

We continue to post new items daily on our new blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Director Independence Standards: Confusing and Lax?
– Auditors Under Pressure: More Lawsuits on the Way?
– Some Thoughts on Using Twitter: My Experiences So Far
– Do You Need an Annual Meeting Transcript?
– How to Market Yourself Through Us
– Twitter This, Twitter That: Corporate & Securities Law Issues to Consider
– A Primer on “Overboarded” Directors

– Broc Romanek