Smaller Public Companies May Be Able to Escape SEC's XBRL Requirements

A majority of public companies could soon be able to avoid a technology requirement that has vexed a great many of them in recent years.

Last Friday the House Financial Services Committee approved legislation that would exempt companies with less than $250 million in annual revenue from having to file their financial reports in Extensible Business Reporting Language, or XBRL, format for five years (see House Panel Approves Bill Exempting Small Companies from XBRL Requirement). The Securities and Exchange Commission began requiring the largest public companies to use the data-tagging format back in 2009, but phased in the requirements gradually over the next two years for smaller companies.

The technology was supposed to make it easier for investors and analysts to compare financial data across companies and industries. However, XBRL never quite lived up to its promise and endured a rocky rollout as companies struggled to tag their financials correctly and investors found a great many inaccuracies in the data, making comparisons and analysis more difficult.

Companies have also complained about the cost of implementing the technology, which can be high, at least initially. Lawmakers in Congress, always happy to claim they are cutting unnecessary regulations and lifting the shackles from small business, responded with a bill that may be going a bit too far. The Small Company Disclosure Simplification Act would apply not only to small businesses, but to any publicly traded corporation with less than $250 million in revenue. That encompasses about 60 percent of all public companies, according to XBRL US, a national consortium for XBRL reporting, which, not surprisingly, is opposed to the legislation.

Such companies might even be exempted for more than five years under the bill. The legislation would require the SEC to perform a cost-benefit analysis of the XBRL mandate’s impact on smaller public companies. Under the proposed legislation, companies with less than $250 million in annual gross revenues would be exempted from the XBRL requirement for either the later of five years after enactment of the law, or a determination by the SEC after conducting its cost-benefit analysis that the benefits to issuers outweigh the costs.

One of the bill’s sponsors, Rep. Robert Hurt, R-Va., already sounds convinced that the costs outweigh the benefits. His office contends that in order to comply with XBRL regulations, small companies must expend tens of thousands of dollars on average, even though less than 10 percent of investors actually use XBRL.

XBRL US, for its part, argues that the technology is not as expensive as opponents claim. It estimates the cost to be as low as $2,000 per year, ranging up to $25,000 per year. The group noted that the costs are already starting to decline as many companies transition to financial management programs that already incorporate the XBRL process.

The committee passed the bill by a lopsided margin of 51-5, which means it could enjoy enough bipartisan support to eventually pass both houses of Congress. The situation is reminiscent of what happened a couple of years ago with the Jumpstart Our Business Startups Act, or JOBS Act, of 2012, which exempted so-called “emerging growth companies,” which were defined as those with under $1 billion in annual gross revenues, from a number of regulations such as the outside audits of internal control that were originally mandated by the Sarbanes-Oxley Act of 2002. A number of accounting organizations and consumer advocacy groups warned that the exemption would apply to the majority of companies that go public and allow such companies to attract investors who would assume the issuer’s financial controls had been audited as carefully as any other company that had gone public in the past decade. Another exemption in the JOBS Act allows emerging growth companies to submit confidential drafts of their IPO documents to the SEC before they file for a public offering. Critics have warned that the JOBS Act would have allowed a company like Groupon to file for an IPO before watchdogs could have caught problems with the idiosyncratic financial measures the social couponing company originally used to tout its growth to potential investors.

The Financial Services Committee, a large committee that is frequently lobbied by the financial industry, originated a number of the provisions that eventually went into the JOBS Act. Similarly last Friday it passed four other regulatory relief bills along with the one exempting smaller companies from the XBRL mandate. Those included one aimed at the emerging growth company category created under the JOBS Act, reducing SEC registration and disclosure requirements. The bill, co-sponsored by Rep. Stephen Fincher, R-Tenn., and Rep. John Delaney, D-Md., passed unanimously in the committee. It would reduce the number of days that emerging growth companies must have a confidential registration statement on file with the SEC from 21 days to 15 days, allow a one-year grace period for an issuer that began the IPO process as an EGC to complete its IPO as an EGC, and clarify financial disclosure requirements for EGCs.

Perhaps the exemption for XBRL will not have the kind of wide-ranging impact that the emerging growth companies earned under the JOBS Act, as XBRL has never really won any popularity contests with either companies or investors. But the technology has always held the potential for enabling analysts to peer beneath the surface, when it’s working right and the data and tags are accurate.

The SEC has reportedly been able to use XBRL technology to search for signs of earnings manipulation and accounting fraud. The rollback of the XBRL mandate could make the job of finding fraud harder, and take away a tool that at least some investors, analysts and regulators are already using to ferret out the real financial details hiding beneath the puffery of so many inflated claims about a company’s financial performance.

Do you think XBRL should be required of all public companies?

Michael Cohn is editor-in-chief of AccountingToday.com.

Photo: Dave Dugdale/Wikimedia Commons