The Slow Death of Financial Forms

By creating a new data-tagged filing system, the commission will end its "form-based" habits — and it expects companies to do the same.
Sarah JohnsonAugust 19, 2008

The Securities and Exchange Commission has introduced a new system that supports data-tagged financial statements, which large companies will likely have to start filing later this year. The changes will break the SEC from its “form-based approach” for collecting information from companies, according to an academic who is studying how the commission can better disseminate data.

Within the next three to five years, investors may no longer see the familiar paper-based 8-Ks and 10-Ks they look up today on EDGAR, the SEC’s 20-year-old database for housing corporate regulatory filings. “We’re not going to get rid of the forms. The forms will simply die,” said William Lutz, an English professor at Rutgers University who is working on the SEC’s 21st Century Disclosure Initiative.

In other words, the data provided to the SEC can be more easily reviewed and searched by investors using the new version of EDGAR, which is called IDEA, or Interactive Data Electronic Applications. They would be able to analyze and compare companies on their own without paying a third party to aggregate financial information for them.

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On Tuesday, SEC Chairman Christopher Cox presented IDEA during a news conference and said it will be fully up and running in three years. He claims the new system — which will cost the SEC $48 million — will make the task of filing 8-Ks and 10-Ks with the commission more efficient and less expensive over time. “IDEA keeps the SEC on the cutting edge of technology and makes sure the information investors get is more accessible and more reliable,” he said.

His vision depends on all of the SEC’s registrants using XBRL — or extensible business reporting language. The SEC’s timeline for requiring all publicly traded companies to implement the technology has the smallest of them making those types of filings by the end of 2010.

The first year of using XBRL will cost a company tens of thousands of dollars, Cox said, depending on its size. He resisted reporters’ questions to be more specific. XBRL’s ongoing expense is “modest,” he added.

The changes companies will have to make aren’t that much different from the work involved in switching operating systems, Cox said. “No one likes to do it but you become more functional and efficient once you do,” he added.

The popular thinking by those in the SEC, and proponents of XBRL, is that CFOs won’t become interested in tagging their financials unless they have to — and the full potential of XBRL won’t be realized unless every company uses it so that investors can make easy comparisons. Indeed, the number of volunteers in the SEC’s three-year pilot program never got above the three-digit mark.

Cox said that the SEC will vote on the proposal by the end of the year. If approved, the commission will require U.S. publicly traded companies with market caps above $5 billion to use XBRL on their next 10-Ks. Smaller companies and businesses that use international financial reporting standards would later have to comply.

Companies would have 30 days after submitting their SEC filings the traditional way to share their XBRL-prepared versions with the SEC. They also have a year after they first begin using the technology to tag their footnotes and schedules.

However, critics don’t believe the commission has built enough leeway into the proposal. Finance executives have sent letters to the SEC criticizing its “aggressive” timeline and questioning whether the regulator has truly thought out how much the requirement will cost their companies. Moreover, they wrote, the proposal could lead to a rush on service providers not fully ready to meet the high demand when small companies begin to use data tagging.

As for EDGAR’s future, the database will still exist as the SEC expects to keep it running indefinitely. Still, Cox bid a fond farewell to the database he considers a “trusted old friend” that was becoming more expensive to maintain. He said, “We all want to tip our hat to EDGAR…. We won’t ever forget him.”

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