Spending six years as a Program Manager for SEC filings teaches you a thing or two. Ever since the mandate kicked in, I have been closely associated with XBRL filings for a variety of U.S companies across industries, revenues, sizes, and geography. And if there is one thing common to all of them, it is the mad rush to meet the filing deadline. And we all know that preparing something as critical as financial reports in a hurry may lead to other compromises, including that of data quality with inconsistencies and inaccuracies creeping in.
And mind you, the SEC is watching! Over the past few years, the SEC has released several updates regarding a serious move to examine the quality of data in the filings submitted by corporates. These mild warnings have also been accompanied by helpful information such as augmented rules on how filers should structure their filings, maintain the quality of data, and use XBRL to connect with stakeholders.
But despite the SEC’s best intentions, the quality of filings hasn’t really changed all that much. While every rule from the SEC is ultimately for investor benefit, so that they may get a full picture of financials, most corporates just manage to meet the minimum threshold in terms of data quality. So in the larger interest of things, heres a quick cheat sheet that I came up with to help you prepare a high-quality SEC filing the next time around.
1. Double-check reporting of negative values
On November 18, 2015, the XBRL US Center for Data Quality approved certain Guidance and validation rules to help public companies detect inconsistencies or errors on their XBRL document. One of the rules was related to negative values in the instance document. Recent data published by the Center reports 34,000 errors of this kind in the Q42015 filings.
Let me explain this to you with an example. If a formula that is set to deduct the cost from revenue is fed with a negative value for the cost, it will end up adding both (you know what they say about two negatives making a positive J), thus inflating the final output! Read here to know What happens when values in XBRL are captured with the wrong signage?
The Center has therefore issued a list of elements for which negative values should not be reported. We suggest you keep this list handy and run a quick check against your final filing.
2. Check calculation relationships
You might guffaw if I asked you Does 1+1 equal 2? But in the quality reports of SEC filings, there are numerous instances of calculation errors between various reported items. In July 2014, the SEC issued a warning letter to certain public companies requiring them to define calculation relationships in their instance document in accordance with the EDGAR Filer Manual (EFM) rules 6.14 and 6.15.
As a check, there should always be a calculation link defined between all the calculation-linked relationships in the report because, the incorrectly created calculation links as well as incorrectly reported or entered values in the instance document, ultimately show up as calculation inconsistencies.
It, therefore, makes sense to ensure that calculation relationships, if necessary, have been included in the instance document.
Read here to know more on Calculation Relationships: When to use negative signage in XBRL: A birds eye-view on calculation link
3. Keep track of the final version
We all know that it takes a small army to prepare the SEC filing document. The document is prepared by one set of people, reviewed by another, and sometimes audited by a third before final submission.
And no matter how early you start, there are always last-minute changes in the report. It goes through a lot of iterations before it actually becomes final. Hence, it is of utmost importance to keep a track of all the changes and ensure that these are captured in the final document.
In such a scenario, technology plays a pivotal role. A tool with collaboration as a feature can help you keep track of all the iterations by the entire team via one single application.
4. Cross-check values in the XML and HTML versions
Once done with the document preparation, you may be sure that it carries all the necessary information, but is it presented correctly? Make sure that the XBRL output is correct and complete. Check whether the correct contexts, scales, and labels have been assigned to values. Also, ensure that all the values present in the HTML or pdf version are the same as the ones in the XML format. Remember that even though the XML and HTML versions look very different from one another, they essentially need to carry the same information. This might be especially true for companies that use different service providers or software to prepare both versions.
Moving to a single source application that gives outputs in multiple formats might be a more permanent solution.
5. Run the document through a validation engine
Now that you have prepared, edited, reviewed, and completed your filing document as per your understanding of the rules and regulations, it is always advisable to validate it before filing with the SEC. Always run your document through a validation engine. The validation tools test the document against various validations such as EFM rules, consistency and calculation checks, and other business rules. It’s possible that the engine may catch some errors that somehow got through the cracks.
6. Finally, test the waters before you leap
Even if you have run your document through a validation tool and are confident that the document is error-free, do a test submission before the final live submission. A test filing allows you to ensure that the submission is correct by checking all the assembled documents and applying host processing steps like determining the fee and checking your security codes. In a test submission, the filing fee is not deducted, the filing is not disseminated, and does not count towards your requirement to file with the SEC.
These 6 steps followed every quarter will go a long way in improving the data quality of your filings. With the SEC paying more and more attention to data quality and coming out with more validation rules, these steps will hold you in good stead so that you measure up to the regulators data quality standards.