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XBRL

Don’t Drink The Pond Water!

By March 17, 2014No Comments

Dear Investor:

This June marks the 5th anniversary of the SEC’s XBRL mandate that promised more accurate and timely information to the investing public. Here is an except from the SEC’s proposed rule on XBRL from June 2008:

Interactive data also could provide a significant opportunity to automate regulatory filings and business information processing, with the potential to increase the speed, accuracy, and usability of financial disclosure. Such automation could eventually reduce costs.”  (1)

Since the mandate took effect in 2009 there have been over 100,000 filings with XBRL disclosures, each containing some very valuable information. Unfortunately, these filings are also filled with errors that make the information difficult to consume without taking significant measures to correct the information as it was intended to be represented.

Using the SEC’s XBRL data without correcting the errors is the equivalent of drinking pond water through your faucet. These errors are not confined to smaller companies or companies that recently began filings their financials in XBRL. We find errors across the spectrum of size and industry, including companies generating significantly more than $250 million in revenue and those that have been filing in XBRL for almost 5 years.

The following financial statements were delivered to the SEC on November 5, 2013 by a company that investors trust to facilitate over $1 trillion in transactions every month yet they, and the SEC, distribute erroneous XBRL financial statements to the public containing basic debit and credit errors. 

Example #1: Income Statement Errors

NYSE-IS2

The above income statement indicates interest expense (debit) for the 3-month periods ended September 30th and interest income (credit) for the 9-month periods ended September 30th. However, a quick look at the HTML version of the filing (below) shows that all periods should be expenses (debits).

NYSE-IS-HTML

If an investor used the erroneous interest expense from this filing’s XBRL it could have resulted in bad decisions. Bad decisions cost money and the jobs of those who make them. Our small startup has built the technology to identify and correct these errors so that they don’t end up in our customers’ analysis. The filer (NYSE Euronext), their XBRL vendor (WebFilings), and the SEC all missed this error. There is no reason that all three of the nodes in this supply chain should have allows this error to be distributed to the investing public. Nobody is checking the math. This is why investors are not using XBRL.

Example #2: Cash Flow Statement Errors

The same filing from NYSE Euronext also contains an error on the cash flow statement. Specifically, the line “Sales of equity investments and businesses” is omitted from the XBRL filing.

NYSE-CF-HTML

As a result, Net Cash Used in Investing Activities does not compute for the period in the XBRL filing because there is $156 million in cash flow missing. There have been investment banking analysts fired for much lesser mistakes. Nobody is checking the math. This is why investors are not using XBRL.

NYSE-CF

If you found these two errors in the same filing would you have any faith in the quality of the rest of the company’s data? If you had found errors from multiple companies would you trust the quality of the data in the entire dataset? This is why investors are not using XBRL.

NYSE Euronext generated $3.7 billion of revenue in the year preceding this error (2). Excluding smaller companies from the requirement to file XBRL disclosures will not fix these types of errors.

NYSE Euronext filed their first XBRL disclosure with the SEC on August 7, 2009, more than 4 years before this error. These errors will not correct themselves over time without either validation or enforcement from the SEC. This is why investors are not using XBRL. 

Fix it. Don’t close it.

Please join me in asking congress and the SEC to fix the errors in XBRL so that you and other investors will start getting value out of the significant investment that has been made in the technology. Exempting small filers as has been recently proposed is not the solution.

Notes:

(1) Source: http://www.sec.gov/rules/proposed/2008/33-8924.pdf

(2) NYSE Euronext was subsequently acquired by IntercontinentalExchange on November 13, 2013. This was the last XBRL filing made by NYSE Euronext.