SEC highlights XBRL’s role in enhancing enforcement activities

Posted on July 7, 2024 by Editor

The US's Financial Data Transparency Act of 2022 (FDTA), which came into force in December 2022, mandates the Securities and Exchange Commission (SEC) to report on the use of machine-readable data for corporate disclosures. The SEC recently published the third edition of this report, detailing the public and internal use of XBRL data, identifying disclosures that use machine-readable data, analysing the associated costs and benefits, summarising enforcement actions, and outlining the SEC's use of the data. This reporting will continue biannually until December 2029.

The SEC report underscores significant benefits from using XBRL in its enforcement activities. According to the report, the SEC's enforcement division has leveraged machine-readable data to efficiently analyse disclosures and accounting practices of individual companies, as well as perform sophisticated cross-sectional analyses.

The requirement to tag disclosures in XBRL has helped enforcement staff to detect indications of earnings management and other financial misconduct more effectively. Over the past four years, this capability has led to actions against six public companies and several individuals for artificially meeting or exceeding consensus earnings-per-share estimates.

The report highlights a specific case in 2023 involving a Colombian conglomerate, where XBRL data facilitated the detection of Foreign Corrupt Practices Act violations. The SEC notes that without machine-readable data identifying such violations would have been significantly more challenging.

XBRL has also contributed to reduced information-processing costs, increased market efficiency, and enhanced competition by reducing insider advantages. The report says that companies have benefited from lower audit fees, improved financial reporting timeliness, and enhanced performance benchmarking.

Despite the initial compliance costs, which range from $1,500 to $30,000 annually depending on company size, the SEC believes that the long-term benefits of XBRL will continue to grow as more tools become available.

Find the full report here.