How the SEC is Switching to 21st Century Reporting

"If we don't change direction soon, we'll end up where we're going", goes an old Yogi Berra-ish saying. Financial and business reporting in the late 20th century was heading in an unsustainable direction. To a large extent it still is.

That direction was characterized by requirements for more and more detailed information about companies' finances, ever more complex financial instruments to achieve their objectives and reporting standards growing rapidly in scope and complexity. The result was an exponential increase in the volume and complexity of corporate reports and a staggering increase in the volume and complexity of information flowing into the offices of the regulators.

These trends meant growing difficulty by investors in reading, understanding and analyzing those reports. They meant the regulators did not have the time and resources to process those reports. So a lot of the increased information began to be ignored, or, at best, poorly understood.

The SEC responded with the visionary approach of requiring filings to be done in XBRL, which essentially involved introducing metadata into the filings that could be read by computers without human intervention and therefore making it possible to analyze the data without using up valuable human resources. Very sensible and rational.

More recently, the SEC introduced its Accounting Quality Model (AQM) to actually take that XBRL data and analyze it to quickly identify anomalies which could be followed up. Exception reporting - an old idea but a natural way to deal with voluminous data.

The results of the AQM are beginning to be felt in the form of query letters to the filing companies arising from the AQM and also new initiatives being launched by the SEC.

Slowly - some say too slowly, the SEC is moving into the type of reporting that is essential in this complex world of the 21st century. Many other regulators in the world are doing and have done the same thing.

For an excellent summary/analysis of the SEC actions, check out this article from Merrill.

Automation of the financial reporting process from beginning to end, including the interaction between information providers and consumers, is the only way to deal with the informational demands of the 21st century. Hopefully more people, companies and regulators will begin to understand that.