Expanding Role in SEC Compliance
David T. Copenhafer
- Meeting SEC compliance requirements has never been easy.
But since the advent of mandated electronic filing in June
1996, SEC registrants have witnessed a steady increase in
the role technology plays in the disclosure process.
technical progression started with the SEC’s electronic
data gathering, analysis, and retrieval (EDGAR) system,
which moved most compliance from the traditional world of
paper, typewriters, photocopiers, and hand delivery into
a new, unfamiliar electronic environment. Personal computers,
application software, document formats, and electronic communication
were all unwelcome intruders into a world that had been
stable, manageable, and generally successful for decades.
Despite initial shocks and difficulties, the electronic
document preparation and filing processes are now comfortable
and familiar to many.
the addition of hypertext markup language (HTML) in 1999
added another layer of complexity to the U.S. filing and
disclosure processes, most issuers took the change in stride.
In fact, non-U.S. issuers have shown themselves to be the
most aggressive HTML filers: 76% of non-U.S. issuers filed
Form 20-F in HTML during 2004, while only 58% of their U.S.
counterparts filed their annual reports on Form 10-K in
HTML. Foreign issuers have also been leaders in pushing
the stylistic limits of HTML in their SEC filings.
some might wish that electronic filing and document presentation
issues were the extent of the technical intrusions into
the compliance process, things have not stopped there. Recent
accounting and auditing failures have led to a series of
regulatory changes that have, in turn, produced a flurry
of technology-related initiatives:
XML (Extensible Markup Language) for Section 16 ownership
Automated filing solutions from a number of vendors for
accelerated 8-K filing;
Automated filing solutions for international issuers filing
Issuer applications to meet Sarbanes-Oxley Act (SOA) section
404 requirements; and
An XBRL (Extensible Business Reporting Language) pilot
project at the SEC.
technical changes are simply byproducts of nontechnical
changes in the statutes or in the SEC’s disclosure
rules. Accelerated filing deadlines, for example, have led
many issuers to look to technology for ways to speed up
the reporting and disclosure process. Self-service applications
for smaller 6-Ks and 8-Ks also fall into this category.
But the technology involved in meeting the requirements
of SOA section 404 or participating in the XBRL pilot both
represent more significant investments.
are finding that an internal controls program that satisfies
SOA section 404 and ensures that the issuer receives the
needed auditor attestation will touch almost every aspect
of a company’s information processing. While the fundamental
objectives of section 404 are to ensure that a company’s
financial statements are created within a secure, controlled,
well-defined, auditable environment, the typical section
404 program must be supported by an extensive set of automated
project management applications, report generators, and
information-processing audit trails.
price tag attached to the technical and staff resources
needed to ensure successful compliance in this area is only
now being recognized, but by most accounts, it is substantial.
An SEC public roundtable in mid-April reviewed the cost-benefit
implications of section 404 compliance. Issuers are not
the only ones relying upon technology to solve compliance
problems. The U.S. Congress and the SEC both appear to believe
that the time has come to examine how technology might make
disclosure data (financial as well as narrative) easier
for computers to handle.
offers recipients and users of disclosure documents “tagged”
information that computerized applications can use to locate,
extract, manipulate, and summarize in manifold ways. If
XBRL meets expectations, it will ultimately become part
of every company’s general ledger as a set of tags
or markers associated with each accounting entry. Compliance
reports filed in XBRL will present the company’s finances,
as well as narrative discussions, in a format that could
make automated analysis simple for anyone with an analytical
software application that understands the XBRL tags.
SEC is hoping XBRL will help it meet the mandate of SOA
section 408, which obligates it to review every listed issuer
no less than once every three years. XBRL may even form
the basis for the “real-time” disclosure of
corporate financial data. But XBRL is a still long way from
large-scale implementation. The specifications and technical
tools needed to create and effectively use XBRL are only
now being refined to the point where they can be considered
usable. The SEC’s pilot program is important, however,
because it will give everyone involved—issuers, regulators,
analysts, investors, as well as software developers—a
chance to see if XBRL deserves to be the next big technical
T. Copenhafer is director of EDGAR Services at Bowne
& Co., Inc. (www.bowne.com),
an international financial printing and business solutions