The Truth About The SEC’s RoboCop & The Importance of XBRL Data Quality

August 12th, 2013

 

If you find the deluge of information on the internet (and filling up your inbox) regarding XBRL, SEC Compliance, and the end of the Limited Liability period for SEC Filers, to be a bit overwhelming — you are not alone. We here at RDG Filings think so much of this information glut stems from certain sales tactics that hope to benefit from hysteria and misunderstanding. However, every now and then we find an article or a blog-post that is truly helpful and important. John Carney and Francesca Harker’s recent online article for Forbes is a valuable resource to anyone seeking to pick the value from the online rubbish.

The article from 8/09/2013 is titled “How SEC’s New RoboCop Profiles Companies For Accounting Fraud.” Carney and Harker offer an excellent explanation of the SEC’s new fraud detection tool—Accounting Quality Model (aka: AQM or RoboCop)—operates, and how corporate filers can avoid being flagged as potential wrongdoers by automated system. The authors also briefly profile Mary Jo White, who was recently appointed the Chairman of the SEC, and discuss the “renewed commitment by the SEC to seek out violations of financial reporting regulations” that she brings to the SEC.

When President Obama introduced Mary Jo White as the new Chairman for the SEC, he warned that “You don’t want to mess with Mary Jo.” To back that up, Ms. White, in an interview with the Wall Street Journal after her appointment said: “I think financial-statement fraud, accounting fraud has always been important to the SEC. It’s certainly an area that I’m interested in, and you’re going to see more targeted resources in that area going forward.”

You can read about some of the new initiatives the SEC has recently introduced under Mary Jo White’s leadership in a previous blog post by RDG Filings, but all the new initiatives are made possible primary by Accounting Quality Model (“AQM” or “RoboCop”) and the advent of XBRL filing. According to the Forbes Article, RoboCop “is an analytical tool which trawls corporate filings to flag high-risk activity for closer inspection by SEC enforcement teams.”

As Carney and Harker explain it, “RoboCop’s objective – to identify earnings management – is not a novel one.” It is not the analytical strategy that is unique, and it would not in-and-of-itself be concerning to SEC Filers. However, it is RoboCop’s “proficiency that should worry filers.” The SEC’s RoboCop is capable of extending the traditional earnings management approach “by including discretionary accrual factors in its regression.” Additionally, it is the speed with which RoboCop can raise potential red flags about a filing that is revolutionary for the SEC’s enforcement teams. As the Forbes article explains: “RoboCop is a fully automated system. Within 24 hours from the time a filing is posted to EDGAR, it is processed by the AQM and the results are stored in a database. The AQM outputs a risk score which informs SEC auditors of the likelihood that a filing is fraudulent.”

RDG wants to highlight this article for you because it not only offers a good explanation of the AQM-RoboCop system, but it also explains how it will affect SEC Filers. It could be easy to overlook the fact that all of the SEC’s new enforcement tools and initiatives are made possible by XBRL, and creating quality, compliant, and clean XBRL filings will only become more important as the SEC moves forward with these new strategies. Filing excellent XBRL documents will be the first and most important line of defense against the AQM-RoboCop system flagging your company for further SEC attention. Carney and Harker write that “because RoboCop is an automated system looking for oddities, it is unable to account for mistakes made. This is particularly important because the AQM relies on the newly-mandated XBRL data which is prone to mistakes by the inexperienced. Sloppy entries could land your company’s filing at the top of the list for close examination.”

As Carney and Harker state, software is unable to account for mistakes made. The next logical deduction is that it doesn’t matter which of the various software programs you use, because what’s more important is the person using the software, and their expertise in creating the documents.

Yes, we at RDG Filings are pleased that this article so strongly validates of our service model. Additionally, we think this article highlights this fundamental truth about XBRL reporting — If you do not know what you are doing, you are prone to XBRL mistakes that will put your company at risk of being flagged. It takes human understanding, experience, and expertise to build excellent XBRL filings; software cannot do it alone.

RDG Filings has years of experience doing XBRL tagging and filing, and we offer unparalleled Quality Assurance Services that will ensure your filings far exceed the standard of SEC compliance. RDG Filings has the knowledge, expertise, and experience to ensure that the AQM-RoboCop tool being deployed daily by the SEC are far less likely to flag your XBRL filings. Additionally, RDG can give you the support you need should the SEC’s examiners contact you with questions, because as Carney and Harker explain, the SEC’s “increased reliance on an automated model means examiners will come across filings with high risk scores which have not engaged in any fraudulent activity.” This means that “exam teams will be in more frequent contact with filers and will also more readily accept legitimate explanations for filing decisions. “ RDG Filings will ensure your XBRL filings are held to the highest standards, and we will also be a resource to help you “respond quickly to inquiries with a reasoned explanation for accounting choices.”

Carney and Harker conclude that it “is more important than ever for corporate filers to understand SEC enforcement strategies, especially the AQM, in order to decrease the likelihood that their firm will be the subject of an expensive SEC audit.”

We at RDG could not agree more with these conclusions, and we can help any SEC Filer who wants to know that their XBRL filings exceed SEC validation requirements, and will be in line with the enhanced standards, protocols, and guidelines already put forward by the FASB, the AICPA, the US-GAAP, XBRL.US, and others.

This is what we do at RDG Filings. Please get in touch if we can be of service.

Stewart Walker – SVP, Director of Sales.  415.643.6017