Henry Ford once said, “Coming together is a beginning, staying together is progress, and working together is a success.” That quote rings so true when the end goal is to democratize the availability and usability of financial and ESG data.
Today, we face that crossroad. As the U.S. continues the second decade of XBRL implementation for corporate financial reporting, and the EU comes on board next year with ESEF, we face the same dilemma:
How do we fulfill that common objective to make financial data easily accessible and usable to all stakeholders?
It's All About Accessibility, Usability and Comparability
The SEC states that "accessible and usable disclosures are central to the SEC's mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation."
Similarly, the goal of the European Single Electronic Format (ESEF) is to make reporting easier for issuers and to facilitate accessibility, analysis, and comparability of annual financial reports. While these aspirations represent ideals we at idaciti share with, we also know and experience the realities of the rocky and bumpy road to get there. In the following summary, we lay out five critical ingredients for achieving true democratization of financial and non-financial company data.
Five Essential Components for Democratizing of Financial and ESG Data
A Single Electronic Access Point
The SEC’s EDGAR platform makes all public company financial and non-financial, structured, and unstructured information freely available to all stakeholders. As of writing, ESMA has yet to announce how the XBRL filings in the EU will be made available to the public. Will the filings be available in a centralized portal? Or, will they be made available through each of the individual member jurisdiction’s portal?
Quality Control at the Submission Level
Since the inception of the XBRL mandate in the U.S., the SEC has not publicly ‘called out’ specific filers for errors and inconsistencies in tagging. With strict oversight and enforcement of XBRL data from the SEC, companies will be held accountable for the XBRL technical and accounting-related tagging errors. Quality control at the submission level is critical. Investors, analysts, and the public rely on this data for decision-making. ESMA is in the position to learn from the experience in the U.S. and be more actively engage in enforcing data quality.
Integrate ESG Data
Investors are demanding more data outside of the financial statements and footnotes to help them with their investment decisions, especially data surrounding ESG. Integrating structured ESG data and structured financial data would allow investors more efficiently to execute their investment decisions.
With great excitement, we note the recent announcement of the sustainability standard-setters' commitment to collaborate and work together to develop a framework to connect sustainability disclosures to GAAP reporting disclosures. While ESMA has placed ESG at the core of its activities, the SEC appears to be rolling back required disclosures surrounding environmental and human capital risks.
Apply the Same Audit Standards
Based on the reading of the Transparency Directive issued by the EU, the Committee of European Auditing Oversight Bodies (CEAOB) concluded that the XBRL metadata embedded in the electronic filing would be required to be audited to comply with the European Single Electronic Filing (ESEF) requirement.
In the U.S., there is no audit requirement on the XBRL filing or XBRL metadata embedded in the iXBRL filing. Since the iXBRL filings are now the only source of financial statement information made by companies to the SEC, investors rely on the information and data contained therein for investment decisions.
It begs the question of when the SEC will follow the EU's footsteps to require the iXBRL filing to be audited explicitly?
Keep the Consumers in Mind & Listen to the Consumers
The goal of structuring financial and ESG data is to help the capital markets function more efficiently. Investors and stakeholders rely on this information to help allocate capital more effectively. Hence, listening to what investors, analysts, and stakeholders, the consumers of this information, want, and need is critical.
Drawing on the wisdom of Henry Ford, success means that all stakeholders - regulators and standard-setters around the world, investors and analysts, companies, and auditors - should come together. Only when all collaborate to fulfill that common objective to make financial data easily accessible, available, and usable can we truly democratize the data.
