XBRL-based Reports, Audit, Report Quality

The European Single Market Authority (ESMA) is an independent European Union (EU) authority whose purpose is to improve investor protection and promote stable, orderly financial markets. As part of that mission, the ESMA collects financial information from regulated companies.  The European Parliament mandates that this information be provided in electronic form using regulatory technical standards (RTS).  

To this end, the ESMA developed the European Single Electronic Format (ESEF). That ESEF format is described in the ESEF Reporting Manual. That reporting manual specifies, among other things, that the reports submitted to the ESMA be prepared using Inline XBRL.

Inline XBRL is a global standard technical format published by XBRL International. Inline XBRL is composed of two pieces or you might think of them as "layers".  One layer is HTML which is used to present the information so that humans can read that information.  Embedded within that first layer is XBRL which enables machines to reliably read and understand that information.  Below is a screenshot that shows a small sample of Inline XBRL provided by XBRL International and if you click on this link you can experience viewing Inline XBRL using a global standard Inline XBRL Viewer.


Information submitted to the ESMA within financial reports is required to be audited (see Chapter II, Article 4). 

The European Commission has issued a communication relating to the preparation, audit, and publication of financial statements created using the ESEF which are then submitted to the ESMA.

The last paragraph of section 2.1 of that document makes the following statement (emphasis is mine):

"To ensure the integrity of the internal market and a homogeneous level of protection for all users of financial statements and annual financial reports, users should be granted the same level of protection irrespective of how they access the information contained in the financial statements, be it for instance via scanned-paper documents or via electronically structured documents."

As such, the information provided by those ESEF based reports should not have errors because that information is audited.  That information should be of very, very high quality.

Yet, there are many rather obvious financial reporting related errors in those reports submitted to the ESMA using the ESEF format.  Basic things like:
  • Entering a fact as a POSITIVE when it should have been entered as a NEGATIVE; or entered as NEGATIVE when the fact should have been POSITIVE
  • Using the wrong concept to identify a fact
  • Using a concept incorrectly relative to some other concept
  • Fundamental inconsistencies such as the balance sheet not balancing (here are others)
  • Inappropriate extension concepts created when an appropriate concept exists in the provided XBRL taxonomies
  • Etc.
Marc Houllier of Corporatings is pointing out issues with the quality of those financial statements submitted to the ESMA using the ESEF format:

Others such as myself and XBRLogic have pointed out issues with XBRL-based reports that have been submitted to the U.S. Securities and Exchange Commission (SEC). XBRL US understands the quality issues, they started the Data Quality Committee and publish sets of rules to detect quality problems.  Even the SEC has put a "shot across the bow" of public companies submitting information to the SEC within their XBRL format.  

Here is documentation for literally hundreds of errors in XBRL-based reports submitted to the SEC to help give you an idea of the sorts of mistakes that also exist in ESEF reports submitted to the ESMA

I, as a certified public accountant, am quite interested in creating provably correct financial reports including XBRL-based financial reports and created a best practices based method for doing so which I call the Seattle Method.

If you have good tools (like I do), and you have a lot of experience with XBRL-based reports (like I do), and you simply look (like I do); it is not particularly hard to see mistakes in XBRL-based financial reports. 

These are not XBRL technical errors, the XBRL technical syntax is actually quite good in XBRL-based reports because of a very high quality XBRL International conformance suite which software vendors use to test their software.  Errors exist in things like the fundamental accounting concepts and relations between those concepts as one example.

Who is responsible for detecting and correcting these quality problems? 

  • Are auditors responsible? The ESMA seems to think that they have a role in report usability and quality impacts usability.  
  • Are the companies that create the actual reports responsible? Clearly they play a role.
  • Are software vendors responsible? Yes, if their tools cannot enable the creation of provably correct reports then the tools are not working correctly.
  • Are the ESMA and SEC responsible?  I think yes; they should be requiring more robust inbound verification of reports to detect these sorts of issues so that they can be corrected prior to report submission.  
  • Are the IFRS Foundation and FASB responsible for quality problems? I say yes, they should be publishing better XBRL Taxonomies used to create the reports.  
  • Is XBRL International responsible in some way?  Well, I don't think they are directly responsible but they could help software vendors understand XBRL-based financial reporting better so that those software vendors can build better software.

Also, would it be helpful if the U.S. SEC had an audit requirement similar to the ESMA?  I think yes.

XBRL-based reporting can never rise to it's true full potential if those creating XBRL-based information cannot control report quality. Trust has to be both justified and earned.

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