The SEC’s Risky New IDEA -Interactive Data Electronic Applications (IDEA, for short) - 8/21/08

The SEC’s Risky New IDEA

http://dirtdiggersdigest.org/archives/173

August 21, 2008 by Phil Mattera

When you go to the Securities and Exchange Commission website these days, the first thing you see is an animation that looks like something out of The Matrix films or the TV show Numb3rs.
It seems the agency’s accountants and lawyers are trying to look cool
as they move toward the creation of a new system for distributing
public-company financial information on the web.

This week SEC Chairman Christopher Cox (photo) unveiled
Interactive Data Electronic Applications (IDEA, for short), the
successor to the EDGAR system that corporate researchers have relied on
since the mid-1990s for easy access to 10-Ks, proxy statements and the
like. The big selling point of IDEA is tagging. Companies (and mutual
funds) will be required to prepare their filings so that key pieces of
information are electronically labeled—using a system called XBRL—and
thus can be easily retrieved and compared to corresponding data from
other companies. The first interactive filings are expected to be
available through IDEA late this year. EDGAR will stick around
indefinitely as an archive for pre-interactive filings.

“With IDEA,” the SEC press release
gushes, “investors will be able to instantly collate information from
thousands of companies and forms, and create reports and analysis on
the fly, in any way they choose.”

I just finished watching the webcast
of Cox’s press conference earlier this week and came away with mixed
feelings about IDEA. In one respect, it will be great to be able to
readily extract specific nuggets of information. My concern is the
emphasis being placed on disclosure as simply a collection of pieces of
data. This may serve the needs of financial analysts and investors, but
as a corporate researcher, I find that some of the most valuable
portions of SEC filings are narratives rather than
numbers—for example, the descriptions of a company’s operations, its
competitive position and its legal problems that appear in 10-Ks.

As Cox finally mentioned about an hour into the press conference,
tagging can be applied to text as well as numbers. Yet I can’t help
worry that the direction the SEC is going in will tend to reduce
narratives to bite-size portions that serve to diminish the full scope
of disclosure. It was not comforting to hear William Lutz, the outside
academic who is advising the SEC on a complete overhaul
of its entire disclosure system, suggest during the press conference
that the forms (10-K, 10-Q, etc.) companies are currently required to
file will be phased out. Perhaps it was unintentional, but the
impression Lutz and Cox gave is that future disclosure will be mainly
quantitative.

This shift in focus from text to numbers would, I believe, increase
the risk that company reporting on social and environmental matters,
already inadequate, will be scaled back. That may not mean much for
short-sighted investors, but it would be a major setback for corporate
accountability.