The Effect of XBRL Adoption on the Receipt and Remediation of SEC Comment Letters

• In Event: Finding and Fixing Accounting Problems

Abstract

Given that the SEC’s review process is associated with enhancement of financial statement disclosure, XBRL-provided efficiency gains to the SEC have important implications for the long-term benefits of XBRL to the users of financial statements. This study focuses on the effect of XBRL and the extent of customized extension element usage on the SEC’s review process. We find that the use of XBRL significantly enhances the SEC’s efficiency in their review of financial statements. Further, we find that greater use of customized XBRL elements increases the likelihood of receiving a comment letter and the number of rounds to remediate the comment letter received. These findings suggest that greater use of customized elements lead to a lack of clarity on the financial statements, rather than providing unique firm-specific information, resulting in a more adverse outcome for the firm in the SEC’s review process. Such results extend the literature on the on the economic consequences of XBRL adoption, and can be used as a guide for regulators, board members, investors, and management on the impact of XBRL and, more specifically, the proportion of customized tagging used, on the SEC’s review process outcomes.

Authors

• Min Jeong (Minna) Hong, University of Waterloo

• Jee-Hae Lim, University of Waterloo