Question

Financial Statement reflects the position of assets and liabilities of the organization. Thus, the financial statement should reflect a true and fair view of the state of affairs of the Company. On submitting the XBRL document to SEC, we are communicating the state of assets , liabilities of the organization to SEC i.e. we are submitting the financial results and financial position of the company to SEC, thus the same should be correct in all aspects. However, on review of the Financial Statement of Starbuck we have noted certain discrepancies: - The cash carrying value should be 2,128,800,000, instead of the carrying value reflected in the XBRL document. The cash balance reflects the liquidity position of the organization. It helps the company to understand the working capital availability position and to make a proper estimates regarding the day to day functioning of the organization. In case the same is reflected incorrectly in the financial statement, the users of financial statement may not be able to take the proper decision regarding the fund position and liquidity of the company The Accounts payable reflected in XBRL document is understated by 760,600,000. The same is stated as a negative but should be positive 730,600,000. This means that the company has short recorded the liability by 730,600,000 and have increased the assets unnecessarily. The Financial statement is showing that the company has paid advances and is entitled to receives services from the creditors amounting to 730,600,000.However, the same is not correct. Instead the company needs to make payment to creditors and they have already availed services from the creditors. On computation of liquidity ratio with the accounts payable reflected in XBRL document, the same will be highly over-stated The Retained earnings in XBRL document is overstated and the same should be 5,949,800,000. This means that the company is showing their profit overstated by 5,949,800,000. They are showing that the company have profit and they can utilize the same for dividend and for other reserves creation etc. This reflects that the company is performing very good but the actual scenario may not be like this. In case any person will take any investment decision on the basis of the position reflected in Financial Statement, he may not achieved as per his desires and estimates The Net revenue in XBRL document is understated and the same should be 16,844,100,000. Reflection of incorrect revenue will result in computation of wrong profit and ultimately the retained earning of the organization will also gets effected. The gross profit, net profit ratio etc. will also not computed correctly as the sales is not representing the correct picture.

Write a formal memo to the SEC to explain the correction of the irregularities

Answer 1

Answer –

We need to study what are the effects of wrong filling of XBRL to SEC.

How errors and delays in SEC filings can hurt companies — and their shareholders

Delays and mistakes in SEC financial reporting can have far-reaching consequences for companies and even for their shareholders. The impacts may include:

· SEC Enforcement reviews, actions, and penalties

· An SEC comment letter, demanding a time-consuming and expensive response

· A required filing amendment, including financial restatements

· A drop in the company’s stock price

· Complications with the company’s stock-exchange listing

· Unfavorable scrutiny by analysts

· Loss of short form (S-3) eligibility and well-known seasoned issuer (WKSI) status

A study reported by The Wall Street Journal in September 2018 shows an uptick in corporate financial restatements during the first half of 2018, the first increase in a decade. [See Companies Are Finding More Accounting Flubs, by Nishant Mohan, Sept. 20, 2018.] The article quotes an accounting expert who observes that the errors prompting restatements “can be anything from a misapplication of accounting principles to an error in inputs in accounting software or an error in [Microsoft] Excel schedules.” Those who should have caught the mistake usually feel the consequences, “particularly...the CFO and the controller.” Notorious examples of data errors in SEC filings have occurred even among high-profile companies (Netflix, for example, was adversely affected by a single data error).

Late filings often cause the stock price to drop

Investors interpret amended filings as signs of trouble

SEC comment letters influence investor behavior

XBRL exposes issues to analysts and SEC staff

SEC technology uses XBRL for deeper review

Filings with XBRL errors go into a special bucket for review

After finding matters that should have been reported on Form 8-K but were not, the data analyst submits the discovery to an enforcement team. “In our screening process,” he warned, “the filings with unnecessary extensions or XBRL errors go into a bucket, where they’re looked at more closely. Often, nothing is there. But it is in a company’s interest not to go into that bucket to begin with.”

Fixing XBRL errors: human review is essential

XBRL errors can be conveniently grouped into two categories: mistakes that can be found by software, and errors that are beyond the reach of computers and warrant human review. For those errors that can be detected by software, the baseline use of software to check for mistakes is essential. Good software can check specific items and show where, how, and why the XBRL tagging is not in compliance with the SEC rules.

The SEC put the spotlight on automated checking of XBRL and the accuracy of tagging in its EDGAR Release 18.3 (effective from Oct. 1, 2018), which includes new types of XBRL validation checks. The new error types, which are flagged as warnings (not suspensions), occur when XBRL submissions contain one or more errors of these types:

· US GAAP and IFRS numeric reporting items tagged incorrectly as negative

· Deprecated tags

· Redundant custom axis tags that are already provided for in the US GAAP taxonomy

As Lou Rohman, Vice President of XBRL Services, explains “Providing error messages directly to the filer at the time of the test submission will raise awareness and will likely result in filers correcting the errors prior to live filing, consequently improving their data quality … I expect the number and significance of the items [to be checked] will grow in the not-too-distant future.”

XBRL US warns that in this updated version of the EDGAR Filer Manual, “the Commission is taking note of the quality of the XBRL data submitted by SEC filers and is bringing the importance of data quality to the attention of filers.”

XBRL errors that only a person can detect are as frequent, severe, and painful as the errors that software can find

However, for those errors that cannot be detected by automation, human expertise is required to prepare and review the XBRL files properly. XBRL mistakes that are detectable only by a person can be as frequent, severe, and painful as the errors that software can find. For example, new rules for lease accounting will take effect in 2019. IFRS and US GAAP categorize and tag lease information differently. Filers need expert guidance to implement this and other new financial-reporting disclosures and their related XBRL structures.

Unparalleled XBRL team routinely spots XBRL errors that cannot be detected by software in the financial statements of SEC registrants. Unfortunately, these errors often significantly misreport a registrant’s financial disclosures. Whether from inside or outside the company, the XBRL preparer and reviewer should have a deep understanding of accounting disclosures, experience with the XBRL specification, expertise with the EDGAR Filer Manual, familiarity with the US GAAP or IFRS taxonomy, and knowledge of the XBRL US Data Quality Committee rules.

“Errors that cannot be detected by software really require the involvement of knowledgeable XBRL individuals,” Mr. Rohman emphasizes. “That’s a key point of getting the XBRL right. By knowledgeable, I mean individuals who understand the SEC rules, the accounting disclosures, the intricacies of the XBRL itself, and then are able to apply that experience to the XBRL document.”