On December 17, the SEC voted 4-1 to implement a final rule for the introduction of XBRL for reporting to the SEC. After a decade of hard work by hundreds, it is sad to see such a missed opportunity at this juncture.

There are four glaring problems with the new rule:

l          Litigation relief

l          No requirement to have the XBRL version of the financial statement audited

l          Voluntary tagging of text in footnotes

l          The roll-out schedule

How can this be? It seems sadly lacking, given that Chairman Cox, as recently as November 17, said:

For the SEC as well as for financial regulatory agencies around the world, corporate reporting is not an end in itself, but a means to achieving our missions. Those missions include protecting investors, encouraging capital formation, and promoting healthy markets. Every one of those missions will be better achieved with the widespread adoption and use of interactive data. Interactive data will also make disclosures more useful to investors, and to every market participant.

Only Commissioner Aguilar had the courage to vote against the rule, declaring that this was the first time in history he has seen the SEC weaken protections for investors:

I am not prepared to reduce the level of protection that I believe investors are entitled to. Using new technology to improve disclosure is a good thing — but not when it dilutes investor protection. In these times of market turmoil, investors need to know the SEC is looking out for them.

Let me quickly say that I have always been, and remain, deeply convinced that XBRL can and will revolutionize business reporting, both internal and external, and that XBRL has the ability to deliver incredible efficiencies across the business reporting supply chain. And let me add that, in the long run, the SEC’s action last Wednesday represents a major step forward toward the full implementation of XBRL for financial reporting in the United States.

But for now, the specific inclusion of litigation relief, coupled with identifying the XBRL document as supplementary information and therefore not requiring an audit, makes a mockery of the dream of interactive data. What a boon for analysts and investors: an unaudited subset of a company’s financial information, with no recourse should the company provide erroneous content. In order for the analysts and investors to actually place any confidence in the XBRL, they will still need to refer back to the original, audited, and filed financial information and footnotes.

Those familiar with the technical issues of XBRL — and that is a very small number of people — can list a number of situations that could "in good faith" result in errors in the XBRL that is produced. The SEC’s rule will result in faster, cheaper, more detailed data — and a virtually risk-free environment for the corporate executive who, in these particularly troubled times, decides to engage in financial statement fraud to attempt to influence investors to support the share price. The defense will always be that "a good faith attempt" was made to produce an error-free XBRL version of the financial statements.

Of course, the vast majority of CFOs and CEOs act in good faith to ensure that accurate information is provided to markets and regulators. Sometimes even acting in good faith errors will occur, and the audit process serves as an additional protection for the investor. So while the SEC might not require an audit for interactive data, it is my expectation that the majority of filers will seek assurance over their XBRL-tagged information. I can only say shame on any company that provides such information to the analyst and investor community unaudited.

Next, there is the issue of optional tagging of the textual content of disclosures. So often it is the text of the disclosure that discloses, not the numbers in subsidiary tables. Allowing filers to elect not to tag this text leaves analysts and investors right where they are today, having to sift through HTML or text documents to find the information buried in the text of the disclosures.

Finally, the schedule for implementation is slow enough to mean that all companies will not be providing XBRL-tagged information for analysts and investors until 2012. Peter Wallison, a member of the CIFR (Committee for Improvements to Financial Reporting), said in his dissent to the recommendations of the CIFR that:

the Committee adopted an extended phase-in that will delay the widespread use of XBRL for financial reporting well into the next decade. I dissented from the Committee’s vote — and am filing this separate statement — because I believe the Committee’s proposed timetable is (i) based on an erroneous assessment of the potential costs of auditor assurance, (ii) applies restrictions on reporting that will be harmful to XBRL and to users, and (iii) unnecessarily delays the date on which XBRL will be available to investors and analysts.

I am confident that the SEC will review and revise the rule, and to be fair, the litigation relief does have a two-year window. But those two years represent a critical time period in which investor trust will need to be re-established for the markets to recover.

Unfortunately,Commissioner Aguilar’s summary statement says it most eloquently:  "It departs from our best traditions,and shackles investors with the risks and costs arising from errors and misstatements in interactive data, even though issuers control the process of preparing the disclosure and are in the best position to ensure its accuracy and reliability."

So Chairman Cox gets the credit for “bringing the system of financial reporting into the 21st century.” But someone else will have to make it happen.