Financial Data Transparency Act will spur progress in gov't reporting

Progress is here and coming at a rate as fast as any time in history. Generally, the U.S. government invests to stay competitive in a global economy and spends money to support progress. Indeed, the government spends a lot of money.

The National Human Genome Research Institute is funded annually by congressional appropriation. The CHIPS Act, signed into law last year by President Biden, gave roughly $280 billion in new funding to be invested in domestic research and manufacturing of semiconductors. The U.S. government is making investments in clean energy and transportation through the Inflation Reduction Act, providing funding of over $370 billion to advance these initiatives. These are just a few examples of increased government spending.

All these new initiatives boost the need for tracking the dollars of government funding through better data recording and analysis. 

The accounting profession understands the changes due to new government regulations and initiatives, technical advances in data collection, and cybersecurity, and is anticipating that data analysis will be a leading skill needed for future CPAs. Beginning in 2024, the American Institute of CPAs and the National Association of State Boards of Accountancy are changing the CPA exam to better align the skills needed for future accounting professionals with the needs of public and private entities. Significantly, one section of the CPA exam will focus on information systems and controls. 

The AICPA and NASBA acknowledge this will be a constantly evolving topic that will need frequent updates. The profession recognizes the need to train future CPAs for the demands of information technology and data analysis. Innovative CPAs have been leaders in recognizing the need for data modernization for decades. 

The SEC, XBRL and EDGAR data

Charlie Hoffman is sometimes referred to as the father of the computer language XBRL (Extensible Business Reporting Language). He recommended to the AICPA the idea that if you created a background language for data that could be machine readable, data would be usable. 

The backbone of XBRL is a taxonomy. Taxonomies are not new. This term is found in science. Animals are classified by taxonomies. For instance, the taxonomy for a pet puppy starts with animal and works its way down a hierarchy of classification that goes through 15 steps until we learn it is a canis lupus or house dog.  Data in financial reporting is not much different. 

The term "cash" has a hierarchy that lets us know the account is cash, it falls under an element classification called an asset, and assets are found on balance sheets. The cash is defined by a time and an amount. Cash can be labeled or tagged like bar codes found on grocery products. All facts presented in a financial statement can be "tagged" or coded with a programming language to explain the origins and descriptions of the data that makes the information machine readable and searchable. The data in a can of soup is more machine-readable than current government financial data that have no data labeling.

There are recognized and respected organizations, XBRL International and XBRL US, dedicated to improving data reporting standards. XBRL is used in more than 50 countries. Millions of XBRL documents are created every year, replacing older, paper-based reports with more useful, more effective, and more accurate digital versions. 

Beginning in 2009, publicly traded companies were required to tag their financial statements with XBRL for their  EDGAR filings. In 2018, increased mandates required publicly traded companies to code even more of their financial SEC submissions. This is called Inline XBRL or iXbrl. The 10-K and other statements are fully searchable. The documents can have thousands of facts tagged for easy searchability.

But what about modernization when it comes to government reporting?

Welcome to the FDTA

In 1492, Luca Pacioli produced the first written and printed work on the practice of accounting in a book called Summa de Arithmetica Geometria Proportioni & Proportionalita. His section on accounting was not thought to be original because double-entry bookkeeping had been in use in Venice for around 200 years prior to the publication of Summa. The irony is that governmental financial reports are presented in the same manner as the Summa was almost 600 years ago.

The Summa and government annual comprehensive reports are now available online in PDF form and that's it. Neither of them is machine readable. The progress toward converting governmental accounting data to a modernized reporting structure was minimal prior to December 2022 with the passage of the Financial Data Transparency Act. 

A bipartisan bill sponsored by Senators Mark Warner, D-Virginia and Mike Crapo, R-Idaho, the act was signed into law Dec 23, 2022, as part of H.R. 7776, the James M. Inhofe National Defense Authorization Act for Fiscal Year 2023. According to Senator Warner's office, "The act is designed to modernize the collection and dissemination of financial data by federal financial regulators, making that information more accessible, more uniform, and ultimately more useful to investors and consumers."  

The legislation will not change any standards set by rulemaking bodies such as the Governmental Accounting Standards Board. It will simply develop data standards like those required by SEC reporting for public companies.  

Good news about FDTA progress and implementation

XBRL International and U.S.-based XBRL organizations have been working on machine-readable data for over 25 years. In April 2008, XBRL US completed the first release of the XBRL U.S. GAAP Taxonomy. This taxonomy is now managed by the Financial Accounting Standards Board. 

In 2021, a new pilot program in Flint, Michigan was funded to explore how the use of XBRL can improve transparency in fiscal reporting and lead to better governance for state and local governments. The effort was a joint project with the University of Michigan's Center for Local, State and Urban Policy, the city of Flint and XBRL US.

Remember, Flint, Michigan had numerous problems with debt and fiscal insolvency. Implementation was funded by the Mott Foundation in hopes that modernizing the city reporting would lead to better analytics for data processing for the management of government spending. This initial research and taxonomy development by CLOSUP, Flint and XBRL US lays a solid foundation for servicing the requirements of the FDTA that passed in late 2022.

XBRL US reported earlier this month, "The Public Finance Network, representing U.S. state and local governments, government entities and issuers of municipal securities, has requested that its members be involved and provide input in the implementation of the Financial Data Transparency Act."

Can the FTDA succeed?

The legislation is a step in the right direction. However, to make the legislation work, true leadership is needed. In 2007, when the original mandates for XBRL reporting were underway, much of the credit was given to then-SEC Chairman Christopher Cox. He is credited with moving the project forward in a big way. Anyone who was intimately involved in the process gives him tremendous credit for this progress happening.

Leaders in the XBRL arena see benefits in the new legislation. "If implemented correctly, FDTA will improve the efficiency of the municipal bond market, making it easier for investors to distinguish more risky issuers from those that are less vulnerable to default," said Marc Joffe, a federalism and state policy analyst at the Cato Institute.

"There's an enormous amount of municipal government financial data locked up in PDF documents," said Stephanie Leiser, a lecturer in public policy at CLOSUP. "Unlocking that data has the potential to radically improve transparency and dramatically enhance our ability to understand how to support and promote healthy governments that provide the services we rely on every day."

The passage of the FDTA is an important first step, but it will need the kind of leadership Christopher Cox provided for public company compliance with XBRL mandates to make this work. Given all the changes in society and government spending, it's unavoidable that government reporting will need to progress and fully embrace the FDTA.