Northern Illinois University's Center for Governmental Studies and Department of Accountancy unveiled a draft taxonomy that will enable analysts to compare financial information over time and between governmental units.
In addition to being documented via spreadsheet, this new taxonomy is expressed in machine-readable XBRL, short for Extensible Business Reporting Language. The taxonomy standardizes basic reporting definitions so that financial information is consistently and explicitly defined. Because the reports can also be expressed in XBRL using the taxonomy the information submitted by governments is immediately machine-readable and easier to analyze. The taxonomy development is part of a national project in which NIU has collaborated with partners including colleagues at Rutgers University, financial reporting tool industry leaders, along with XBRL and other domain experts, according to a release issued on Tuesday by NIU CGS.
"We are already pilot-testing this taxonomy for the government-wide financial statements in two Illinois cities, Aurora and Fulton, and are looking forward to working with other governmental entities in the state to establish digital reporting standards," said Dr. Shannon Sohl, a CGS researcher who is leading the taxonomy initiative.
In Illinois, the state comptroller collects and publishes annual financial reports from local governments. These reports are often inconsistent with audited information in comprehensive annual financial reports filed in PDF format by the same governments.
"Rather than have two sets of inconsistent disclosures which are difficult to work with, we want to encourage the government finance community to standardize around one machine-readable reporting format," Sohl said. "This will reduce the amount of work and confusion for everyone involved."
Marc Joffe, principal consultant of Public Sector Credit Solutions, assisting CGS with inputs to the XBRL taxonomy, said that the situation is similar in California. In a 2013 study for the State Treasurer's Office, Joffe found large discrepancies between CAFRs and data published in the State Controller's Cities Annual Report.
"Not only will XBRL make reporting more efficient and consistent at the state level, but it will also help investors and credit analysts get the data they need to analyze municipal bond default risk," Joffe said.
Professor Tammy Waymire in the NIU Department of Accountancy said academic research in the government finance area has been limited by the lack of availability of data.
"Researchers are often left with one option for conducting financial research related to state and local governments – hand-collection, gathering information one pdf document at a time. Availability of data, in the standardized format to allow for comparability, would draw new academic researchers to the field, and increase the scope and timeliness of government finance research," she said.
XBRL was developed in the late 1990s and entered widespread use after the Securities and Exchange Commission began requiring public companies to file their quarterly and annual financial reports (10-K's and 10-Q's) using that language.
According to the release, in Brazil and Spain, local governments are required to report their financial statistics to central authorities in XBRL. No such mandate exists in the U.S. Under the Single Audit Act of 1984, the federal government is required to collect audited financial statements from state and local governments receiving $750,000 or more of federal assistance annually, but these disclosures are in a PDF format. Similarly, the Municipal Securities Rulemaking Board receives audited financial statements from state and local governments that issue municipal bonds only as PDFs.
That situation would change if HR 2477, the Financial Transparency Act of 2015, were to become law. One provision of the bill, which has 35 co-sponsors, mandates the MSRB to collect issuer disclosures in searchable and machine-readable text formats. Although passage of the bill is uncertain in this Congress, proponents are expected to offer similar legislation in the future.
"But the community does not need to wait for Congressional action," Sohl said. "We are urging the accounting profession, statement preparers and consumers of government financial data to partner with us to complete the taxonomy and encourage its use."
