For decades, the goal of increased government financial transparency has been widely shared across political parties and stakeholder groups. The Financial Data Transparency Act (S.4295), proposed by Sen. Mark Warner, D-Virginia, and Mike Crapo, R-Idaho, takes a major step toward openness and accessibility by directing seven financial regulators, including the Municipal Securities Rulemaking Board, to develop "machine-readable" data standards that accurately reflect the existing reporting standards. So, it is surprising that this transparency measure has attracted stiff opposition when it has proven so successful in corporate reporting.
The movement to convert documents to machine-readable data that computer applications like spreadsheets can use is not new. The FDIC adopted machine-readable reporting standards for bank call reports in 2005. These required regulatory reports collect the basic financial data of commercial banks in the form of a balance sheet, an income statement and supporting schedules. The Securities and Exchange Commission similarly modernized public company reporting in 2009 by requiring publicly traded companies to report their information in machine-readable data language. The Federal Energy Regulatory Commission did so in 2021. Many other countries also have modernized their financial disclosures. This global trend affirms a recent statement by the U.S. Chamber of Commerce: "Digitization will enable government agencies to cut costs, increase efficiency and reduce waste. Congress must know that digital modernization is a priority for the American people."
Currently, government financial reports available on the MSRB's Electronic Municipal Market Access platform are mostly in PDF form. These documents can range up to hundreds of pages and are often resistant to copying and pasting into applications, like spreadsheets and databases, and are not always searchable due to the use of embedded images in the documents. Even sophisticated users are challenged to find on EMMA the information necessary to independently evaluate the financial well-being of governments that issue municipal bonds.
The situation contrasts strongly with public stock and bond markets overseen by the SEC. When the SEC decided to advance transparency for corporations through machine-readable disclosure in 2008, it chose the Extensible Business Reporting Language, or XBRL, a globally adopted, royalty-free standard for expressing financial data.
Visitors to the SEC's Electronic Data Gathering, Analysis and Retrieval system can see company financial reports on web pages that are easily searched, copied and downloadable for quick analysis. More importantly, the financial data from EDGAR can be easily processed by third parties, which republish it at no charge to individual investors on Yahoo! Finance, MarketWatch and numerous other free web sites.
Critically, machine-readable data speeds analysis for the benefit of investors, regulators and trust in the public markets. These benefits are long overdue for the municipal bond market, which comprises nearly $4 trillion in outstanding securities. Importantly, the Financial Data Transparency Act gives financial regulators the choice of which data standards to apply, on a case-by-case basis, if it is free and open to any user.
If the FDTA were to be enacted and implemented as currently written, the MSRB would be authorized to develop standards that are based on existing information collection requirements, making municipal financial disclosure more accessible, less ambiguous and more trustworthy. These standards would apply to the brokers and dealers whose business is state and local government bond financing (the MSRB does not have the authority to regulate issuers and the FDTA does not change that). Ultimately, the data in these documents will be processed by financial data aggregators and made available to small investors and taxpayers for free on third-party websites, like www.truthinaccounting.org. Just as it is easy to find revenues and expenses for Apple, Google and Microsoft today, anyone interested will be able to quickly retrieve similar statistics for Madison, Wisconsin; Chicago, Illinois; and Flint, Michigan.
In a time of rising interest rates, issuers of municipal bonds should be looking for any opportunity to reduce the cost of borrowing. The improved information flow that results from common machine-readable disclosure practices is one such opportunity.
Those in opposition voice concerns of excessive costs to transform existing archaic systems. However, companies or governments generating machine-readable reports do not have to rewrite or replace their accounting systems. Data languages, like XBRL and XML, are just tagging systems applied to finalized financial statements. The tags that are applied to the reports are defined by the existing information collection standards. That is, the reporting requirements don't change, but are given greater significance because machine-readable tags are defined for them for use across a variety of reports.
Data standards are built on reporting standards — not the other way around, so existing charts of accounts can remain unchanged. To produce machine-readable versions of the financial reports, these tags can be applied to documents by third parties or by financial statement filers themselves using commercially available software. The global market for this software is competitive, and this has led to lower prices than are reported by those opposed to the legislation.
Because the MSRB regulates financial intermediaries rather than government bond issuers themselves, it will be up to these companies to ensure that conforming machine-readable statements are uploaded to EMMA. These financially savvy players will be able to assist smaller governments that may lack the resources to use tagging technology or select vendors to perform tagging. Also, the FDTA gives the MSRB the discretion to delay or exempt the application of machine-readable standards to smaller reporting entities.
Another objection to the municipal finance language in the FDTA is that the implementation timeline is too fast, and any taxonomy (list of financial statement elements) produced by the MSRB will be inflexible, thus hamstringing some or all of the varied types of government entities. These critics seem unaware of the work of the XBRL US Standard Government Reporting work group that has already produced four versions of a government reporting taxonomy, the last one in conjunction with the University of Michigan's Center for Local, State and Urban Policy. The working group has sought and incorporated input from government accountants, municipal bond analysts, academics and other stakeholders. Its work can give the MSRB a huge head start toward developing its own standard. Further the working group has leveraged the chosen non-proprietary data language to build flexibility into the taxonomy so it can support a wide array of financial statement filers.
It is confusing why anyone would voice opposition to a movement designed to bring more transparency in financial reporting. In 2009, when the SEC first required publicly traded companies to post their financial reports in machine-readable data, organizations issued a Best Practice statement to members recommending they "monitor developments in standardized electronic financial reporting (e.g., [XBRL]) and apply that language to their electronic document process when appropriate." It was clear, even in 2009, that machine-readable data facilitates additional transparency to financial disclosures. The ease of implementing machine-readable data standards has greatly improved, with millions of financial statement filers — corporate, nonprofit and public sector — now producing standardized electronic financial reports across the world.
Fourteen years after regulators began applying machine-readable data standards to corporate financial reports, the time has come to extend this technology to the entities regulated by the MSRB too — that is, the brokers and dealers whose business is state and local government bond financing. It's time to move governments from the status quo into the digital age. Citizens, taxpayers, elected officials and other users of government financial data desire the transparency and accessibility that is provided by the machine-readable data required by the Financial Data Transparency Act.