Pros and cons of the Financial Data Transparency Act

The trend toward digitization of government data has been affirmed as a priority by the passage of recent legislation, the Financial Data Transparency Act.

The FDTA is a bipartisan bill, sponsored by Sen. Mark Warner, D-Virginia, and Mike Crapo, R-Idaho, that 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."  

Over the summer, national conferences have offered sessions on the implementation of the FDTA. These conferences include the Spark Conference of the American Accounting Association, the  Association of Government Accountants and the National Association of State Auditors, Comptrollers and Treasurers. Joel Black of the GASB, Emily Brock of the GFOA and others have spoken in panel discussions about this legislation. I have been fortunate to sit on these panels with the outstanding professionals. The panels presented robust discussions concerning the pros and cons of the FDTA. 

Background

In 2009, the SEC began requiring companies to make their submissions to its Electronic Data Gathering, Analysis and Retrieval system, EDGAR, in machine readable format. The system provides users easy accessibility for investors and regulators alike. In recent years, there has been a growing movement to convert government financial documents into machine-readable data that computer applications can process, matching the simplicity of use of EDGAR. Currently, government financial reports are often available in PDF form, which can result in challenges when retrieving data. 

The Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) platform is similar to the SEC EDGAR system. Governments submit relevant reporting documents to EMMA when they have publicly traded securities. These documents primarily exist in PDF format and sometimes span hundreds of pages, which poses challenges when attempting to copy and paste their contents into other applications, such as spreadsheets and databases. Moreover, the presence of embedded images in these reports hinders effective searchability. Even experienced users encounter difficulties in locating essential information on EMMA to assess the financial health of governments issuing municipal bonds independently. The FDTA addresses this specific MSRB reporting requirement.

Discussion

Of course, anytime something new and arguably mandated is required, there are opposing views:  in this case on whether the transition to machine readable data is necessary for government reporting and whether the federal government can mandate this change under the Tower Amendment. 

Here are some of the pros and cons of making governmental financial statements machine-readable which came up in the panel presentations:

Pros

1. Automation and transparency: Machine-readable financial statements facilitate the automation of data extraction and processing, promoting transparency in financial reporting. This level of transparency fosters greater accountability and trust among stakeholders, including investors and the public. Accountability is a main tenet of governmental accounting: "GASB Concepts Statement No. 1 describes accountability as a broad concept that forms the cornerstone of all financial reporting for state and local governmental entities." The FDTA is a positive movement in that direction.

2. Efficient resource allocation: Access to machine-readable financial data allows for better analysis of public spending, revenue generation and resource allocation. This can lead to more efficient allocation of resources and improved fiscal management, benefiting the government and its citizens. According to McKinsey and Co., "Scrutinizing past expenditures and radically challenging cognitive biases can help governments cut costs and create better outcomes for citizens." The FDTA would make scrutinizing past allocation of resources easier when that information is machine readable, versus in pdf format. 

3. Data integrity and accuracy: By reducing manual data entry and manipulation, machine-readable financial statements enhance data integrity and accuracy. This is proved in a recent report issued by the SEC in June 2023. The irony is the report was required by the FDTA legislation. 

4. Policy and investment insights: Transparency and efficiency in reviewing governmental financial data enables comprehensive analysis, providing insights into the government-sector economic landscape. Investors, citizens and policymakers can make more timely informed decisions when the information is made more simply accessible. 

5. Public accessibility and participation: Machine-readable financial data in the private sector fosters public accessibility to budgetary information, facilitating greater civic engagement and public participation in fiscal matters. If this level of transparency is made available for government reporting, it could empower citizens to hold their governments accountable.

Cons:

1. Implementation complexity and costs: Transitioning governmental financial statements to machine-readable formats may be complex and costly. Governments may face significant challenges in updating legacy systems and adopting new technology. According to the Government Accountability Office, "Each year, the U.S. government spends over $100 billion on information technology. Most of that will be used to operate and maintain existing systems, including aging — or "legacy" — systems." These systems can be costly to maintain and vulnerable to hackers. However, in acknowledgement of these aging systems, grants have been written to help with this process. Universities and private foundations are funding pilot projects to answer these questions.

2. Lack of standardization in government reporting: Governmental financial reporting may lack uniformity across regions and countries. Harmonizing and standardizing financial data in the public sector is necessary for meaningful analysis.

3. Complexity of government accounting: Government accounting and budgetary processes can be more intricate than corporate accounting. There are often no standardized charts of accounts, and the variety of reporting entities is far wider than that of corporations. It is estimated there are over 89,000 government reporting entities in the United States. This complexity may pose additional challenges when converting government financial statements into machine-readable formats.

4. Data validation and reliability: Some have argued publicly that validating and verifying the accuracy of governmental financial data in machine-readable formats does not always happen. The purpose of machine-readable data is to enhance the transparency and accessibility of financial information, but it does not provide any assurance on the accuracy or correctness of the tagged data.  However, recent reports by the SEC state, "Making corporate disclosures machine-readable has decreased information asymmetry by reducing information processing costs, making stock prices more informative (i.e., more reflective of firm-specific information), and reducing market inefficiencies and risks)." This 2023 SEC report makes the reliability and validation argument less robust.

The FDTA requires governmental financial statements be produced in machine-readable formats when required for submission at the MSRB. The legislation encompasses directives to establish data collection protocols within select federal agencies. It also outlines standardized formats for information submission by entities governed by the GASB reporting to the EMMA website. This platform allows investors, local governments and market participants access to municipal securities documents and pertinent details about individual municipal bonds. 

The FDTA stipulates that the U.S. Department of the Treasury, the primary regulatory body, must conclude the rulemaking process within two years from the enactment of the FDTA in December 2022. Subsequently, data filers must adhere to the FDTA's requirements within two years of rulemaking completion, allowing a maximum of four years for full implementation.

This presents numerous opportunities for enhanced transparency, efficiency and decision-making. However, addressing implementation challenges, ensuring data security and standardization, and overcoming potential complexity are critical to realizing the full benefits of this approach. As technology continues to advance, governments must adopt and improve machine-readable data standards to usher in a new era of government reporting and analysis. The road may not be easy, but it will bring government reporting into the 21st century.