Research in Action: Neal Snow’s Municipal Financial Reporting Taxonomy Informs Best Practices
A new national industry working group is basing its work on research by Neal Snow, assistant professor of accounting at Lehigh.
The State and Local Government Disclosure Modernization Working Group, formed by XBRL US, the national consortium for the business reporting standard, focuses on using standards to improve the efficiency of data collection and analysis concerning government entities’ financial performance.
The group’s work is based on research by Snow and colleague Jacqueline Reck, the James E. and C. Ellis Rooks Distinguished Professor in Accounting at University of South Florida, who developed a taxonomy, or system of naming, that allows for standardization of municipal financial reports. Snow and Reck’s research is reported in their article, “Developing a Government Reporting Taxonomy,” published in the Journal of Information Systems.
Snow and Reck developed the taxonomy to address the issue of municipal bondholders and potential buyers not having the same level of information as investors choosing to invest in public companies. In part, the inequity is due to poor data accessibility, they said. Frequently, the data is provided in a format that doesn’t allow easy comparison across governments or over time. While the Securities and Exchange Commission requires publicly traded companies to file reports in the standardized eXtensible Business Reporting Language (XBRL), no similar requirement exists for municipalities.
To produce the taxonomy, Snow and Reck researched and looked through hundreds of municipal statements beginning in 2011. They first extracted all of the headings from a mass of financial reports, and then took frequency counts of the most common terms used. As a result of their research, they compiled a taxonomy containing 194 terms that would sufficiently encompass the headings of financial reports. The standardization of headings make it so that the data is much more readable and comprehensible.
The aim of the classification is to keep the financial reports uniform, consistent and standardized, with a goal of increasing comparability and consistency in government reporting. In the past, governments used their own headings on reports, therefore making it difficult for people to read and compare data over time or between municipalities because of the inconsistency in labeling.
“It won’t solve all of the problems, but if we do the taxonomy right, it will eliminate some,” Snow said.
In addition to being used by the working group, Snow’s research demonstrating a standard municipal government reporting taxonomy has made a notable impact and advanced how eXtensible Business Reporting Language (XBRL) is used today.
Florida's Open Financial Statement System
In March, Florida was the first state to sign a bill requiring its local governments to produce their financial reports in the XBRL format. The law establishes the Florida Open Financial Statement System and enables the state chief financial officer to build XBRL taxonomies for state, county, municipal and special district financial filings.
In the past, municipalities produced their reports in verbose and complicated PDF files. Manual copying was the only way to copy or process the data, making it challenging and inefficient for people to collect or transfer any of the data on a computer.
Lack of standardization among annual financial reports produced by most of the 90,000 state and local governments in the United States makes it difficult to aggregate fiscal results and perform comparative analysis across public sector entities, according to the XBRL US consortium. “Financial data standards that enable automation can free the data from these documents, increasing the timeliness and quality of reported data, and reducing the cost of data processing,” said Campbell Pryde, chief executive officer of XBRL US.
The new XBRL format will make it much easier for people to access financial data and compare different municipalities over time. It will be a major step in comprehending the municipal bond market and keeping governments transparent with their finances.
The use of XBRL format and the Florida mandate will have a significant impact on the valuable data presented in financial statements, and ultimately how that data is utilized. The impact on a more national scale is still to be determined.
“After it’s there and it’s out there, it’s probably going to be contingent on whether major cities are willing to champion it and push out their financial statements in that format, using that taxonomy,” said Snow, whose research areas at Lehigh focus on communication channels, crowdfunding and content analysis.
XBRL US, a not-for-profit organization, supports implementation of digital business reporting standards through development of taxonomies for use by U.S. public and private sectors, aiming to produce interoperability between sectors and adoption of XBRL standards through marketplace collaboration.
The State and Local Government Disclosure Modernization Working Group was formed to find better and more efficient ways to collect and process data pertaining to governmental financial statements. It aims to improve government financial transparency, enhance municipal bond market efficiency and streamline regulatory reporting, including grant reporting.
It also will build data standards for Comprehensive Annual Financial Reports, Single Audit packages, state-mandated Annual Financial Reports and responses to relevant Census Bureau financial surveys. Standards proposed by the group will implement existing accounting standards issued by the Governmental Accounting Standards Board to streamline financial reporting for U.S. state and local governments, according to XBRL US.
The group’s founding membership represents companies, not-for-profit institutions and academic institutions, including Lehigh University, along with Middle Tennessee State University, Northern Illinois University, University of Maryland College Park, and University of South Florida.
Story by Erin Hom ’19