Introduction to CAFR reporting
A Comprehensive Annual Financial Report (CAFR) is a set of financial statements issued by a state, municipality or other government entities. CAFR conforms to the accounting protocols laid down by the Governmental Accounting Standards Board (GASB). Providing accurate and complete information concerning the governmental entity’s financial management is the primary function of a CAFR. As the annual financial report gives insight into the finances of a business, CAFR provides insights into the financial health of a city, county or state.
Purpose of CAFR
The foremost purpose of a CAFR is to provide financial transparency and thus, promulgate accountability. When a city or state government issues bonds to fund public projects, CAFR provides insights into the financial functioning of the government, based on which investors can take an informed decision. CAFR also serves the purpose of providing the general public with insights into how their elected officials manage public finances. CAFR essentially is a report-card of a city or a state. With it, people can see how public funds are being managed by the government.
Standardization of CAFR
As per the most recent census, there are 90,106 state and local governments in the United States.* Spending by these entities is estimated to be almost 11% of GDP. The Federal Reserve reported over $3.8 trillion in municipal securities outstanding in the first quarter of 2018. The sheer size and indebtedness of this sector should be reasons enough to make comprehensive reporting in a standardized format a must. *Carma Hogue, Government Organization Summary Report: 2012 (Washington, DC: US Census Bureau, 2013).
While all local and state governments issue audited CAFR annually, these are published in PDF format. This poses a particularly difficult challenge to anyone who wants to import the data to a spreadsheet or consolidate the data using an automated process. Whereas, accessing, extracting and analyzing the data is fairly easy when it is available in a standardized format such as the eXtensible Business Reporting Language (XBRL).
XBRL is an extension of XML for financial reporting. The data in an XBRL document is contained within delimiters or “tags”, which are readable by any data-parser. A list of such tags along with the defined rules of inter-relationship of all tags is known as a taxonomy. Not only is the data presented in XBRL easily analyzable but an XBRL document can also be validated by the filer before submission, theoretically, thus making it error-free.
Although the filing of corporate financials in XBRL has been mandated since a decade ago, little if any progress has been made towards standardization of US state and local governments’ financial filings. When SEC was contemplating mandating XBRL for corporate financial reporting, there were a few who suggested applying the same to the public-sector as well. In 2008, the Association of Government Accountants (AGA) published a report entitled “XBRL and Public Sector Financial Reporting”, which discussed converting portions of State of Oregon’s CAFR to an XBRL instance document. Around the same time, the Municipal Securities Rulemaking Board (MSRB) hinted at their intent of making XBRL a part of their disclosures in its Electronic Municipal Markets Access (EMMA) system. The Governmental Accounting Standards Board (GASB) initiated an Electronic Financial Reporting project to “monitor the effect of the electronic media on information delivery and user needs.”
Despite such positive steps being taken by several bodies individually, the realization of standardizing state and local fiscal reporting has been elusive. This, in part, was due to the great recession of the last decade, which crippled public financial resources, restricting any potential of funding an ambitious new technological migration. Unlike SEC for corporate financial reporting, there is no single regulatory body bearing responsibility or the authority to effect a mandate on public-sector financial reporting. If despite the many challenges the dream of standardization of public-sector reporting is achieved, the US would be one of the very few countries, to have done so. The grass shoots of such a reality have already started showing. Rick Scott, Governor of the state of Florida, on 23rd March 2018, ratified the law making it mandatory for the local governments to file their financial reports in XBRL. The law essentially empowers the state’s Chief Financial Officer to implement XBRL taxonomy for the local government financial report. While Florida passed the law last year, Will County, Illinois, became the first local government to publish its financial data in standardized, XBRL format using CAFR Demonstration Taxonomy. The Demonstration CAFR taxonomy was developed by the XBRL US State and Local Government Disclosure Modernization Working Group, of which IRIS was a part too.
Impediments to standardization of CAFR
State or local governments’ financial reporting is a bit more complicated than corporate financial reporting. Governments do not issue equities as corporates do, and although the municipal bonds market is huge, trading frequency is far less as compared to the corporate equities. Corporates who trade on any of the US exchanges fall under the jurisdiction of the SEC, which has the authority to mandate the manner of their financial reporting. The SEC, however, does not have the authority to mandate financial report filing by the local and state governments. This is due to the Securities Act of 1933, which exempts municipal, state or federal government from registering issued securities with the SEC.
Many local and state governments’ financials are managed by employees who work part-time and are often self-taught as opposed to full-time, trained professionals. For such a workforce, learning to produce CAFR in a standardized format could be a daunting and time-consuming challenge. Training personnel to produce CAFR in XBRL may seem to be a monetarily expensive exercise. Daunting and expensive put together doesn’t paint a pretty picture, which is enough for many to procrastinate. However, local and state governments should not be put off by the perceived costs.
The primary benefit of standardizing data is its scalability. There are many software available today that the local governments can use to produce their CAFR in XBRL without investing much in the way of time or money. The entities can get their reports standardized quickly and efficiently. One such software is IRIS CARBON® – which has proven extremely useful for issuers around the world. Standardization of CAFR should be pursued with gusto, as it is a sure time and cost saver, especially for smaller state and local government entities.
Can Standardization help local governments?
Any governments entity’s foremost responsibility is their duty towards its citizens. Publishing of government financial information in a standardized, machine-readable format, would not only help bring accolades and operational transparency but also enhance citizens’ confidence in their elected representatives. Municipal bonds are a large source of funds for roads, parks, schools, and other infrastructure developments. Muni-bonds are also a large investment market, where investors seek the credit rating of the issuer before buying. It would help reduce government expenditure in large bond-funded projects, such as road and park construction if the investors easily understood the fiscal health of the local governments through the readily available structured data. Making the financial information of local governments available to investors can help lower the risk and thus, the cost of bond-funded projects.
A standardized CAFR will streamline the reporting process at the municipal level, thus giving every stakeholder (government, citizens and investors) structured data in lesser time. Local governments that are almost always strapped for resources can benefit from the standardization of CAFR. Coordination and collaboration of local governments from neighboring states or counties will be enhanced, making key decision-making that much easier and faster, thus leading to mutual growth and development.
The groundwork for the standardization of CAFR has been laid, for an existing information model for governmental financial reporting. Leading data structures are available in XBRL and iXBRL. Thanks to the initial progress made in corporate and federal financial reporting in structured data, the software tools needed to create XBRL CAFRs already exist. All there is left to do for the government entities is to gather the will and take a step forward, just like Will County and Florida.