The Case for Digital Annual Comprehensive Financial Reports
In 2016, Surprise, a city in Arizona, lived up to its name when it was found that a senior finance employee stole $836,000 from the city coffers. “It’s pretty embarrassing for the city to have that happen right under our noses,” said a Councilman of the embezzlement.
Then there’s the famous case from 2012 in Dixon, Illinois, where the comptroller embezzled a whopping $54 million over 22 years to fund a lavish stable of 400 horses.
What’s common in both these cases is that the fraud could have been found out early – and not just by watchful eyes. If the local governments had been using digital standards for financial reporting, the fraud would have been hard to hide.
A recent article on Fraud and Embezzlement in Local Government by the International City/County Management Association (ICMA) says incidents of financial crime are only rising. The article said the following areas of local government are vulnerable to financial fraud:
- Fuel use management.
- Procurement/purchasing functions, including fraudulent refund schemes.
- IT and cybersecurity.
- Utility operations and utility billing functions.
- Grant management, including ARPA funding.
- HR operations.
- We are permitting operations.
- Inventory management, including both fixed assets and small and attractive assets.
- Payroll management, including overtime use.
- Accounts payable and accounts receivable.
- Cash handling throughout all departments.
- Scheduled drug management (fire/EMS operations).
- Evidence handling and management (police operations).
Financial crime can do serious damage to a local authority. Damage that is both reputational and financial. Managers might have to be fired, projects might be deferred, and pay rises may not be allowed. Citizens might lose confidence in the local authority, resulting in officials losing the next election.
…which is why there is an urgent need to implement digital financial reporting for local, municipal, and state governments in the US. Annual Comprehensive Financial Reports (ACFRs) must be produced in a machine-readable format called eXtensible Business Reporting Language (XBRL).
The Latest on Digital Annual Comprehensive Financial Reports
What local governments need for getting started with XBRL reporting is a digital collection of accounting standards known as the taxonomy. XBRL US, a non-profit for digital standards, and the University of Michigan have recently published a local government taxonomy for public comment.
This taxonomy comprises over 2,800 digital standards based on the items disclosed in local government financial reports. Seven financial statements and four footnotes from the Annual Comprehensive Financial Report are covered in the taxonomy. It also includes two reports specific to local bodies in Michigan. What’s special about this taxonomy is that it is transferable to other US states.
This taxonomy’s 60-day public comment period ends on August 15, 2022.
Pilot Project on Local Government Reporting in XBRL Format
The University of Michigan (U-M) Center for Local, State and Urban Policy (CLOSUP) is working on a pilot project in Flint, Michigan to see how digital standards make financial reporting transparent and improve governance. The U-M is partnering with the City of Flint and XBRL US in this pilot project.
Currently, audited Annual Comprehensive Financial Reports supply information about the fiscal health of local governments. However, ACFRs are currently in PDF format, which renders them inaccessible and difficult to analyze. The City of Flint pilot project will try to remedy the situation by using XBRL reports. Let’s understand how that will work.
How to prepare Local Government Reports in XBRL Format?
XBRL reporting involves placing digital or machine-readable tags against the items in a financial report. Such tags help computers understand and interpret the information in a report. The tags need to be taken from a taxonomy, which a regulatory body prescribes based on the information it needs from the reporting entities.
Local governments can use software solutions to prepare ACFRs in XBRL format. Some software vendors also provide XBRL conversion services. It is up to each local government to decide which route it takes toward digital financial reporting.
IRIS CARBON® is a cloud-based software solution used to prepare SEC and EDGAR reports, including in the XBRL format. The solution has been part of the US local government taxonomy development process.