It Figures Podcast: S4:E19 – The Financial Data Transparency Act

Speaker 1:

From Carr, Riggs and Ingram, this is, It Figures: The CRI Podcast, an accounting, advisory, and industry-focused podcast for business and organization leaders, entrepreneurs, and anyone who is looking to go beyond the status quo.

Rob Lemmon:

Hello and welcome to another episode of the CRI It Figures podcast. Thank you for joining us today. My name is Robert Lemmon and I’ll be doing another governmental episode for you. So today’s topic we’re going to be discussing is the Financial Data Transparency Act. We’re going to be discussing what is it, what does it require, what are people saying about it, all that kind of good stuff because it is out there, it is effective and it is new. So we want to get people up to speed on what’s going on with the Financial Data Transparency Act. With me today, I’m fortunate to have a couple of terrific guests who have fantastic technical expertise and practical application knowledge of these sorts of subjects. So I’m really lucky to have them with me today. First of my special guests is Dean Mead. Dean, do you want to say hello?

Dean Mead:

Hi Rob. Hello everybody. My name is Dean Mead. I’m a partner at CRI where I’ve been for a little over a year, and before that I was at the Governmental Accounting Standards Board for 24 years, most recently as the assistant director.

Rob Lemmon:

Fantastic. And thank you again, Dean, for joining us. Also with me today is April Shuping. April, do you want to say hi?

April Shuping:

Sure, thanks Rob. I’m April Shuping, I am a partner in CRI’s Gainesville, Florida office specializing in government and I have been in public accounting about eight years now with the vast majority of my time before that working actually directly in governments. And so I like to think I have an interesting perspective from both the outside and the inside of how some of these government things work. So thanks for having me on, Rob.

Rob Lemmon:

Well, thank you. Right. We’re going to get into some questions here. I’m going to fire them at you and give our audience a little bit of information about this Financial Data Transparency Act, or as I’m going to say it, FDTA, just for short. So question one, Dean, will you kick us off and just give us a really high level summary. What is the FDT A?

Dean Mead:

Well, Rob, the FDTA is a law that was included in the National Defense Authorization Act, or NDAA, that Congress passed last December and that was subsequently signed into law by President Biden. The NDAA is the title that’s given to the bundle of federal laws that specifies the defense department’s annual budget. The purpose of the FDTA, which was tucked into that as described by one of its sponsors is quote, “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,” unquote. It requires the Treasury Department, Securities and Exchange Commission and six other major federal financial regulators to establish data standards for information that is submitted to them.

Rob Lemmon:

Okay, so this is all about better information for the public and for investors. And can you give us a bit on, what specifically are some of the FDTA requirements?

Dean Mead:

So first and foremost, the FDTA and its sponsors have been explicit in saying that it’s not going to require governments or other entities to make any new disclosures, only a change in the way disclosures are made and information is submitted to the federal government. So the FDTA tasks the SEC with leading the effort to create the rules that will establish data standards. In other words, a uniform set of guidelines for collecting and reporting information.

In broad strokes, it is looking for a system that’s comparable to what is used by publicly traded companies to submit their financials to EDGAR in compliance with SEC rules. The data standards, according to the FDTA, should be such that the information is available in an open data format, in which information is freely available to download in human-readable format and accessible digitally and in bulk by platforms and software that collect and analyze data, which could prove to be very important because I read recently in a report by the SEC that over 95% of the quote unquote “visitors” to Edgar are actually machines and not people.

Specifically the FDTA requires that the data standards that are created under this law establish common identifiers for transactions and financial products or instruments, including non-proprietary legal entity identifiers, or LEIs, to: identify governments in the same manner, regardless of which regulator they’re submitting information to, to make the data fully searchable and machine-readable, to create a taxonomy that defines the various data points that are required to be submitted, to be non-proprietary and open source, to be consistent with the standards of the regulators, and be based on applicable accounting and reporting principles such as those of the Governmental Accounting Standards board.

So although the FDTA’s requirements relate to the collection of information by all eight of the federal regulators, most of the discussion around the FDTA has been about the continuing disclosure requirements of the SEC, specifically SEC Rule 15c2-12 for the submission of information related to issuers of municipal debt to EMMA, the Electronic Municipal Market Access repository that is maintained by the Municipal Securities Rulemaking Board, or MSRB.

Rob Lemmon:

Okay, lots to digest there. So let me see if I got this right, Dean. So first headline, no new disclosures in your financial statements, right?

Dean Mead:

Yes.

Rob Lemmon:

But what this is going to be is it’s more about providing data to the federal agencies, and it’s all about driving standardization and kind of future proofing with, like you say, machines looking at the data a lot more often, it’s going to be in a format that’s more assisted, like long-term that’s sustainable for the future and meets the needs in the future and enhancing transparency. So it’s standardizing, future proofing, and enhancing transparency. That’s kind of the objectives. Is that a fair summary?

Dean Mead:

Bingo.

Rob Lemmon:

Fantastic. So you did give us a lot of really great stuff, but for people who don’t want to rewind and have to listen to it again, but would rather read up for themselves, where would you tell them to go? If they wanted to get access to the information of what’s required by the FDTA, Where would you recommend they look?

Dean Mead:

Well, just Googling FDTA in the first place will get you a whole bunch of information, but the two websites that I tend to go to when I need to look something up are the Data Coalition. They’re at datacoalition.org. And the National Association of State Auditors, Comptrollers and Treasurers, nasact.org, N-A-S-A-C-T.org. And if you go to their website, look under federal relations and you’ll see a link to their page. And I often go there because they have links to the entire text of the NDAA, and a link specifically to the text of the FDTA.

Rob Lemmon:

Excellent, fantastic resources there, Dean. Thank you. And I’m going to stay with you just a second longer. So obviously like we said, no disclosures added to the financial statements. It’s more about the information provided to federal agencies. Dean, is this going to affect as well what governments put on their websites? And then as a second part to that question, when did this all become effective, this FDTA. So, there’s two parts to that question: what the publicly available information that’s provided on websites, on government websites, is that going to change or need to change, and when did it become effective or is it effective?

Dean Mead:

Well, presuming that the data standards that are used end up similar to the functionality of what’s called Inline XBRL, which is both machine-readable and human-readable. And for human-readable, something like a printed document or a PDF, an Adobe doc, or an Acrobat document, like most governments publish their financial statements in now. So in terms of what’s available on their websites, they could provide something that looks a lot like what they’re doing right now and most people would never notice the difference, but they also may be able to provide their financial statements using this data standard so that people who want to go just to their website and not to a federal regulator’s website would be able to get this new information that is searchable and very easy to download and to utilize.

Rob Lemmon:

So it sounds like what’s really required in this act is what goes off to the federal regulators. That’s what must be complied with. But you could use the same stuff on the website that’s going to the federal regulators, but that’s not the real crux of the act, and what the act requires. What’s on the website isn’t subject to that. But from an efficiency standpoint, it sounds like you could use the same data and same reports on the website. Is that right, Dean?

Dean Mead:

Yeah, ideally I think this becomes the way that governments produce their external financial statements going forward and therefore rather than it being something that is in addition to the things they already do, it would be a replacement and one that produces information that is easier to use and more valuable. But ultimately, as you say, the requirement that might be placed on a government or another type of entity that submits information to the federal government applies strictly to how they submit that information to those federal regulators, not how they use it in any other context.

Rob Lemmon:

Got it. Thank you. Sorry, I’m hammering that point just for my own understanding, but yeah, what the act needs is what goes into the regulators to be in the format, but if you’re looking for efficiencies, you could use that same format for your publicly available documents on the website. Okay. And then just again, effective date of all of this, Dean? When did this kick in?

Dean Mead:

Well, it became effective the moment it was signed into law and it has a couple of deadlines in terms of when the data standards have to be established and when it will be a requirement or put into place, which is I think December of 2026 would be the ultimate deadline for the act.

Rob Lemmon:

Okay. So it’s effective but you got a little bit of implementation period. So people should get on this pretty quickly though because time flies. So thank you Dean, I’ve hammered you a lot. So I’m going to switch gears here and chat to April and just ask you, April, timeline for these activities. Piggybacking on what Dean just said, what is the timeline please for those… You got any more details on those deadlines, April?

April Shuping:

Yeah, so the act does lay out some deadlines for this project. So as you know, SEC’s kind of been tasked leading this project and so within 180 days, and then every under 180 days thereafter for the next seven years, the SEC is actually required to publish a report that talks about the experience that’s happening with machine-readable data for the corporate disclosures, including a cost benefit analysis, which I think is going to be pretty important information as we look ahead. That initial report already has been issued. The deadlines that I think are really relevant to know for our purposes going ahead is that the SEC also has a deadline, as Dean said, that they have to publish draft rules for the public comment. So we can actually all say, “Yeah, maybe we should look at this a little differently.” That deadline is June of 2024, so less than a year from now we’ll have to see those draft rules for public comment.

And then by December of 2024, the SEC has to actually publish their final rule. Then after it’s published, whenever that final rule is published, it’s actually going to take effect within two years of that date. So pretty tight timeline. So this act is imposing both on the SEC for developing those final rules and then on the governments and government issuers to actually implement them.

Rob Lemmon:

Excellent. So we do have a bit of time before governments need to start taking action, is that right? But definitely I guess the action for right now is get familiar with the current layout of the act and monitor the SEC rules as they start coming out. Is that what you would say April?

April Shuping:

I’d say yeah, definitely keep an eye on those draft rules when they come out for public comment. I’m sure that our great agencies like GFOA, Florida League of Cities and Counties will all have their eyes on it, but it doesn’t hurt even individual governments to be fully aware of what’s happening there so that if there’s anything that feel like deal breakers, they can chime in and have their voice heard.

Rob Lemmon:

That’s excellent info. Thank you, April. I’m going to hit you with another question. So from what you are hearing with all the people you work with and all the clients you have and people you talk to in the industry, what are people saying? What are their supporters saying in favor of this thing or what are the critics saying, even? What are you hearing, April?

April Shuping:

So well in support of this, we know that accessing and using information from the audited financial statements of governments can be challenging, especially when you’re having to gather data from multiple governments or over a number of years. Governments do generally publish their financial statements in a PDF format. Generally it’s a searchable PDF format, which is helpful. But the typical person looking for financial information is still going to have to go find those either on EMMA or the government’s own website, download a PDF, pull out the information they need from that PDF and maybe repeat that process 20, 30 times if they’re looking at a multi-year analysis with Peer City data, for example. Once they’ve done that, they’ve got to find the information they want within the document and then manually enter it in their own spreadsheet or other software so they can do the analysis they want. Pretty time-consuming process there.

So we can see that there’s some very considerable potential benefits of implementing a consistent data standard in our muni markets where we could pull that information in bulk without those individual downloads. Successfully accomplished, this project should make obtaining and analyzing that governmental financial data a lot easier and far less time-consuming which one would think would level the playing field a bit for investors looking to invest in some muni bonds, particularly individuals and smaller firms. Also, a lot of benefit to governments themselves who very often, when they’re doing their budgeting and forecasting, are looking to get comparative information across different entities. So that’s her pluses, right?

Well, on the other side of the benefit, we have the cost. So a project of the size certainly is going to have a substantial cost. At a minimum, we’re looking at the initial cost of the SSEC creating those data standards, and then the ongoing cost of maintaining them in the future. Every government that’s an issuer that has to submit documents is going to have to bear a cost in figuring out how to comply with whatever standards get put into place. Although the act is explicit that it doesn’t actually require any new disclosures, having to change the way you produce your financial statements to report them to EMMA or other regulators is going to be a burden on governments.

We mentioned already that GFOA and some of these other agencies, well the GFOA and 17 other similar organizations in a letter to congressional leaders have actually estimated an overall cost to governments to implement something like this to be about 1.5 billion dollars. So that’s not small change there we’re talking about, even though we do see a pretty big benefit. So that cost of complying is really your biggest downside to this act. So when you hear people not in agreement of it, that’s probably a lot of what we’re looking at.

Some other benefits though, because we do have some more. The act actually does allow the data recording requirements to be scaled in order to theoretically reduce the burden on smaller entities. We’ve talked about the possibility of Big GAAP/Little GAAP for eons it seems like, well, we may have something similar in here if they choose to go that route, and that might minimize some disruptive changes to the affected entities. We still don’t know what shape that would take. Governments still have to submit their annual financial statements under the existing continuing disclosure requirements, and they do generally prepare those following GAAP, which is the same regardless of the size of the government. So while we don’t have Big GAAP/Little GAAP, it’ll be interesting to see if they do some kind of big data, little data change as they implement this going forward.

Proponents of the act are also saying that accomplishing the requirements of this… They’re not starting from scratch, right? They’ve got prior experience with XBRL for publicly traded companies, which been in place for a while. So developing those new data standards won’t be as big of a lift this time. The critics say governments aren’t publicly traded companies. They are very different than those. They’ve got different accounting standards, very different economic, regulatory, and legal environments. And maybe while having the XBRL experience with publicly traded companies is great, it might not translate that well to the public sector.

The critics on the other hand are concerned that the requirements could have more governments deciding to just wash their hands from reporting under GAAP anyways, and just start reporting on something like cash basis for simplification. We do know, and we’ve seen this across the board, that many governments are having more and more difficulty with the cost and time and effort and experience of producing GAAP-based financial statements, and they’re having a harder and harder time getting experienced and knowledgeable staff who can do that. So this might just be the extra strong, the camel’s back that pushes them off of GAAP entirely.

And then finally, governments don’t always have to go to the muni market to borrow money. There’s some concerns that with this extra burden of reporting, governments may decide to go more frequently or even exclusively to direct bank loans rather than borrowing in the muni market because it doesn’t have those same requirements. Generally, borrowing direct from a bank as opposed to the market is going to be more costly to government and therefore the taxpayers and is generally less transparent to the public as well. So that could be an unintended consequence of this act depending on how burdensome governments perceive the implementation to be.

So as you could hear, it’s all over the place. There’s a lot of costs, but there’s a lot of benefits too. So it’s a heavily weighted scale on both sides, Rob.

Rob Lemmon:

Yeah, that’s some really good discussion you’ve been having and at some point in the future we could potentially talk pros and cons of Big GAAP versus Little GAAP, but that might be an episode for another podcast. The discussion, like you say, really is all over the map.

And it just makes me realize, this could have a big knock on effect, this act, because like you say, if it impacts whether governments choose to obtain funding in different fashions, because the compliance is so burdensome, or if it does drive to a Big GAAP/Little GAAP kind of situation in the future, it could be an extra push in that direction. I mean, this could have bigger implications and like you say, a lot of it is cost, but it is not an inconsequential cost on the negative side, a lot of it’s the cost. And it seems like a lot of that would be kind of short-term learning curve and short-term cost in initial year or two of implementation. But there is some ongoing cost it sounds like. So you can certainly see both sides of this thing. It’s going to be interesting to see how it plays out.

So that was just, yeah, I’m just absorbing everything you gave me here, but that was very informative and useful information. So I’m going to wrap it up here and round us out with a final question. Dean, let’s drag you back in and just ask you this one. What do you see, Dean, as the potential stumbling blocks to achieving these requirements? If you were there working for a government right now, what would you be on the lookout as a possible stumbling block?

Dean Mead:

As I’ve been looking around at what various people and organizations are saying and following the work that has been done so far in the first seven months or so of the act, there are at least five major issues I can think of that that’ll need to be overcome to make this successful. Number one is picking the right organization to create the data standards. The GASB knows the accounting and reporting standards the best. I don’t think anybody could question that since they’re the ones that create them, but it hasn’t previously created data standards of this sort. It does, however, have the benefit of close proximity and access to the FASB’s XBRL staff, which just happens to be led by Louis Matherne, who directed the development of the original private sector XBRL taxonomy.

Number two would be the timeline. It’s a reasonable question to ask, how can the standards be created in just two years? Actually less because the draft rule hasn’t even been proposed yet. And so no real work has been done on the data standard. And then secondly, how can the governments and others be ready to comply within just two years after that.

Issue number three, how to deal with non-GAAP information, because some governments don’t follow GAAP, but they still have to comply with the federal data submission requirements. So some accounting requirements also may vary from state to state. Each state has its own chart of accounts, for instance. So the data standards are going to need to encompass both financial data that’s produced on a GAAP basis and financial data that’s not based on GAAP, as well as potentially other required non-financial data that is outside of GAAP entirely.

Issue number four, settling for less than a full taxonomy. The line of thinking here is if it becomes apparent that comprehensive data standards can’t be accomplished according to the FDTA’s timeline, that an interim goal might be some subset of financial statement data. And if that subset is considered to technically satisfy the requirements of the FDTA, then people are concerned that the effort to create comprehensive data standards may lose steam and perhaps stop altogether. And this is problematic because really anything less than a complete set of financial statements, notes and supporting information like you currently get in PDF format will not be beneficial to the municipal markets, or at least not as beneficial as it should be because people will still have to hand collect and analyze many, many other data points.

And then lastly, the fifth item is being wedded to XBRL, which perhaps may prove to be the best way to establish the data standards, but it’s no longer new technology and it may not be the best option for the future. Fact is, we just don’t know. So ideally the data standards would be developed in a manner that is agnostic with respect to technology, and therefore can be utilized by various structured data platforms including XBRL and JSON and XML and other platforms as well, so that it doesn’t depend upon any one particular technology. And as we progress into the future, is more amenable to being used by whatever new and more effective and efficient data platforms are developed going forward.

Rob Lemmon:

Wow. So quite a few things, a few challenges let’s say, on the horizon. And I’ll say, I’ve learned a lot today. This has been a fantastic conversation for me to learn. And if there’s one thing I know for sure about this is that I’m glad we’ve got a little bit of time to digest all the information that’s still to come and read up on it before it becomes fully effective and fully starts impacting governments. So definitely pleased that we’re out in front of this one. It’s a big, big topic that is going to have good big implications, and I’m certainly glad that you guys have been able to take the time today to share the insights and the early read on what’s going on in this. And I’m sure CRI will be putting out more technical guidance on this as things start to develop more. And I know we’ll keep everyone up to date as the plan becomes clearer.

But with that, I’m going to wrap things up and thank you, Dean, thank you April, for being the guests today and the terrific information. If any of our listeners would like more information or have questions on this topic, you can check us out on cricpa.com and submit questions to us through there. And we’ll happily do our best to answer those questions. On that website, cricpa.com, you will see a lot of useful information specific to governments on our government page. There’s all kinds of articles and useful resources that we have there and other podcast episodes and webinar recordings for technical content. So lots of good stuff if you’re interested in checking that out. Obviously follow us on social media as well. We’re on all the major channels and yeah, we just appreciate everyone listening today. So with that, I’m going to sign off and thank you again for listening and say goodbye. Have a good day.

Speaker 1:

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