AccountabilityFrom apoliticalPerformance
March 11, 2020

Why we need algorithms to keep an eye on government’s finances

Governments across the world have made great strides toward providing financial transparency, yet much still needs to be done. Financial transparency — the ability for citizens to monitor a government’s fiscal affairs — increases accountability and provides the public a way to identify corrupt practices.

While many governments across the world post revenues, expenditures and other financial statistics, it remains difficult to make comparisons between them, and especially between subnational governments — the ability to perform “apples-to-apples” comparisons between cities, states and provinces to track relative performance. The key to enabling this kind of analysis is the publication of “machine readable” financial reports, which can be readily analysed by computer software.

In this article, I will briefly survey advances toward government financial transparency thus far and propose a way forward.

A history of financial transparency

Innovative governments have been publishing financial statistics for centuries. In 1854, the United Kingdom began issuing an annual statistical abstract that included extensive revenue and expenditure details.

In 1922, the League of Nations — the interwar predecessor to the United Nations — commenced publishing its Annual Memorandum on Public Finance that included comparative financial statistics across member states. This publication was later succeeded by a public finance chapter of the UN Statistical Year Book (1948) and finally by the International Monetary Fund’s Government Financial Statistics Yearbook (1977).

The IMF issued a “Code of Good Practices on Fiscal Transparency” in April 1998 and has updated this code several times. The most recent version of the Fiscal Transparency Code, released last year, advocates several best practices including timely release of financial statements, use of external auditors, comprehensive coverage of all public entities and interim reporting, but it does not address such technical aspect as whether, and, if so, how government financial reports should be published on the internet.

Nonetheless, web publishing of government financial reports has become widespread both at the national and sub-national level. In 2005, the Government Finance Officers Association (GFOA) — which represents public finance officials in the United States and Canada — published a best practice advisory recommending that entities publish financial disclosures on their web sites.

In the English-speaking world, government financial reporting is still normally done in PDF form, although both New Zealand and the US federal government also publish their financials in HTML

Although GFOA’s statement did not recommend a specific file format, it suggested technical standards related to posting in Adobe PDF, which was then the dominant format for online government financial reports, just as it is today. The advisory did suggest the use of “in-document links”, bookmarks and searchable text — features often missing in government financial disclosure even today. Finally, the advisory recommended that governments “monitor developments in standardised electronic financial reporting and apply that language to their electronic document process when appropriate.”

Standardised electronic financial reports include tags that associate individual financial statement entries with a caption (e.g. accounts payable, accounts receivable, etc.), time period (e.g., fiscal year ended June 30, 2020) and scope (e.g., government-wide or some subset). A parsing program, written in Python or another programming language, can readily read the tagged data and convert it to spreadsheet or database format, facilitating ratio analysis and peer comparisons. A recently released peer comparison of California cities, produced by the State Auditor, encompassed 470 governments and three years of data, requiring manual entry of over 1400 financial reports. Had these documents been published in a standardised, machine readable format, the State Auditor could have completed her analysis far more quickly.

The most common tagging protocol for financial statements is XBRL — eXtensible Business Reporting Language — which is based on XML. A newer variant, Inline XBRL (iXBRL), is based on HTML and allows for the creation of financial disclosures that are both easily viewed in a web browser and easily loaded into a spreadsheet or database. While old-style XBRL documents are machine readable (i.e. they can be parsed), they are not human-readable (i.e., they are hard to understand when visually inspected). Inline XBRL documents are both human and machine readable.

Milestones

Unfortunately, little progress was made toward public sector electronic financial reporting in the years after 2005 in the US, Canada or other English-speaking countries. Instead, alternatives to PDF financial reporting advanced in the private sector and in the Spanish public sector.

Numerous financial regulators and stock exchanges have adopted XBRL for corporate financial statement reporting. The US Securities and Exchange Commission adopted an XBRL reporting mandate in 2008 and is now shifting filers to Inline XBRL. The Canadian Securities Administrators have had a voluntary XBRL filing program since 2007. The Australian Securities & Investment Commission began accepting Inline XBRL filings in 2015. Finally, the United Kingdom has been a global leader in iXBRL implementation, requiring the technology for all corporate tax filings since 2011. Companies House, the nation’s repository for financial reports, began accepting iXBRL statements at the same time.

But this evolution has not extended to public sector financial filings. In the English-speaking world, government financial reporting is still normally done in PDF form, although both New Zealand and the US federal government also publish their financials in HTML.

Detailed financial analysis and peer comparisons will help government officials better manage their scarce resources and learn from others

One step toward electronic public sector financial reporting has been taken by the Global Initiative for Fiscal Transparency. GIFT supports a standard known as the Open Fiscal Data Package (OFDP), which was developed by Open Knowledge International in connection with its OpenSpending data visualisation tool. OFDP is a great tool for exchanging machine readable government spending data, allowing some ability to perform automatic peer comparisons. But is not a complete solution for government financial statements, which include balance sheet information and revenues as well as categorised expenditures.

The only country that has implemented XBRL in the public sector is Spain. In 2006, the Finance Ministry began a migration to the tagging technology — requiring several thousand municipal governments to file XBRL financial reports as a prerequisite for central government aid. The ministry posts the data it collects on a central web site. Brazil and Italy have also made strides toward implementing XBRL for local governments.

Toward a future of reporting standards

As populations level off and age in most English-speaking countries, municipal, state and provincial budgets will face increasing strain. Static or declining population is associated with less revenue, while population ageing means greater pension and healthcare costs. Heavily indebted governmental entities may become insolvent, as did the US cities of Vallejo, Stockton, San Bernardino and Detroit during and after the last recession. Others will have to make hard choices between competing spending priorities.

Detailed financial analysis and peer comparisons will help government officials better manage their scarce resources and learn from others. To realise these benefits in a cost effective way, government financial reporting will need to evolve beyond PDFs and toward standardised, machine readable, tagged formats.

With a $3.8 billion market for municipal bonds, the US may have the greatest need for this policy reform 

In 2009, the US Securities and Exchange Commission began requiring corporations with traded securities to issue their financial reports in XBRL format. But it did not implement a similar requirement for state and local governments with traded bonds. At the time, a self-regulatory body that oversees the municipal bond market, the Municipal Securities Rulemaking Board, indicated an intention to extend the technology to the public sector but did not follow through. Inertia and concerns over implementation costs sidelined this technology.

More recently, the standards body XBRL US formed a Standard Government Reporting working group in hopes of kick-starting this change. The group has been developing a reporting taxonomy that implements standards set by the Government Accounting Standards Board (GASB). We help early adopters, like Will County, Illinois, create compliant filings and educate regulators and practitioners about the benefits of machine readable reporting. Florida passed a law in 2018 that begins to migrate local governments to XBRL and at the end of 2019, the President signed legislation that will eventually require state and local government grantees to adopt electronic reporting.

With a $3.8 billion market for municipal bonds, the US may have the greatest need for this policy reform (since bond investors and credit rating agency analysts need to evaluate financial statement data as part of their credit analysis). But Canadian provinces also have considerable debt and the United Kingdom hopes to create a municipal bond market. As the costs of creating machine readable disclosure falls (due to increasing experience and competition among service providers), migrating to this new technology should spread to all local governments worldwide. 

This piece originally appeared on Apolitical, the global network for public servants. You can find the original here. For more like this, see Apolitical’s government innovation newsfeed.

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Marc Joffe

This article is written by Marc Joffe, senior policy analyst at the Reason Foundation.

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