The development of Extensible Business Reporting Language (XBRL) in the corporate sector, the demand for better state and local government reporting, legislation at the national and state levels, and increased user interest in XBRL reporting are the factors providing momentum for use of this powerful reporting tool for state and local government financial reports. In 2018, Florida was the first state to pass legislation (https://www.flsenate.gov/Session/Bill/2018/1073/Analyses/h1073z1.IBS.PDF) requiring the state’s Chief Financial Officer to create an XBRL taxonomy that would be used by Florida local governments starting in 2022. Other states, including California, Utah, and Illinois, are exploring similar XBRL reporting requirements.
Impetus for XBRL Reporting
Closely following the passage of the Florida legislation, XBRL.US formed the State & Local Government Disclosure Modernization (SLGDM) Working Group in July 2018. The objective of the group is to develop a standardized taxonomy consistent with GAAP that can be used for state and local government financial reporting when preparing statements with Inline XBRL. The importance of developing a standardized taxonomy for use by state and local governments cannot be overemphasized. Financial reporting for the state and local governments is not regulated in the same manner as corporate reporting. Adoption of a standardized taxonomy is up to each state.
Ensuring that a standardized taxonomy is in place prior to state adoptions of XBRL will make it more likely state and local government XBRL financial reporting is efficient, effective and comparable. It is worth noting that, where governments do not prepare GAAP-based financial statements, the proposed taxonomy, which is GAAP-based, would not be suitable. Among those that do present GAAP-based reports, XBRL offers the potential for increased consistency in measurement and reporting of financial statement elements. Moreover, the ease introduced in the reporting process may encourage some governments to voluntarily adopt GAAP-based reporting or lead some states that currently permit alternative regulatory reporting frameworks to require GAAP-based reporting.
There are at least three factors that could add momentum to state interest in XBRL adoption and reporting. The objectives of the Digital Accountability and Transparency Act (DATA) of 2014 (https://www.congress.gov/113/plaws/publ101/PLAW-113publ101.pdf) include disclosing expenditure information related to federal grants; establishing financial data standards that will provide consistent, reliable, and searchable spending data; simplifying reporting requirements for entities receiving federal funding while reducing costs and improving transparency; and improving the quality of data submitted. Although DATA applies to the federal government, the objective to apply DATA to all federal grants suggests that requirements could be extended to state and local governments. A second potential legislative factor is the Financial Transparency Act, introduced into the House last year (https://www.congress.gov/116/bills/hr4476/BILLS-116hr4476ih.pdf). If enacted, the bill would require the Municipal Securities Rulemaking Board to provide, to the extent practicable, machine-readable data that is based on a taxonomy or ontology model.
A third factor providing momentum to the adoption of XBRL is the functionality Inline XBRL offers to address many of the concerns that continue to be expressed by the SEC with respect to the reporting of financial information to municipal credit markets—that is, the timeliness and quality of disclosures (U.S. Securities and Exchange Commission, “Report on the Municipal Securities Market,” https://www.sec.gov/news/studies/2012/muni-report073112.pdf). XBRL, inclusive of Inline XBRL, can be particularly advantageous in addressing these concerns given the SEC’s experience with XBRL for publicly traded companies.
Financial reporting for the state and local governments is not regulated in the same manner as corporate reporting. Adoption of a standardized taxonomy is up to each state.
Supporting the contention that XBRL can help address SEC concerns is research showing that XBRL reporting, and recently Inline XBRL, has the potential to increase the timeliness of financial reporting (K. Amin, J.D. Eshleman, and C. Feng, “The Effect of the SEC’s XBRL Mandate on Audit Report Lags,” Accounting Horizons, vol. 32, no. 1, 2018, pp. 1–27; S. N. Sohl, T. R. Waymire, and T. Z. Webb, “Determinants of Bifurcated Local Government Reporting Lag: The Potential for XBRL to Improve Timeliness,” Journal of Emerging Technologies in Accounting, vol. 15, no. 1, 2018, pp. 121–140). Timeliness is affected by reporting lag, which has two components—the length of time to complete the audit and the length of time to prepare and release financial reports. The latter lag component can be shortened with XBRL, particularly in years subsequent to the adoption year. Once financial statement elements are tagged, much of the aggregation of financial information that takes place after the audit report date can be eliminated. Sohl et al. (2018) found that audit firms with greater government audit expertise were slower in meeting regulatory deadlines for their Illinois local government clients, likely due to the constraints in the supply of audit firms serving this market. XBRL adoption offers the opportunity to reduce this delay in release of financial information.
The SEC’s ongoing concern about a lack of timeliness and transparency in municipal financial reporting is related to the negative consequences of delays for state and local government issuers. For example, researchers (Trent S. Henke and John J. Maher, “Government Reporting Timeliness and Municipal Credit Market Implications.” Journal of Governmental & Nonprofit Accounting, vol. 5, no. 1, 2016, pp. 1–24; Christopher T. Edmonds, Jennifer E. Edmonds, Beth Y. Vermeer, and Thomas E. Vermeer, “Does Timeliness of Financial Information Matter in the Governmental Sector?” Journal of Accounting and Public Policy, vol. 36, 2017, pp. 163–176) have found that delays in issuing audited financial reports can contribute to an increased cost of debt and lower bond ratings.
Because they are responsible for assurance with respect to the aggregating of accounts and funds for presentation purposes, auditors can benefit from governments’ use of Inline XBRL reporting.
SEC Commissioner Luis Aguilar has expressed concern that, in addition to its lack of timeliness, municipal financial information lacks consistency, completeness, and accuracy (“Making the Municipal Securities Market More Transparent, Liquid and Fair,” February 13, 2015). Data quality provided to external users can be improved through the use of Inline XBRL by increasing the completeness, amount, consistency, and conciseness of the data made available. Use of a standardized taxonomy means that data points provided are defined by the data tag; this ensures the term has the same meaning across government entities and has been measured consistently. The ability to extract data from Inline XBRL documents allows for ease of data aggregation and comparison across government entities.
Auditors’ Role in XBRL Reporting
There are multiple reasons for the lack of timeliness in government reporting, including delays in issuing the audit. Several factors contribute to audit delay; financial systems that allow for the production of high quality financial reports and investment in IT, however, have been shown to reduce audit delay (Andrew J. McLelland and Gary Giroux, “An Empirical Analysis of Auditor Report Timing by Large Municipalities,” Journal of Accounting and Public Policy, vol. 19, pp. 263–281, 2000). Thus, investment in Inline XBRL by governments has the capability to assist auditors as well as preparers in the timelier issuance of audited financial reports.
Because they are responsible for assurance with respect to the aggregating of accounts and funds for presentation purposes, auditors can benefit from governments’ use of Inline XBRL reporting. Inline XBRL offers the opportunity to streamline the reporting process, facilitate more efficient review by auditors, and generate financial information for auditors to use in their planning—for example, benchmarking and ratio analysis can identify areas of risk in the audit engagement.
In addition to the standard audit report, auditors of state and local governments are frequently involved in internal control and compliance audit work related to the Single Audit Act. Many local governments are also required to prepare separate reports for state governments. Having standardized data that can be efficiently and effectively aggregated can be beneficial when several different reviews are being conducted by the auditor.
XBRL has been a part of financial reporting in the corporate sector ever since the SEC mandate in 2009. As a result, auditors have become increasingly familiar with the benefits and shortcomings of using XBRL as part of the reporting and auditing processes. Applying what has been learned from the corporate sector, some audit firms can benefit from the movement to Inline XBRL in the state and local government sector by realizing efficiencies at a faster pace than SEC adoption.
XBRL implementation may be more challenging for regional and local CPA firms that do not have publicly traded clients. For these firms, the move to Inline XBRL for governments could initially require additional training and resources. Such an investment may be well worth the effort, particularly for those firms with a significant government auditing practice.
XBRL adoption has the potential to reduce audit fees for some governments. Reduced audit fees can free up resources for other government assurance work. Similar to corporate XBRL, governments may have a need for XBRL instance document assurance. Furthermore, as XBRL becomes more pervasive, the use of XBRL GL (General Ledger) has the potential to enhance the audit trail and improve a client’s internal controls allowing for more efficient internal control inquiries and substantive testing (Yuan George Shan and Indrit Troshani, “Does XBRL Benefit Financial Statement Auditing?” Journal of Computer Information Systems, vol. 54, no. 4, pp. 11–21, June 2014); Pascal A. Bizarro and Andy Garcia, “Using XBRL Global Ledger to Enhance the Audit Trail and Internal Control,” The CPA Journal, May 2011, pp. 64–71). Ultimately, the benefits of XBRL should accrue to both governments and their auditors.
As companies and audit firms become driven by technology and data analytics, there is increased pressure on governments to increase their use of technology and data to better inform users. Inline XBRL is one step in moving state and local governments toward increased transparency as well as increased efficiency and effectiveness in financial reporting and auditing. CPA firms should leverage what they know about XBRL in other sectors, considering the sector-specific issues in government auditing, in order to meet their clients’ needs as XBRL is legislated or implemented to meet transparency initiatives.