Welcome to "Bridging the GAAP," your go-to source for insights directly from the Governmental Accounting Standards Board (GASB). In each episode, we take you on an in-depth journey through the latest financial reporting update and GASB projects that are of interest to investors, accounting professionals, auditors, and financial statement creators across companies, nonprofits, and governments. Our goal is to shed on the critical work of crafting and refining the Generally Accepted Accounting Principles (GAAP) that govern financial reporting in the United States.
Hosted by Matt Broder, FAF VP of Communications, "Bridging the GAAP" is an indispensable tool for anyone engaged with financial issues and seeking firsthand insights from decision-makers about the present and future landscape of governmental financial reporting. The podcast is produced by Eileen Foley, FAF Senior Manager of Digital Operations, and audio-visually enhanced by Patrick Dorsman, FAF Manager of Video and Digital Design.
Episode 1 TranscriptionSpeaker 1 [00:00:07] Hi there and welcome to the very first episode of Bridging the GAAP, a podcast brought to you by the Financial Accounting Foundation. My name is Eileen Foley, and each episode we will be putting you in contact directly with leaders from the Governmental Accounting Standards Board, otherwise known as the GASB. In today's episode, our host Matt Broder speaks with GASB chair Joel Black to discuss and demystify the Financial Data Transparency Act, a hot topic these days in governmental financial reporting. Now, let's go ahead and listen in as Matt guides us through today's discussion. Over to you, Matt!
Speaker 2 [00:00:44] Thank you, Eileen and Joel. Welcome to the inaugural edition of the Bridging the GAAP podcast. We're delighted to have you here today. Thank you so much for coming.
Speaker 3 [00:00:53] Thanks for having me. Looking forward to it.
Speaker 2 [00:00:55] So we're going to talk about the Financial Data Transparency Act and I'm guessing that not everybody in the world follows this as closely as you do. So for those who may not be following it as closely as the folks at the GASB, what is the Financial Data Transparency Act and why is it a big deal for states and cities and towns that prepare financial statements?
Speaker 3 [00:01:14] Sure. And we call it the FDTA, right? Financial Data Transparency Act for short. It is an act that was signed into law in December of 2022 by Congress as part of the Defense Authorization Act. And basically it requires the federal financial regulators, which include the SEC, Treasury, the Comptroller of the Currency and others to create a data standard that makes all the information filed with them machine readable, or maybe for lack of a better term, digitized in a way. And some might think that that means, well, can I just have a PDF that's unlocked or searchable? But it's really something more than that. The Act wants the data that's in those reports to be defined in a way to be part of a taxonomy, part of a schema so that the machine not only can see it and pick it up, but also knows at each point what each information element means. And that it means the same thing from report to report to report so that the machine not only kind of reads it, but understands it.
Speaker 2 [00:02:24] So it's almost like a language to read and understand and be able to share with others.
Speaker 3 [00:02:29] In a way, that's right. And why states and cities and counties care about it is that within the Act, it does require the municipal bond market to participate in this, with the SEC specifically being given the regulatory authority to require any information filed with the Municipal Securities Rulemaking Board to fall under this Act and have a data standard required for it, which would encompass the municipal bond market.
Speaker 2 [00:03:01] Which thousands of governments participate in. Okay. So it's got big implications for cities and towns and states. But why does GASB care about this issue?
Speaker 3 [00:03:12] Sure, it is a good question and I'd like to kind of step back a little bit beyond just the FDTA and talk about why we care about electronic financial reporting altogether, because we actually have started looking at this and thinking about this prior to the FDTA coming along. And it was something that was interesting to me as I came in to be the GASB Chair about three years ago. And if you think about the mission of the GASB, it's to make sure that we set accounting and financial reporting standards for state and local governments in the US. But it's really to make sure that users of government financial information, which includes citizens, legislative bodies and those in the investment community, the municipal bond community, make sure that those users are getting the financial information they need to make decisions and assess the government's accountability.
We have in our government community done that in much the same way for decades. The government produces a big thick what used to be paper document and now is an electronic paper document in PDF. They send that out into the world. Users manually extract information out of that document to then ingest into their processes and use the information. I had to imagine that technology was going to change that, was going to disrupt that somehow; evolve that process. So if you think about that in the context of our mission and if there is disruption in that process and there comes some other way in which users can more easily get access to financial information, then they might start using that way of getting the information instead of that hard manual way of extracting from a financial report.
So who is it that makes the decisions about what information is produced electronically? If somebody else were making that choice about the right pieces to pull out of the financial statement document, this is the information we want to make more easily accessible, then somebody else is kind of achieving our mission for us, right? They're deciding what information users get, at least get easily. And I wanted to be sure we understood how that was evolving so that we could take our place, continue to achieve our mission, and make sure that users are getting the information they need and whatever this new mode of communication was. And so that's my interest in electronic financial reporting.
FDTA kind of takes that thing that I thought was happening anyway and going to happen and really just speeds it up and kind of puts the SEC in the role of potentially making that determination of what's the right information to make tagged in this information that goes to the investor.
Speaker 2 [00:05:56] So this transition, which you foresaw coming at some point in some fashion, is now actually arriving. Although we don't know the final form of it.
Speaker 3 [00:06:06] Yet, seems to be.
Speaker 2 [00:06:09] So I know you travel a lot. You meet with stakeholders all over the place. When you talk to stakeholders about the FDTA, what kind of outcomes are they looking for? And I guess maybe another way of saying that is what kind of questions they have or concerns are they expressing to you about where this is now going?
Speaker 3 [00:06:28] Sure, it is definitely a hot topic. And when I go to conferences, this tends to be mainly what they want us to talk about. And what you largely hear from people that are, you know, optimistic and are kind of looking at what the positive outcomes of the Act should be. It's really kind of that reduction of friction of information getting from government to end user. Can we make that process more effective and efficient to increase the efficiency and effectiveness of the capital market because we can get that information to them quicker? That's the positive. That's maybe why this exists. That's what we all want. That is a good positive outcome.
I think those that have concerns are concerned with, especially from a preparing government perspective, they're concerned with "I'm limited for resources, I'm limited in personnel. I've got too much to do already with that limited resource. Now you're just adding one more thing to my plate. One more either technology solution thing I have to buy and understand and implement or at least one more part of my process I have to add that I didn't have before and I don't have the resources to do that."
And then on the user side, what they're worried about tends to be "Am I going to keep getting all the information that I used to get? I don't want a reduction in information. It would be nice to have it easier, right, and more frictionless. But I don't want to lose information in the process. I don't want poorer quality data as a part of that process." So they're interested in making sure they get the same or more information and that it's the same quality of an audited financial statement. Those tend to be the concerns.
Speaker 2 [00:08:11] I guess that make sense. I mean, if you're resource-constrained on the one side and if your information-interested on the other side, you don't you don't want to go backwards, no matter what.
So you've established that GASB has an interest in this. The question that I have would be, what is the role that you think GASB might play as this new era of digital financial reporting or electronic financial reporting kind of comes into being. What role would you guys have?
Speaker 3 [00:08:47] I guess my view of it is that that the data standard is really kind of a rule about what's the right items of information to be digitized, what level of aggregation or disaggregation should there be, What should the common rule be that's written that says here in a municipal financial statement, this is how we describe each piece of information that's in that and make sure that they're all encompassed. I think that we have a place to write that rule, to maintain that taxonomy, to maintain that schema, to develop that, because it really is what we've done for our 39 years of existence is establish rules about what the information should be in financial reports.
We can also kind of convert that into, if you will, this kind of data standard electronic age. I think we definitely have a role to play there. And my view of it, our view of it would be that it would be kind of technology solution agnostic, which really means we're not going to develop the actual technology solution that uses the rule and we don't care what it is, whether it's, you know, an XBRL tagging kind of methodology or data extraction AI-influenced kind of technology solution. Any one of those technology solutions could use a rule that we develop to program into their systems, create definitions, whatever that might be. So I think that that's a role that we can and hopefully should be able to play.
Speaker 2 [00:10:11] Good. I'm wondering, though, does the FDTA actually raise any accounting issues for local governments, state governments. You haven't mentioned GAAP yet and you guys write GAAP. And I'm just wondering, does the implementation process, will that require any standard setting on your part?
Speaker 3 [00:10:34] The short answer is no. Actually, the rule itself, the Act itself says that no new reporting requirements can be created in the implementation of this Act. It only kind of makes machine readable information that's already required. So there will be no changes that we will have to take in GAAP to implement this.
Speaker 2 [00:10:54] So no projects forthcoming that would require.
Speaker 3 [00:10:57] No GASB standard number XXX will result from this.
Speaker 2 [00:10:59] As chair of the GASB, do you have any advice or insights for people that are in state and local government if they're tracking this issue and they're concerned about it? Do you have any thoughts about what it might mean for them?
Speaker 3 [00:11:17] What I would suggest that they do is pay attention to and participate in the process. The SEC, in particular the Office of Municipal Securities, who has responsibility for the municipal securities market within the SEC is asking for and looking for market participants to participate with them in the rulemaking. They will come out with at some point rules with an exposure draft. You can comment on them, but I would suggest being involved even before that. Talk to them, communicate with them. They are open to listening. They have had a couple meetings with us. They are open to listen to whoever wants to talk to them. They are, as they say, in the information gathering mode so I would participate with your groups like GFOA and other stakeholder groups that represent you. Work on task forces, make sure your messages are getting out to the SEC and participate in the process.
Speaker 2 [00:12:18] Now, is it your sense and I'm not going to ask you to like put odds on this or make a wager, but is your sense that, you know, GASB will ultimately be responsible for driving the taxonomy that's going to guide these digital financial reports?
Speaker 3 [00:12:34] Well, hard to say because that is totally up to the SEC. It is, I guess, worth noting that our sister standards setter, the FASB, has a contract with the SEC on the public corporation side…Speaker 2 [00:12:48] Right, FASB does oversee XBRL, right?
Speaker 3 [00:12:50] …That's right. They maintain this taxonomy or rule, if you will, for XBRL on behalf of the SEC. So the SEC could do the same thing and ask the same thing of us, but we don’t know.
Speaker 2 [00:13:00] Well, that's true because FASB has been involved with XBRL for many, many years now.
So, what's the next thing that that that you expect to see in the development of this interesting initiative?
Speaker 3 [00:13:16] Well, it's kind of broken into two phases of rulemaking in the Act. The first is all the federal financial regulators jointly are creating presumably some kind of broad data standard that then each individual agency will enact. And the law requires that broad rulemaking to happen within the first two years, of which we're six months in already. So, in the next 12 months or so, look for a broad joint rulemaking kind of document to come out for public comment. And then the SEC will likely begin their rulemaking process and have two years after that to then enact their specific rule for, in our case, the muni environment. But even that would just be when they're required to have the rule issued. So four years from the Act, three and a half years from now, what its effective date will be is something the SEC has the ability to determine. So it could be even several years further down the road.
Speaker 2 [00:14:14] So they’re in information gathering mode now, perhaps a rulemaking in 2024 or at some point after that? Good. Well, this has been great, Joel. Is there anything else that you think our listeners ought to know about, about the Financial Data Transparency Act?
Speaker 3 [00:14:31] Yeah. The only thing other thing I would say—and this is probably advice for anybody but in particular the state and local governments—is that know that these rules have not been written. The Act itself is a pretty broad mandate on the regulators to enact a rule. But there's no rule written, which means that there's no technology solution out there that's already been picked that can solve this for you. So I would just say to state and local governments, don't go purchase some software because you don't even know what the rules are that you're trying to adhere to yet. Just participate in the process along the way.
Speaker 2 [00:15:04] Well, Joel, this has been really illuminating. I'm grateful to you for your time and thank you. And I'm sure we'll be checking back in with you about this and other topics in the future.
Speaker 3 [00:15:13] Thanks, Matt. Look forward to it.
Speaker 2 [00:15:14] Thanks.
Speaker 1 [00:15:20] Thank you all so much for tuning in with us to this episode of Bridging the GAAP. We hope you'll join us again and please be sure to visit GASB.org/podcast to subscribe and to stay updated on future episodes. You can also follow the GASB on LinkedIn, Facebook and X (previously Twitter). Bridging the GAAP is a production of the Financial Accounting Foundation, produced by myself, Eileen Foley, and brought to Audio/Visual life by Patrick Dorsman. So, until next time, keep balancing those books, crunching those numbers, and embracing the art of financial reporting!