How to fix government financial reporting

Just give us the good stuff and leave the obscure accounting reports to the databots.

Photo by Melanie Deziel on Unsplash

Happy Finance Friday! Welcome to Part II of my series on understanding financial reporting by states and localities. Last week, I wrote about what’s wrong with government financial reports and this week, I’ll lay out some ideas for fixing the current model.

Divide and conquer

Generally, people look at a Annual Comprehensive Financial Report (ACFR) for one of two reasons: 1) They are looking for specific data or 2) They are curious about the overall finances or economy of a particular state or locality.

Journalists, taxpayers and elected officials often access the reports for both reasons while researchers, analysts and the like are typically scraping the reports for data. 

The current format of most financial reports attempts to serve both purposes while not really serving either as well as it could. As the Governmental Accounting and Standards Board (GASB) has created new standards for financial reporting—all in the name of good governance, accountability and transparency—the ACFR has turned into a beast of a document that is complicated and labor-intensive to produce. It’s difficult for us lay-people to understand without spending lots of time learning about how to navigate them. And data folks complain that they’re filed in a PDF that’s cumbersome (at best) to extract data from and they want something more machine- and data-friendly.

It’s sort of like an old house that has been expanded over the decades while each new owner has converted its use to adapt to the changing needs of the surrounding neighborhood. The original structure was clear but has since been joined to the house next door, expanded with additional wings and multiple stories, and given a redesigned façade and new landscaping. It looks odd and once inside, the layout is hard to follow and it’s easy to get lost.

So if the two main reasons for accessing a financial report are for specific data and to understand how a government is doing, the information should be tailored accordingly. And it can save us all some time.

Step One. Almost all of the government books are done using Microsoft Excel or an equivalent program. It is a mind-numbing fact that finance officers then take that data, paste all the relevant tables into a PDF report…only to have users on the other end extract those numbers and convert them back into a table format so they can analyze the data. Governments should just be allowed to file all their audited financial data, complying with generally accepted accounting principles and standard, in their original spreadsheet format and call it a day.

Step Two. State and local governments can then extract information from that data to produce “financial reports specifically designed to be readily accessible and easily understandable to the general public and other interested parties without a background in public finance.”

The good news is, hundreds of governments already do this. That quote is the Government Finance Officers Association’s description of an award-worthy Popular Annual Financial Report, or PAFR. The scoring for the award is based largely on reader appeal (25%) and understandability (40%).

Sadly, this is nothing like the certificate of excellence awarded for the financial reports that governments are actually required to file. An award-worthy ACFR is one that goes “beyond the minimum requirements of generally accepted accounting principles” and fulfills most items in a long checklist criteria. Outside of finance departments, this is not exciting news for anybody.

If the accounting standards are dealt with separately and more easily, then the PAFR could be our model for rethinking the regularly published annual financial report. But what information should governments include and what should they leave out?

The 80/20 rule