Data standardization has often been trumped as the gold standard for financial reporting – and justifiably so. Not only can it help ensure greater transparency and comparability between the financial performance and position of companies or local government bodies, but it can also lead to reduced costs when it comes to data preparation, conversion and interpretation. Additionally, data standardization can provide more comprehensive datasets that analysts can study to assess factors such as financial risk.
The benefits of data standardization have not gone unnoticed. Back in May, J.P. Morgan Chase released an article named Data Standardization – A Call to Action. Speaking broadly, the article speaks about the importance of data standardization and urges relevant bodies – from those in the financial services industry to global regulators – to take steps to address the gaps in standardized reporting. According to the article’s summary, “establishing and implementing a common global language for financial instruments and transactions will create efficiency, reduce costs and result in the improved usability of financial data to create valuable information and manage systemic risk.” A noble vision indeed.
However, to achieve such a grand dream within the United States, a few crucial changes need to happen. Regulatory reporting within the United States remains far away from having a common reporting standard in place. Often, there is too much duplication, with each agency focused on its own data collection needs and processes. This means that the cost of reporting is not only higher than it could otherwise be but that the quality of the data being reporting is also poorer.
As just one example, the Federal Reserve has acknowledged that the definition of financial institution in the Banking Organization Systematic Risk Report (FR Y-15) differs from the definition used in other regulatory reports. While this acknowledgement is welcome, no steps have been suggested as to how such definitions could be better aligned between agencies.
Although data standardization throughout the United States may only be a distant dream at the moment, it’s not all doom and gloom, and some progress has been made.
In Florida, HB 1073 has been passed which, from 2022, will lead to local government comprehensive financial reports (CAFRs) being prepared in XBRL format as opposed to the PDF format that they are currently submitted in. In order to enable this change, XBRL taxonomy will be developed and put in place to help create a more standardized reporting framework across local governments.
Such measures, while far from being implemented on a federal scale, show that higher priority is being placed on data standardization and the benefits it can bring, from lower costs to improved data analytics.
However, if data standardization across the United States is to become a reality, then much more needs to be done – in both the private and public sectors. For instance, the J.P. Morgan Chase article suggests that the Financial Stability Oversight Council could try to work towards the standardization of regulatory reporting requirements across its member agencies, but such measures would have to form part of a wider movement in the United States that recognizes the advantages of data standardization.
Having standard taxonomies and standardized datasets makes sense in this digital age – a standard taxonomy not only assists in sharing data between companies and agencies, but it also ensures that everyone is on the same page. Every definition is clearly outlined and understood, and duplication or poor data quality becomes a thing of the past.
However, care would also have to be taken to ensure that no accounting extensions arose which could interfere with the ability of analysts or stakeholders to compare financial data between peers.
Read the full article by J.P. Morgan Chase here.
DataTracks is a global leader in the preparation of financial statements in XBRL and iXBRL formats for filing with various regulators. With a track record of thirteen years, DataTracks prepares more than 13,000 XBRL statements annually for filing with regulators such as SEC in the United States, HMRC in the United Kingdom, Revenue in Ireland, ACRA in Singapore and MCA in India.