Late audited government financials problem grows worse

The median time the municipal sector took to produce audited comprehensive financial statements worsened by 13%, jumping to 166 days in 2021, compared to 147 days in 2010, a 19-day increase.

That is according to a draft report produced by Richard Ciccarone, president Emeritus of Merritt Research Services, an Investortools Company, who teamed up with Deborah Carroll, director of the University of Illinois at Chicago’s Government Finance Research Center.

In March, S&P Global Ratings placed 149 ratings on CreditWatch with negative implications because they have not received 2021 ACFRs from those issuers.

The issue of timely audited financials becomes more salient in times of market and economic uncertainty such as now because investors look more closely at a company’s financials when making decisions.

“Investor groups ranging from bond investors to government watchdogs to regulators have regularly called for faster audit times from municipal bond issuers,” Ciccarone and Carroll wrote in the report. “Timely audit reporting is essential for credit evaluation and proper pricing in the municipal bond market and is an indicator of good governance and stewardship.”

ACFRs provide “rating agencies, investors and oversight agencies data needed to gauge the risk that the government entity will face a fiscal crisis in the future,” said Marc Joffe, federal and state policy analyst for the Cato Institute.

While corporations are required to produce audited financials in 60 to 90 days depending on their size, the Governmental Accounting Standards Board (GASB) recommends municipals release them within 120 days, “and we aren’t achieving that,” Ciccarone said.

Information provided in the ACFRs can bring fiscal distress to light sooner, rather than later, Ciccarone said.

Ciccarone’s firm created the database in 2007 to track the timeliness of audits and is in its second year of working with UIC.

“We had been doing it since 2007, and it was getting noticed, but I wanted it to have a broader impact,” Ciccarone said.

He originally began the project after the National Federation of Municipal Analysts was founded, because it was discovered that there was a serious problem with accessibility, consistency of documents and timeliness. While strides had been made on the other two issues, he said, the timeliness of ACFR’s continued to be a problem.

A shortage of accountants and auditors has contributed to the current erosion in timeliness, Carroll said, but they also made other findings.

Public sector auditors are systemically slower than private auditors, which was attributed in part to staffing shortages, especially in states where the state auditor is required to sign off, Carroll said.

“There are exceptions,” Carroll said.

Two counties in Tennessee — Cumberland and Robertson — produced some of the speediest ACFRs, and both were audited by the Tennessee Comptroller of the Treasury, Carroll said.

The reported lauded the Tennessee Comptroller and KPMG for exceptional timeliness.

Other notable findings were that governmental bond sectors were generally slower than revenue bond sectors and there is a direct correlation between audit timeliness and jurisdiction size and level of indebtedness for half of the municipal bond sectors. Larger and more indebted issuers generally produced faster audits — with the exception of California.

California has developed a reputation since 2018 for being particularly egregious in the amount of time it takes to produce audited financials. It took nearly two years before finally releasing its fiscal 2021 ACFR in March, while announcing it would be late on its yet-to-be-released fiscal 2022 ACFR.

State Controller Malia Cohen, who took office in January, said in the state’s annual bond report to investors that she is committed to restoring the timely issuance of the ACFR. To that end, she wrote, the controller’s office intends to have collaborative discussion and consultation with the state legislature, other state officials and state departments, including the State Auditor’s Office, to evaluate the efforts needed to increase the timeliness of the release of the state’s basic financial statements.

“We have seen no impact to recent sales,” said Joe DeAnda, a spokesman for California State Treasurer Fiona Ma. “While we periodically get a small number of questions about the release timing of financial statements from various entities, there has been no deviation in volume from past years.”

DeAnda added that the state’s financial position is described extensively and thoroughly in bond offering documents and disclosures, and they regularly post information and updates to their investor relations website.

Self-regulation hasn’t worked in the municipal industry, because investors haven’t punished issuers with late ACFRs through pricing, unless they are fiscally distressed, Ciccarone said.

The Cato Institute’s Joffe had a suggestion to encourage more timely financial disclosures.

The federal government should consider withholding grant funds from entities that fail to file on time, and then release the funds when the audited financials are released, he said.

“Fiscally distressed state and local governments and those with poor financial controls are more likely to misappropriate or waste federal grant dollars,” Joffe wrote in December.