Municipal audit times improve, but long-term trends remain slow

The time it took municipal bond issuers to produce audited financial statements decreased across sectors from fiscal 2022 to fiscal 2023. But the median time to produce an audit is still higher over the long run, according to a new report from Merritt Research Services, an Investortools company, and the University of Illinois-Chicago’s Government Finance Research Center.

The median time to deliver an annual comprehensive financial report for all municipal bond sectors rose 10.6% over the past decade, from 151 days in 2012 to 167 days in 2023.

That’s compared to an increase of nearly 10.5% from 2011 to 2022, according to last year’s report.

“The overall movement is not good enough; it’s still worsening,” said Richard Ciccarone, president emeritus of Merritt and a co-author of the report. “But I think it’s notable that we did have a one-year improvement … When we really want to change something, it starts with small steps. You’re looking for the incremental, positive change. And then you’ve got to keep it up.”

Ciccarone noted that some people explained last year’s results, which showed municipal audit delays had hit a 12-year high, by pointing to the accountant shortage that’s become a problem across the country. 

“Well, that was last year when that comment came up,” he said. “And these are numbers that would have been affected by that condition, in 2024, and yet they improved. So what does that tell you? I personally have never believed that the accountant shortage by itself is the issue.

“I think it’s a matter of preparation, willingness and resolve, which is what holds them back on achieving shorter times,” he said.

Ciccarone suggested there may be an organizational culture issue at play for some of the stragglers, or a sophistication issue in other cases. 

“Those that have a culture of producing slow audits need to be reproached on this,” he said, citing the impact on the muni market and the matter of accountability in government.

“Having the audit come out so late means you’ve already done the new budget and you’re almost done with the current year of the new budget,” he said. “And that’s too late because the document provides very useful information that helps you to manage the financial affairs of the government.”

In a texted statement, Ciccarone’s co-author, Deborah A. Carroll, director of the UIC Government Finance Research Center, said the muni market needs a broader adjustment around audit expectations.

“Audit timeliness is a key component of fiscal responsibility,” Carroll said. “Over the past few years, Richard and I have studied this topic from several different angles — specifically, to investigate the factors most often cited anecdotally as barriers.”

While they have seen some marginal improvements, their research broadly suggests there must be widespread desire to do so, Carroll said. 

“By highlighting this topic through our research, we hope that our municipal data issuers will be more motivated to establish and maintain higher standards so that stakeholders have access to information that is essential for financial decision-making,” she added.

Municipal issuers badly trail their corporate counterparts, who have median audit times averaging 60 to 90 days from fiscal year end to the date of the auditor’s signature. Muni bond issuers take two to three times longer to publish an ACFR, the report said.

Carroll and Ciccarone found that issuers in the governmental bond sectors tend to have slower median audit times than revenue bond sector issuers. Their report draws on nearly 12,000 municipal ACFRs in the Merritt database.

They found that among the late issuers, chronic tardiness is an issue. The share of issuers considered outliers due to excessive delays in audit completion generally range from 3% to 5% across all municipal bond sectors.

“Issuers that have yet to complete their 2023 audits have significantly slower audit times for 2022 and 2021, suggesting a sustained pattern of failing to complete audits in a timely manner,” the report says. 

In every revenue bond sector, the median time to deliver an ACFR increased from 2012 to 2023, the report said.

Community colleges were nearly 14%, or 19 days later and water and sewer issuers nearly 12%, or 18 days slower between 2012 and 2023.

And the wholesale electric and toll road sectors slowed their median ACFR delivery the least, by 2% or 2 days and by 4.1% or 5 days, respectively.

But 10 revenue bond sectors had a better median time in 2023 than 2022, with the 11th sector, life care, flat at a median 117 days.

With the exception of school districts, governmental bond issuers have slower audit times than all sectors combined, including both revenue and governmental bond issuers. 

“It is important to note that median audit times for every single governmental bond sector worsened between 2012 and 2023, with counties, states and territories performing the worst,” the report says. “Counties worsened their median audit time by 16.2%, or 29 days between 2012 and 2023, while states and territories slowed their median audit time by 2.2%, or 4 days.”

California, a long-running straggler, reduced its audit time to 524 days for fiscal year 2023, the report said.

But it flags Illinois and Nevada, not included in the 2023 totals because they have yet to report their 2023 audits. This “reflects a new record for lateness among states (excluding territories),” the report says. “At the time of this report’s release, they are already over 700 days past their fiscal year-end and counting!”

That matters because states should be models for all municipal bond issuers, the report says.

Nevada, along with California and Puerto Rico, is a repeat offender when it comes to slow audits. California, Nevada, and Puerto Rico had audit times surpassing 487 days in 2022 and California, Nevada, Puerto Rico and the U.S. Virgin Islands had audit times greater than 614 days in 2021, according to the report.

“It’s much more than just a fraud document,” Ciccarone said of a government’s audited financials. “We need to change the culture of the muni market, so that late audits are not satisfactory. They’re not good enough.”