Three Ways to Make Your Government’s Financial Reports More User-Friendly
The people who use your state or local government’s financial reports, such as taxpayers, citizens, creditors, municipal analysts, and your own administrators, need accurate and timely data to size up your financial health and stewardship. Your reports help them:
- Assess the availability of your government’s current financial resources
- Understand your government’s ability to issue new debt and repay outstanding debt issuances
- Make projections about your long-term financial status based on future commitments and contingencies
- Analyze the amount of infrastructure investment made by your government during the year
- Review salaries and develop changes to hiring plans
- Evaluate your credit-worthiness
- Determine whether to invest in your government’s bonds
- Examine the effectiveness and efficiency of your tax revenue usage
- Hold your government officials accountable for decisions made during the year
Because this information is fundamental to a variety of important evaluations and decisions, GASB says in no uncertain terms: “State and local governmental financial reports should possess these basic characteristics: understandability, reliability, relevance, timeliness, consistency, and comparability” (GASB Concepts Statement No. 1, Objectives of Financial Reporting).
Just the same, I see governmental financial reports that are much more confusing than clear. Inaccuracies and errors can result in imprudent decisions, misstatements, audit findings and comments, or comments from financial reporting oversight entities such as the Government Finance Officers Association (GFOA). I’ve noticed three distinct areas where mistakes tend to occur:
- Reporting entity component units
- Management’s discussion and analysis (MD&A)
- Financial statements and footnote disclosures
Let’s take a look at each of them and what you can do to prevent similar errors in your own government’s financial reporting.
Evaluate reporting entity component units every year
When was the last time you evaluated your government’s potential component units? Most governments should have evaluated them in 2012, when GASB Statement No. 61, The Financial Reporting Entity: Omnibus an Amendment of GASB Statements No. 14 and No. 34, went into effect — and every year thereafter. Remember that organizations don’t generally remain static; circumstances change over the years that require the primary government to adjust the presentation of a related entity. Regardless of the basis for determination, whether it be governance structure or just the materiality or significance of the related entity, make the assessment every year before reaching the same conclusion as the prior year. This will keep your information accurate and up to date.
Component unit disclosures is another area where governments tend toward inconsistent reporting. To avoid disparities, make sure your disclosures of component units include:
- The rationale for why each component unit was included and the manner in which it is included (blended or discretely presented)
- The footnote disclosures for each component unit
While GASB doesn’t require that all component unit disclosures be included, all “significant” component units’ disclosures should be included within the primary government’s financial statements.
Publish a clear and apolitical MD&A
The purpose of your government’s MD&A is to provide financial statement users with a narrative about the current year’s finances. This makes it easier for a broader audience to more meaningfully understand the report. You don’t need to write a novel, but you should include enough information to give users a high-level understanding. You are, after all, preparing your financial statements for them in the first place, so put some effort into making your MD&A helpful and clear.
The MD&A should factually recount what occurred during the past year; it shouldn’t be an editorial on your government’s agenda or your disagreements with legislators or regulators. This is not a political document. As you craft the factual context, explain why the trends you are reporting are actually occurring. It’s not enough to say that data changed from the previous year — you need to include an analysis of the changes. The MD&A gives your financial statement users information to help them make important decisions, so providing relevant details and context is essential.
Avoid common weaknesses in financial statements and footnote disclosures
The statements and disclosures themselves are the meat of the financial report document, so they should be free of mistakes and disagreements. To avoid frustrating report users and auditors alike with errors, pay close attention to these common areas of weakness:
- Don’t let your statements contradict one another. For example, I frequently see disagreements in “due to” and “due from” funds. The corresponding funds should agree, and the balances reported in the statements should reflect amounts reported in the footnote disclosures. Double-check your statements and footnotes for proper agreement.
- There are often incorrect calculations in net investment in capital assets. Governments typically net the outstanding balance of debt from the calculation but omit other key items, such as unspent bond proceeds and retainage. Be sure all items are accounted for.
- Fiduciary fund statements consist of a government’s trust and agency funds. GASB requires governments that have separate pension and other post-employment benefit (OPEB) trust funds to include both funds in one column in the financial statements — even if they are separate irrevocable trusts. But many governments still report them separately. Report the combined information for the two separate trusts in the footnotes or supplemental schedules.
- Deferred inflows and outflows of financial resources is relatively new to governmental reporting, but with the application of GASB Statement No. 68, Accounting and Financial Reporting for Pensions—an Amendment of GASB Statement No. 27, many governments now are required to report balances for deferred inflows and outflows. Make sure you are properly describing the details as to what the balances relate to and net items appropriately. Your financial statements must disclose the details of the make-up of the deferred inflows and outflows, and balances should not be netted to only report one net category.
How we can help
CLA’s state and local government professionals are deeply familiar with GASB reporting requirements and the program compliance necessary to obtain the GFOA certificate. We can help you understand your reporting obligations and provide feedback on your financial reports so that they better serve your financial statement users.