An inflection point for government financial reporting
An inflection point for government financial reporting
The last five years have seen a dramatic increase in the time it takes to publish annual financial reports. And it's not the pandemic's fault.
Welcome back readers! The Government Finance Officers Association’s annual conference is coming up and I once again have the privilege of moderating their “Rethinking Financial Reporting” panel discussion. Last year’s experience inspired my three-part series on understanding government financial reports.
As part of preparation this year, I boned up on the most recent data from the University of Illinois Chicago tracking government financial report times. My next two graph and chart-filled newsletters will explore why the numbers got dramatically worse starting five years ago.
It’s easy to blame the pandemic and stop there. But there’s more going on—and it’s been building for quite some time.
Audit times have dramatically worsened since 2018
Annual Comprehensive Financial Reports, or ACFRs, are the official, audited record of the prior year’s financials. They’re critical to tracking government fiscal sustainability but are rarely read or even understood by the public. What’s more, annual reports include so much information that—compared with the private sector—it takes most governments an inordinately long time to produce, audit and publish them.
In some cases, like in Indiana and Ohio, the audit is conducted or signed off by the state auditor’s office. In other instances, localities hire a firm to audit their financial statements.
The University of Illinois Chicago and Merritt Research Services produce an annual report on audit times and I looked at their latest data in combination with data from previous years’ reports. That analysis showed that median audit times since 2009 have increased by 14% to 168 days. That’s three weeks longer than it was before the Great Recession.
Read the report
Credit Rating and Geography: Examining the Timeliness of Municipal Bond Audits
The research was published via the university’s Government Finance Research Center (GFRC) and focuses on the median—rather than the average—because some governments are extreme outliers and take a year and a half or even more than two years to file their annual report.
Why this matters: Slowing audit times are a potential red flag and could signal weakening fiscal conditions. Indeed, the GFRC report found a correlation between faster audit times and higher credit ratings. Moreover:
Accountability: “The information contained in audits in Jersey City are crucial to understanding our finances,” Jersey City, N.J., Councilmember James Solomon told me during an interview last year. “If there’s an error in our information, the sooner you catch that, the sooner you can fix it. if you catch it a year later, you've been budgeting and operating on bad numbers that whole time.”
Credit rating: In mid-2023, S&P Global Ratings withdrew its rating for 64 local governments and districts because they have yet to produce their audited financial report for 2021. A ratings withdrawal could result in a higher interest rate the next time that government issues debt.
Digging in
The report also looked at geography and found that between 2011 and 2022, issuers in New York state had the fastest median times while those in Mississippi had the slowest. Overall, it appears as if places in the Southeast and the Northeast tend to take longer. (The report doesn’t examine patterns, but that’s potentially a follow-up newsletter.)
When I pulled from previous reports to look at the data going back to 2009, I found that two thirds of the median increase has occurred over the last five years. Keep in mind that the years I’m referring to are for the fiscal year the report covers, not the actual year in which the work is being completed. For example, audit times for 2022, refer to work that was generally done in 2022 and 2023.
Between 2009 and 2017:
City and county audit times increased by just three and two days, respectively.
States shortened their audit times by a week.
School districts were the outlier and increased their median audit time by 5% (one week).
But since 2018:
Cities have added a week to their audit times.
County audit times have worsened by three weeks and now top 200 days.
States reversed course and audit times jumped by more than two weeks—a 13% increase from their 2018 median.
School districts steadily worsened, adding one more week to their audit time.
This trend since fiscal 2018 correlates with a time of relative financial strength for state and local governments, even including the Covid-19 pandemic. It would be understandable if we saw an isolated uptick in times for fiscal 2019 as governments in 2020 had—putting it lightly—a lot on their plates. But the trend starts earlier for some places and has persisted long after the immediate pandemic response efforts subsided.
The causes
Instead, the chart above shows the impact from a perfect storm of:
increasing retirements,
increasingly complicated accounting requirements, and
additional financial reporting related to federal pandemic grant funds.
These developments have also resulted in fewer businesses that want to take on government clients, which adds to the overall issue.
In my next newsletter, I’ll dive even deeper for my paid subscribers into the data behind these trends and the consequences. If you want to be on that list, click below!
In the meantime, I’ll leave you with these sources for further reading.
Society for Human Resource Management: More than 300,000 U.S. accountants and auditors left their jobs between 2019 and 2022, a decline of 17%. It’s not just retirements—early- and mid-career folks are also leaving the profession
Understaffed, Underserved (Office of the New York City Comptroller): Agencies with higher vacancy rates are struggling to meet even half of their performance indicators.
High vacancy rates impair a government’s ability to provide basic public services. (Via auditors in San Diego and Berkeley, California.)
The Accounting Burden for Spending Federal Stimulus Funds: My Route Fifty story from 2021 notes that American Rescue Plan Act’s $350 billion for localities and states comes with daunting new accountability and reporting requirements.
Some good news: More college grads want to work in government. The number of students applying for government jobs increased across all sectors compared to 2023.