Why the government auditing crisis could get worse

A deep dive into workforce data and trends hints at increasing trouble for government annual financial reporting in the coming years.

Welcome back readers! Last time I wrote about how it’s taking longer for governments to finish their annual audited financial reports and what that means for transparency. Below the paywall in this newsletter, I’ll provide more data analysis on the factors at play. But first I’ll share some insights from the field about the causes behind the auditing crisis. 

The auditing crisis

A quick review of last week: Since 2009, the time it takes for governments to finish and get their annual financial reports audited has increased by 14%. Two-thirds of that median increase has occurred over the last five years, driven in part by dramatic increases in state and county audit times. Counties have worsened their times by three weeks, now topping 200 days. States, which had shortened their median audit time between 2009 and 2017, reversed course. Their audit times have jumped by more than two weeks—a 13% increase from their 2018 median.

The trend is a result of: 

• Increasing retirements, 

• Increasingly complicated accounting requirements, 

• Additional financial reporting related to federal pandemic grant funds, and

• Fewer businesses are taking on government clients.

I’ve heard from a number of people since the last newsletter and here is some of what they had to share.

On the increasing number of accounting rules: Colin MacNaught, a former Massachusetts assistant state treasurer for debt management, wrote on LinkedIn about how new rules for financial reports could affect the overall transparency of government finances.

“On the one end more detail and new reporting standards are excellent and needed; on the other end, it makes it more difficult for often under-resourced governments to complete in a timely fashion,” wrote MacNaught, who is now CEO and co-founder of the fintech firm BondLink. “Is the latter being weighed when additional accounting initiatives are being considered?”

At least one of these negative factors has an expiration date. Dean Michael Mead, a former assistant director of research for the Governmental Accounting Standards Board (GASB), pointed out that the added burden of reporting on federal pandemic fund spending “will ease off over the next couple of years because the money is running out.”

Mead, a partner at Carr, Riggs & Ingram, also noted that fewer governments will be required to file a Single Audit report on their federal funding because the reporting threshold (total federal grant funds spent in a year) was raised this year from $750,000 to $1 million.

Now let’s dig into the data.

The shrinking public finance workforce

A big reason audit times have worsened so dramatically since 2018 is that there aren’t enough people to do the increasingly complicated work.