GO Issuers Slow To File Annual Audits

State and local governments continue to complete their annual financial disclosures at a slow pace of nearly six months after the close of the fiscal year — a longstanding industry complaint that is getting increased attention in the wake of high-profile distress in Detroit and Harrisburg, a study shows.

Merritt Research Services concluded that issuers of general obligations bonds were most often the tardiest in completing their audits in 2012, while revenue bond issuers were the speediest. The study was the third annual evaluation of municipal finance disclosure undertaken by Merritt, and was based on a survey of about 8,000 fiscal year 2012 audited financial statements. The study measured the length of time between the close of the fiscal year and the time the audit was completed, but noted it could take days or weeks to release the audit depending on issuer procedures.

States and territories carried the banner for sluggish audit completion times, taking a median 174 days after the fiscal year’s end to file.  That was 8 days faster than the prior year’s median, Merritt said, but far beyond the 120 days recommended by the Securities and Exchange Commission. Only Utah, New York, and the District of Columbia managed to hit the 120-day time frame.

Local governments completed their financials faster than states and territories with a median time of 171 days for cities and 172 for counties. Salisbury, Mass. got the nod as the fastest to complete its audit, taking only 54 days. Baltimore, Md., which has undertaken a fiscal rejuvenation effort after a study commissioned by the city’s mayor revealed an urgent need to change course, took the longest time, at 415 days.

Regulators are taking a more serious view of municipal financial disclosure, charging Harrisburg earlier this year with creating an “information vacuum” by failing to keep its disclosures accurate and up to date and forcing investors to rely on misleading public information.

Though the 1975 Tower Amendment to the Securities Exchange Act of 1934 prohibits regulators from requiring issuers to file muni bond documents with them before the securities are sold, the SEC can still use the 10b5 provision of the law to charge issuers with fraud if bond documents are inaccurate, misleading, or contain material omissions. Harrisburg could prove a “shot across the bow” to issuers taking a long time to complete their audits, Merritt said.

Wholesale electric public power providers, hospitals, and private higher education institutions all completed their financial audits more speedily than GO issuers, though still more slowly than corporate issuers. Electric public power providers clocked in at 95 days, while hospitals took 109 days and private colleges and universities took a median 113 days to file. Oak Valley Hospital District in California took only 41 days to complete its 2012 audit, while West Penn Allegheny Health System in Pittsburgh, Pa. took 380 days.

Merritt noted that the size of issuers did not seem to be a key factor in predicting the speed of completing audits, but distress did. New York City, with an extremely complicated audit and population of millions, filed in a respectable 118 days. Distressed cities Stockton, Calif. and San Bernardino, Calif., took 506 and 517 days, respectively.

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