WASHINGTON — Financial reporting delays by state and local governments significantly compromise the usefulness of the information to users, including financial analysts, according to a recent report by the Governmental Accounting Standards Board.
Specifically, GASB said that for 23% of large governments and 44% of small governments, the utility of their financial reports was “seriously diminished” by the timing of their release: more than six months after the end of their fiscal years.
“The results of this research point to a noticeable gap between when financial information is most useful to the users of [annual financial reports] and when governments provide that information,” GASB said.
The report, entitled “The Timeliness of Financial Reporting by State and Local Governments Compared With the Needs of Users,” resulted from studies of financial statements and surveys of the groups who rely on them, including muni bond analysts, legislative fiscal staff, citizen groups, and researchers at taxpayer associations.
Earlier this month, the GASB report was posted on a section of the Securities and Exchange Commission’s website devoted to comments about the state of the municipal securities market. Dubbed a “timeliness study” and a research brief, the report emerges amid a surge of interest among regulators, legislators, and market participants in primary and secondary market disclosure.
According to a memorandum posted on the commission’s site, David Bean, GASB’s director of research and technical activities, participated in a March 30 conference call about the report with SEC Commissioner Elisse Walter, who is spearheading a review of the muni market. Staff from her office and from across the agency also participated, including officials from the corporation finance and trading and markets divisions, as well as the office of municipal securities.
Elaine Greenberg and Mark Zehner, who head the enforcement division’s muni and public pension team, participated in the call as well.
Bean provided a copy of the GASB report to commission staff before the March 30 call, according to the SEC memo. Besides the report, other topics discussed during the call included GASB’s ongoing pension-accounting initiatives and “emerging issues” in municipal accounting.
The SEC launched its muni market review last year, with a report targeted for release during the next seven months that may recommend legislative or regulatory changes. The SEC also is updating its 1994 interpretive guidance on the continuing disclosure obligations of municipal issuers.
And in a speech earlier this month, Walter said the agency should seek authority from Congress to set “basic disclosure standards” in the primary and secondary markets.
According to GASB research manager Dean Michael Mead, market participants who use issuers’ financial reports, including analysts, have long complained about financial reporting tardiness by state and local governments.
In 2005, GASB researchers studying the needs of such users asked for input on issues to bring to the board’s attention.
“The overwhelming first response from the interviewees was that financial reporting needed to be timelier,” the report said.
In its report, GASB examined two questions: how long after the end of the fiscal year do governments issue financial reports prepared in conformity with generally accepted accounting principles, and how does the passage of time between fiscal year end and report issuance affect the usefulness of the underlying information?
To answer those inquiries, researchers combed through financial filings from all 50 states, 100 large counties and localities, and 50 large independent school and special districts.
During the fiscal years ending between 2006 and 2008, 73% of the large governments issued their reports within six months of the fiscal year’s end, the report said. Two percent took more than a year. On average, state governments filed within seven months of the end of the fiscal year and large special districts filed within four months.
The board’s researchers also analyzed a random sample of small county governments, defined as those with annual revenues of between $10 million and $100 million.
On average, GASB said, small county governments released financial reports eight months after the fiscal year ended, two months later than large counties.
Small special districts released their financial statements, on average, two months later than their large-district counterparts.
Seven percent of small governments released their reports more than a year after their fiscal years ended.
As for its usefulness analysis, GASB said it surveyed muni analysts, legislative fiscal staff, citizen groups, and taxpayer associations during a three-month period in 2010.
According to the report, 89% of respondents ranked as “very useful” financial information received within 45 days of fiscal year end. By comparison, 44% of those surveyed said data was “very useful” within three months of the fiscal year end. Only 9% said information received within six months of the fiscal year’s close was “very useful.”
“The overall results of the survey of users of governmental financial information show an obvious and expected trend — the passage of time diminishes the usefulness of financial information,” the report said.
One issuer, though, criticized the GASB’s reliance on a subjective “usefulness” standard, calling the analysis dubious.
“It’s a really, really soft measure,” said Frank Hoadley, Wisconsin’s capital finance director, who is a past chairman and current member of the Government Finance Officers Association’s governmental debt management committee.
About 10 days ago, at a debt committee meeting in San Antonio, Hoadley urged GFOA members to embrace voluntary disclosure of interim financial information, rather than risk having the SEC impose disclosure mandates on them.
Mead, meanwhile, says he would like to understand the causes of the reporting delays, including which aspects of financial reporting consume most of the governments’ time.
“I think the next steps are to try and map out the financial statement preparation process from start to finish,” Mead said. “At this point, that’s largely a black box.”