Illinois bill would loosen many local financial reporting requirements

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A sweeping Illinois bill to water down audit requirements is on pause, but its backers have secured the support of the Democratic nominee for state comptroller and hope to push the legislation through next session.

The bill would allow cash basis accounting rather than the more rigorous Generally Accepted Accounting Principles for municipalities with under $35 million in annual cash receipts. 

It would let municipalities classify themselves in the lowest category for which they qualify based on their three previous years of cash receipts, with the lower three of four categories eligible for cash basis accounting rather than GAAP.

The Government Reporting Enhancement and Transparency Act, HB 5391, would also sunset the requirement for an annual municipal comptroller's report showing information such as the bonds and debts payable during the year. For fiscal years ending after Jan. 1, 2028, the municipal comptroller would no longer be required to send a copy of that report to the state comptroller. 

Through spokespersons, state Rep. Margaret Croke, D-Chicago, who won the Democratic primary for state comptroller, declined to comment. She's a co-sponsor of the bill.   

The bill would similarly sunset the requirement for a pamphlet listing all receipts and expenses of the municipality and the requirement that every year, certified public accountants "make a full and complete examination of all books and accounts of the municipality."

It would also sunset the provision requiring municipalities with bonds tied to swimming pools and recreational facilities to have their accounts properly audited at least once each year. 

For fiscal years ending after Jan. 1, 2028, it would sunset the requirement that municipalities print annually for public distribution reports showing the financial standing of municipal utilities. And it would phase out the requirement that the utilities' accounts be examined at least once a year by a licensed CPA. 

Forest preserve districts and municipalities issuing revenue bonds or sewerage system bonds would likewise have to have their accounts properly audited annually only for fiscal years ending before Jan. 1, 2028.

Current State Comptroller Susana Mendoza "has had numerous discussions with the lead sponsor and the (Illinois) CPA Society," Abdon Pallasch, director of communications for the comptroller's office, said by email. 

Mendoza's office "has expressed administrative concerns in implementing the changes under the bill and stressed that changes to reporting thresholds and corresponding changes to reporting requirements, especially GAAP vs. cash basis accounting, must be done in a thoughtful manner with the ultimate goal of preserving transparency and fiscal accountability," Pallasch said.

The comptroller is focused on ensuring "transparency and fiscal accountability are maintained and that the implementation details of any new requirements and processes are reasonable and feasible," he added.

The Illinois CPA Society believes the current rules of the road represent "a 20th-century financial reporting framework," said Marty Green, vice president of government relations for ICPAS. 

"We have (over) 8,900 units of local government, and those local governments are having challenges getting their financial reports submitted," he said. "We're at about a 42% compliance rate right now."

Green said "we hope to attract CPAs back into doing government work" with the new rules in Illinois. He pointed to a local government audit statute that recently passed in Kentucky, SB 192, which was signed by Gov. Andy Beshear in April. 

That law set a threshold at $15 million, allowing cities under that ceiling to use cash basis, modified accrual or budgetary basis accounting rather than GAAP.

Texas managed to prod municipalities to step up their game on audit timeliness with a state law that took effect Sept. 1. The law bars cities from hiking property taxes if they fail to file an annual financial audit within 180 days of the end of the fiscal year. 

Under the Texas crackdown, 130 cities fell afoul of the new law. But delinquencies were basically cut in half, with 46 cities filing fiscal 2025 audits in under 180 days versus 93 exceeding the requirement for fiscal 2024 audits, according to Merritt Research Services data. 

The Governmental Accounting Standards Board is the private, nongovernmental organization that sets financial reporting standards for governments that use GAAP. It launched in 1984 to serve as an independent arbiter of GAAP principles for state and local governments.

"There's a reason all 50 states and the vast majority of local governments use GAAP," GASB Chair Joel Black said in an emailed statement. "Developed through a rigorous, inclusive process, GAAP provides the information that citizens, elected officials, lenders and investors need to assess the financial health of a government entity." 

Black said using GAAP in financial reporting "remains a best practice for tens of thousands of governments across the country." GASB looks forward "to engaging with interested parties in Illinois to better understand their concerns," he said.

Cash basis accounting is based on "your actual receipts and actual expenditures, which doesn't really account for, particularly on the expenditure side, liabilities that might exist," said Mary Francoeur, industry and media liaison for the National Federation of Municipal Analysts. 

"One of the things that we've come to rely on with GAAP-based financial statements is the delineation and quantification of liabilities, like your pension obligations, your indebtedness, and things like that, and some of that would be lost on a cash basis," she said. "When you're looking at governmental organization, the cash basis of accounting is a rearview mirror."

Financial transparency is "important to the market, it's important to citizens," she said. "I think the bill here is a step back in transparency."

Francoeur estimated that hundreds of local governments in Illinois would fall into one of the categories below $35 million in annual cash receipts. Many of those governments "have substantial amounts of debt outstanding," she said.

While local governments have traditionally had good market access, she said, this could change that. "They may pay a price, in terms of investor demand. There may be some investors who will stay away because of the accounting practices."

And the smaller the pool of investors, the greater the cost to borrow, meaning that struggling local governments most tempted to use cash basis rather than GAAP accounting might be the ones least able to afford it.

Nonetheless, some local governments may decide it's cheaper to use cash basis accounting, said Richard Ciccarone, president emeritus of Merritt Research Services, an Investortools company. The worry is that this bill would exacerbate the connection between weaker credits and late audits, and could hide important information from creditors.

"Not every government is sophisticated, and understands all of this, the richness of the financial report," he said. 

State Rep. Margaret Croke

In addition to hiding pension and other post-employment benefit liabilities, cash basis accounting "impairs our ability to evaluate the infrastructure and the burden that it is incurring relative to depreciation expenses," Ciccarone said.

"This was a very important issue to the rating agencies, as well, as they were making the transition from the 1970s into the 1980s," he said, noting that New York City nearly slid into default in the mid '70s, "when they moved to modified accrual, and then the ability to look at it from a much wider perspective… (when) it evolved in a more positive way with GASB 34," he said.  

The Illinois legislation could cloud analysts' view of local government credits in the state, Michael Rinaldi, senior director at Fitch Ratings, said by email.

"In general, use of cash-basis accounting weakens comparability within a sector whose financial reporting is predominantly GAAP-based, which can impair metric-based credit analysis," he said. "Its short-term focus presents an incomplete picture of a government's balance sheet, which can conceal its long-term fiscal position."

Ciccarone suggested it's a matter of priorities, with local governments "that have put their minds to getting these things done" turning over the full audits more quickly.

"I'm not noticing that the problem is getting worse this year," he added about audit timeliness, in response to a question about a shortage of auditors willing to do government work.

Green said under the Illinois bill, CPAs "wouldn't have to have a systems peer review; they would just have an engagement review, so there's a difference." 

A systems review is more in-depth, examining quality control standards, independence, continuing education and a broader checklist of criteria, he said. An engagement review involves a peer review by one fellow CPA.

In 2024, the American Institute of Certified Public Accountants and the National Association of State Auditors, Comptrollers and Treasurers co-published a report on public sector CPA resources that found the public sector undervalues CPAs relative to the private sector, and public sector resource constraints compound the problem.

The report noted that amid what it called a shortage of accountants, governments were particularly strained.

But some of the strain of recent years was also due to the sudden glut of federal pandemic relief funding to local governments, which triggered additional auditing requirements. As local governments spend down that federal funding and technology improves audit efficiency, it may free up more public sector auditing resources. 

Green said ICPAS and the Township Officials of Illinois conducted their own research, enlisting University of Wisconsin-Platteville assistant professor of accounting Dan Nugent to look into the challenges Illinois local governments are facing.

"(HB) 5391 is the outcome of that field work that was done for two years," he said.

"We need to hit a strategic pause (on the bill), because we know this is going to take longer, Green said, noting the legislature's May 31 adjournment date.

"We did the Cadillac version, and now we're going back and incorporating input," he said. "It's a work in progress."

A spokesperson for the bill's lead sponsor, Rep. Natalie Manley, D-Joliet, said Manley was unable to comment by press time.