WASHINGTON — Issuers are taking longer to disclose their audited financial statements than the Securities and Exchange Commission would like and say a variety of issues make it difficult to file any faster.
Issuer officials described a decrease in auditor availability and reliance on other parties for audit information among other factors delay releasing their financials, even as regulators and elected officials ramp up pressure for more rapid disclosure.
SEC Chair Jay Clayton called for more transparency and timeliness from issuers in comments at a December municipal disclosure conference, and Republican Sen. John Kennedy of Louisiana complained about the issue that same month.
“My broad view is that providing greater clarity regarding existing municipal issuer financial disclosure practices will provide investors and the market with better access to valuable information,” Clayton said. “This transparency and consequent adjustments in investor preferences may also incentivize some issuers to make financial disclosures on a more timely and consistent basis.”
In late January, the Municipal Securities Rulemaking Board began preliminary conversations with the SEC at its quarterly meeting to address Clayton’s comments about taking regulatory action to improve municipal market disclosure. The regulators lack legal authority to mandate the terms of muni issuer disclosure, so it remains unclear what steps they might take to attempt to address Clayton's concerns.
Dee Wisor, a partner at law firm Butler Snow LLP and president at the National Association of Bond Lawyers, said filing unaudited financials instead of audited financials would be quicker, and issuers could put out a disclaimer until they get their actual audits back. In some states, the state auditor has to sign off on local governments’ audits, which can delay the process for up to a year, he said.
Also slowing the process in some cases are practices in which a housing authority or independent entity does their own audit and issuers have to wait before rolling it into their own audit. Wisor heard from some of his clients that fewer accounting firms are working in the government space, creating a limited supply of auditors.
“We need to have a conversation among market participants about what things can be done to accelerate this, but the factors I’ve mentioned are impediments to getting audited financials done more quickly,” Wisor said.
Emily Brock, director of the Government Officers Association's federal liaison center, said issuers now have a lot of requirements to work with in order to release accurate information.
“We acknowledge that there’s a lot of professionals, there are a lot of activities, there are a lot of requirements now that state and local governments have to make sure that they do in order to wrap up and make public accurate information,” Brock said.
A possible decrease in auditor availability causes delay, Brock said. Many local governments who put out requests for proposals to accounting firms notice the number of responses shrinking, which is worrisome, she said.
Cornelia Chebinou, Washington director with the National Association of State Auditors, Comptrollers and Treasurers, said the public sector has trouble hiring high-quality candidates.
“Unfortunately what tends to happen even within the state is that within the auditor’s office they may not pay as much as one of the agencies,” Chebinou said.
The Metropolitan St. Louis Sewer District has to change its auditing firm every five years, said Marion Gee, the agency's finance director. Gee said he loses time to file his audit information while trying to get new auditors up to speed on his organization.
“That is where I think you lose some time, where you could have had an audit staff that is already familiar with the information that they needed to get from you,” Gee said.
It takes the district about four months to get its financials in, Gee said
Relying on other entities to provide the district with financial information can also take up time, Gee said. For example, if a city has component units such as a city-owned utility or a development authority, getting audited financials from them may not always be timely especially if those entities have a fiscal year that is different from the city's.
At a recent GFOA meeting in Washington , issuers repeatedly said every municipality's financials were different, making them very different from the corporate world. Regulators have to be mindful of that, Gee said.
“They really need to understand that governments are not like for-profit organizations,” he said.
In Pataskala, Ohio, Finance Director James Nicholson and his two other employees in the city's finance department usually take five months to submit their financial documents.
“Because we’re a small government, we retained an accounting firm to assist us with our [generally accepted accounting principles] compilation, ensuring that reports are in the proper format and make sure we’re in compliance with all the [Governmental Accounting Standards Board] pronouncements, which is wonderful,” Nicholson said.
Once they finish filing, Nicholson has to give it to the state auditor’s office to check it over, which could take about four to six weeks. Legally, Nicholson is not supposed to release the financial statements until he hears back from the state, but can release them earlier with a disclaimer that it is awaiting approval from the state.
Kathy Kardell, senior department administrator at the Hennepin County, Minn. Office of Budget and Finance said her office uses an outside independent auditor to do its financial statements, but she said not every government in Minnesota is able to do that and has to rely on the state instead.
“The state auditor is doing many, many audits for many, many governments and it’s not as though their resources are being increased,” she said.
Many smaller jurisdictions rely on the state auditor’s office, but Kardell said larger counties in the Twin Cities’ metro area still rely on the state.
Over the next months and year, Wisor said issuers will still be talking about the timeliness of secondary market information. Wisor said issuers have come a long way during his 40-year career.
“Primary disclosure is really in reasonably good shape, but buy side people might like for the presentation to be different in plain English and those kinds of things, but I think in terms of disclosure and material information, primary disclosure is really in good shape,” he said.
