Trust in Timing
Timely financial reporting can reap a government many rewards.
When state and local governments prepare their annual financial report in a timely way, they do their constituents and themselves a great service.
The timeliness of financial reporting (in conformity with generally accepted accounting principles, of course) is such an important issue that the Governmental Accounting Standards Board included it as one of the six qualitative characteristics of effective financial reporting in its Objectives of Financial Reporting concepts statement. GASB noted that, "If financial reports are to be useful, they must be issued soon enough after the reported events to affect decisions. Timeliness alone does not make information useful, but the passage of time usually diminishes the usefulness that the information otherwise would have had."
Citizens, taxpayers and those in the financial community can all benefit from timely financial reports. So, too, can state legislators and governors who need current financial information as they wrestle with difficult budget issues. Unfortunately, a significant number of governments issue their annual financial reports nine months to a year or more after the fiscal year ends. At that point, any hope that the information in the report will be useful is greatly diminished.
The reasons for the lack of timely reporting vary. Some governments have not dedicated enough financial and human capital resources towards the accounting and reporting function -- and that makes timely reporting a challenge. Others claim that no one uses the annual report. However, late issuance of the report makes this statement a self-fulfilling prophesy.
No matter the reason, governments that do not produce their annual reports in a timely way relegate the users of their financial reports to the realm of extrapolation from stale data and educated guesses. On the other hand, those that prepare timely annual financial reports reap the benefits of enhanced accountability, increased public trust and potentially lower borrowing costs.
Under federal securities laws, publicly traded companies are required to submit annual financial reports that provide a comprehensive overview of the company's business, financial condition and audited financial statements within 60 to 90 days of the close of the fiscal year depending on the size of the company.
State and local governments have no similar requirement under federal law or regulation for their annual financial reports. Except for some bond covenants and some state imposed regulatory or statutory requirements, there are generally no requirements relating to when a government must complete and publish its annual financial report.
What is considered timely?
When GASB interviewed more than 250 government financial statement users as part of a research project a few years ago, one of the concluding questions asked was, "What issues would you like to bring to GASB's attention?" The most frequent response: more timely financial reports. This was expressed particularly by municipal bond analysts in credit rating agencies, mutual funds and casualty insurance companies. The implication is that providing information to bond market participants in a more timely way would improve a government's appearance of credit-worthiness and that could lead to lower borrowing costs.
Given today's state of the art government financial reporting practices, few would disagree that annual financial statements prepared in conformity with generally accepted accounting principles within three to six months of the close of the fiscal year are timely.
The federal government requires its agencies to complete and make available their annual financial reports 45 days after the close of the federal fiscal year. As required by state law, New York state and New York City issue audited financial statements within four months of their year end. Clearly, it can be done -- the only question is whether state and local governments will recognize the benefits, dedicate the appropriate resources to the financial accounting and reporting processes, and choose to make timely financial reporting a priority.
Thousands of governments have done just that. To qualify for consideration for the Government Finance Officers Association's (GFOA) Certificate of Achievement for Excellence in Financial Reporting or the Association of School Business Officials International's (ASBOI) Certificate of Excellence in Financial Reporting, government entities must issue their reports within six months of the close of their fiscal year. Approximately 4,000 government entities receive the GFOA and ASBOI certificates each year. These programs are a bright spot in their encouragement of timely financial reporting. In 2008, GFOA issued a best practice paper that suggested ways in which governments could improve the timeliness of the annual report process.
There has been progress, but what about the remaining 85,000 government entities in the United States? Some of these governments do issue their financial reports in a timely way but simply do not participate in the GFOA's or the ASBOI's certificate programs. Nevertheless, thousands of governments do not issue their financial reports in the three- to six-month timeframe; some take significantly longer to report. Many of these governments have the ability to report more timely -- if they were to make it a priority and dedicate appropriate resources to getting it done.
To sum it up: Timely financial reporting indicates responsiveness to the public's concerns, superior managerial capability and greater openness and transparency about how the peoples' business is conducted. In a larger sense, producing reliable reports on a timely basis helps to build trust and confidence in government; while delayed reporting reduces the relevance and usefulness of the information reported. It also tends to erode the trust of constituents. In a representative democracy, trust is an important commodity to pursue.
The views expressed in this article are those of the authors, not their respective organizations.
Join the Discussion
After you comment, click Post. You can enter an anonymous Display Name or connect to a social profile.
LATEST FINANCE HEADLINES
Trump Fights D.C. for a Lower Tax Bill at His New Hotel1 hour ago
Back-to-School Tax Holidays Losing Popularity Among Lawmakers21 hours ago
Insurance Concerns: Half of Louisiana's Recently Flooded Homes Not in 'High-Risk' Areas4 days ago
The Week in Public Finance: Pensions' Funding Gap, An Assault on Fees and More4 days ago
New Tennessee Drunk Driving Law Endangers Federal Road Funding4 days ago
Hawaii Ends Year with Record $1 Billion Surplus4 days ago