Like public corporations, most major governmental entities in the United States are required to file audited financial statements. While most governments file these reports by deadlines that are typically placed nine months after the end of the fiscal year, research reveals some local governments are way behind in meeting their reporting obligations.
These governments’ failures to disclose financial results in a timely manner deprives creditors, federal grantor agencies, and, most importantly, taxpayers of the opportunity to monitor how these governments are performing in real-time.
Audited financial reports are distinguished from budgets and other government financial disclosures because they are reviewed by external accounting firms, which are more likely to identify errors or deception. An external auditor risks reputational damage for allowing inaccurate or fraudulent financial statements to appear with its name attached.
State and local governments are required to produce audited financial reports if they spend more than $750,000 of federal aid in a given year or have outstanding municipal bonds. Federal grantees must submit their financial statements to the Federal Audit Clearinghouse, while municipal bond issuers must upload their audits to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) system.
Some states have more stringent requirements. For example, Utah requires any local government that collects or spends over $1 million annually to produce audited financial statements irrespective of the amount of federal aid it receives or whether it issues municipal bonds.
As of Oct. 1, 2020, the two most notable financial reporting scofflaws are Puerto Rico and California.
Puerto Rico became delinquent in producing financial statements as it approached and then entered bankruptcy. It is now undergoing an elongated process of catching up on its back filings in cooperation with its independent auditing firm, KPMG. Recently, Puerto Rico released audited financial statements for the fiscal year that ended June 30, 2017—more than three years late.
California has traditionally filed its reports on time but ran into difficulties arising from the implementation of a new statewide accounting system. The state has yet to file audited financial statements for the fiscal year that ended June 30, 2019. Under normal circumstances, the report would have been due to the federal government on March 30, 2020, but the Office of Management and Budget granted filers a six-month extension due to the COVID-19 pandemic. That extension ran out on Sept. 30, which means California officially out of conformance with the Code of Federal Regulations, 2 CFR § 200.512. The California State Controller is expected to produce its report sometime this month.
While many smaller governments are also slightly late this year, the below chart highlights those that are extremely delinquent. The table below identifies six local governments with jurisdictions of over 50,000 residents that have yet to produce audited financial statements for their 2018 fiscal year. Even a government with a fiscal year-end date of Dec. 31, 2018, should have filed its 2018 audit by Sept. 30, 2019, so these entities are now over one year late and cannot blame the COVID-19 pandemic for their initial failure to file.
Local Governments Late to Release Audited Financial Statements
|Cleveland County, Oklahoma||284,014||The most recent financial disclosure on EMMA dated March 12, 2020 states: “The Oklahoma State Auditor and Inspector has not completed the audits for fiscal years 2017, 2018, and 2019. Therefore, the last audit for the Cleveland County, Oklahoma filed as required by continuing disclosure undertakings was fiscal year 2016.”|
|Clay County, Missouri||249,948||The County has provided unaudited financial statements for its fiscal years ended December 31, 2018 and December 31, 2019 on EMMA, but audited statements were not posted.|
|Mount Vernon, New York||67,345||The most recent financial disclosure on EMMA dated September 29, 2020 states that audited financial statements for 2017, 2018 and 2019 are not available, providing readers a link to the city budget’s instead.|
|Walker County, Alabama||63,521||The latest audited financial statement on EMMA is for the fiscal year ended September 30, 2016. Unaudited statements were posed for subsequent years.|
|Colbert County, Alabama||55,241||Latest available audit on EMMA is for the year ended September 30, 2017. The most recent failure to file notice cites COVID-19.|
Local governments that issue debt securities and receive federal funds owe it to taxpayers to account for their finances in a timely manner. Hopefully, the governments identified here will come into compliance as soon as possible.