Published: May 14, 2019
The State Auditor’s Office (SAO) performs almost 200 Annual Comprehensive Financial Report (ACFR) reviews each year. Local governments may also submit their ACFR to the Government Finance Officers Association (GFOA) for a Certificate of Achievement for Excellence in Financial Reporting. As part of their ACFR reviews, SAO and GFOA identified several common errors that could affect your government’s ability to obtain this certificate.
Here are some common errors and pitfalls to be on the lookout for when preparing your ACFR:
What is the most common overall comment?
When preparing your annual report, make sure that all amounts reported in the Management’s Discussion and Analysis, Notes to the Financial Statements, Required Supplementary Information and Statistical sections agree to the financial statements where applicable.
What are the most common errors in the Management’s Discussion and Analysis?
Management’s Discussion and Analysis (MD&A) is the narrative explanation of the major financial activity of the year. It is important to:
- Ensure that the MD&A tells the reader the story of your government’s activity. Provide the “why” behind the changes to numbers and percentages in the year.
- Provide the reason for significant changes in balances and transactions of your individual major funds.
- Include the analysis of significant variations between original and final budget amounts in your major funds.
- Discussions of capital assets and debt activity should also include the “why” of the transactions, not just the amounts repeated from the Notes to the Financial Statements.
What are the most common errors in the financial statements?
The financial statements reflect the reporting entity’s financial position and its inflows and outflows during a period. The format and components of these statements is important.
Comments regarding the Statement of Net Position and the Balance Sheet include:
- A statement of net position uses a different format than a balance sheet. Ensure you use the correct format for your government when preparing your financial statements.
- Zero-balance lines on your financial statements should be excluded from the presentation in your statements.
- Deferred outflows and inflows must contain sufficient detail in the title to identify the items included in the total. Deferred outflows and inflows are a category in the financial statements and should not be reported in a single line item total.
- Further consideration should be applied to ensure items reported in financial statement categories are accurate. Examples include separate line items for current and non-current portions of debt such as bonds payable and compensated absences; and unamortized premiums and discounts are a component of long-term debt and should not be presented as separate line items.
- One of the main components of the statement of net position is the net position section made up of Net Investment in Capital Assets, Restricted Net Position and Unrestricted Net Position. Financial statement preparers should exercise care when calculating the net investment in capital assets and net position restricted for net pension assets. Remember to consider all related deferred outflows and inflows before reporting either balance in your net position and remove unspent proceeds when applicable.
Comments regarding the operating statements include:
- Preparers should ensure revenue and expense classifications are sufficiently detailed to be meaningful to a reader.
- There is no authoritative definition of operating revenues or expenses under the economic resources measurement focus and the full accrual basis of accounting. If operating revenues or expense is utilized by your government type, preparers must include a note disclosure to define what constitutes operating revenue or expense for their government.
What are the most common errors in the Notes to the Financial Statements?
According to GFOA, almost half of the comments/errors identified during its reviews were located in the notes to the financial statements. SAO also identifies this section of the ACFR as the one that receives the most comments.
Here are the common comments regarding the Notes:
- In Washington, the Auditor’s Office provides several notes templates for various government types. These templates can be useful; however, it is important to evaluate the templates often. Use only the templates that are relevant note disclosures for your government and for the current reporting year.
- Do not include negative note disclosures such as “We have no leases to report” or “We didn’t have any subsequent events.” This also applies to new Governmental Accounting Standards Board (GASB) implementations. Only those GASB statements implemented during the year should be disclosed in your notes. Do not include all statements evaluated for applicability during the year if they were not implemented.
- Ensure that all GASB references are current; do not refer to outdated GASB statements.
- GFOA noted that a high number of errors are commonly found in the pension and other postemployment benefit (OPEB) note disclosures.
- The pension and other post-employment benefit note disclosures are most likely to have errors due to the complexity of these disclosures. Pension and OPEB note disclosures should include all required elements, including details by plan type. Remember that in pension plans, employers that make significant contributions through the Public Employees Retirement System (PERS) 2/3 plans still have PERS 1 contributions and related liabilities through the unfunded actuarial accrued liability (UAAL) contributions applied to the PERS 1 plan. Use resources such as the BARS Manual to ensure all required components of these notes are included.
- Special care and consideration should also be applied when identifying unearned revenue and unavailable revenue. Unearned revenue is for activity such as revenues received in advance and should be reported as a liability. Conversely, unavailable revenues should be reported as a deferred inflow of resources as defined by GASB Statement No. 63. Your note disclosures should include sufficient explanations for a reader to understand the nature of these activities and identify the related balances on the financial statements.
What are the most common errors in the Required Supplementary Information (RSI)?
Similar to the notes to the financial statements, pension and other post-employment benefit schedules typically have the highest number of errors. Here are the common comments regarding RSI:
- Contributions and covered payroll amounts are affected by the contributions of PERS 2/3 plans through the UAAL contributions to PERS 1. When calculating your covered payroll for PERS 1, it should be at least as much as PERS 2/3 covered payroll, because PERS 2/3 payroll determines a significant portion of PERS 1 contributions.
- The schedule of the net pension liability should be dated as of the plan’s measurement date, and the schedule of employer contributions should be dated as of the employer’s reporting date. This means the two schedules will have different dates; therefore, the covered payroll amounts in each schedule will not be the same.
Below are a few resources for consideration when preparing your financial statements. When in doubt, submit a HelpDesk request to our Office.
Checklist for Preparing GAAP Financial Statements
Discussing the ACFR Award Sections with the Most Frequently Cited Deficiencies
GFOA Common Deficiencies presentation from the May 2017 Conference