Common Deficiencies in Financial Reporting

March 2018 | Article

With the significant and rapid changes that are occurring recently in governmental accounting and financial reporting, the risk of errors is increasing. To help with those errors and deficiencies, we have come up with a list of common deficiencies and how to improve.

A common area of deficiencies is the Management Discussion and Analysis (MD&A).

  • Lack of detail on variances and changes in net position. The MD&A should dive into the details of the variances and changes and why the variance happened. Management should strive to articulate the causes of the significant changes to help the readers understand the basic question the MD&A should answer—“why.”
  • Information does not agree to the financial statements. All information presented should be able to be reconciled to the financial statements, so take care to enter the numbers and make sure that any changes to numbers in statements made after MD&A is prepared are reflected properly. However, do not copy the entirety of the financial statements in to the MD&A—only summarized information is necessary.

The next area where to focus is the Government-Wide Statements.

  • Miscalculating the net investment in capital assets. The calculation for this should be capital assets, net of depreciation less remaining balances of direct debt used for acquisition, construction or improvements including retainages. Deferred outflows and inflows associated with the capital assets and related debt should also be included in the calculation. For example, deferred outflows and inflows arising from gains or losses on refunding should be included but are regularly missed. Other items commonly missed are the inclusion of debt balances that are not related to capital assets such as tax anticipation notes, or the inclusion of debt amounts for which there are unspent proceeds, including long standing reserve accounts that were funded with bond proceeds.
  • Missing capital assets. Capital assets can be overlooked. To help with this, be aware of the capitalization polices, review the detail for capital asset purchases in repairs and maintenance or other expense accounts over capitalization thresholds and hold departments accountable to track assets throughout the year that are purchased. Also consider performing a reconciliation of the capital outlay purchases to the capital asset additions. Don’t wait until year-end or after to start the tracking.

The third area of focus is on the Governmental Funds.

  • Incorrect major fund determination and reporting. Major fund determination can be a tricky area. Any fund that meets the threshold of a major fund must be reported, but classification can change from year to year and capital projects or significant swings in funds can alter the results of the 10 percent and the 5 percent test. Ensure that deferred outflows are added to assets and deferred inflows are added to the liabilities for the calculation. The determination needs to be performed each year, and a final calculation should be completed after all adjustments are posted so changes from the initial calculation and final can be caught and corrected as needed.
  • Failure to properly report revenue. Due to the modified basis of accounting, reconciling items for revenues are common between government-wide statements and governmental funds. Review all receivable balances to ensure receipt was within the period of availability to be recognized as a current revenue. If outside that period, ensure they are properly reported as deferred inflows of resources on the governmental funds but would be reported as revenue on the government-wide statements.
  • Misuse of special revenue funds. Funds that do not meet the definition of a special revenue fund in GAAP are not allowed to be reported as a special revenue fund. The special revenue fund definition from GASB 54 Fund Balance Reporting and Governmental Fund Type Definitions is “funds that are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.” It is important to review the revenue sources received in determining where it is allowed and needs to be reported. In the note disclosures, you will also need to disclose the purpose and identify the special revenue source or sources for the special revenue funds.

The last area of focus will be on defined benefit pension reporting, including financial statements, note disclosures and required supplementary information.

  • Reporting net versus gross for deferred inflows and outflows. This is a confusing area of reporting. The one area specific to pension reporting that is required to be reported as net deferred inflows and outflows is the difference between projected and actual earnings on plan investments. All other deferred inflows and outflows related to pension are required to be reported separately from each other.
  • Reporting multiple benefit plans. When reporting more than one benefit plan, employers are required to report gross numbers for net pension assets and net pension liabilities separately in the statement of net position to not understate liabilities and assets.
  • Differences related to timing. In the required supplementary information, all actuarial based schedules are based on the measurement date and all contribution schedules are based on the fiscal year-end, which will result in different amounts reported for covered payroll.

Overall, the best way to be prepared and avoid the common deficiencies in reporting is to plan ahead. Keys to success:

  1. Attend training to keep up with changes, and be aware of the new standards that are issued and when they are effective
  2. Have someone take ownership for areas of financial reporting
  3. Discuss with peers the issues you are having and how they are solving similar problems
  4. Use checklists and flowcharts to help with the process of reporting and have an internal review process of the statements

Should you have any questions, please ask your Eide Bailly professional.

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