Governmental Financial Statements….Where did These Numbers Come From?
by Michael "Mike" A. Hoerig, CPA, Audit Partner
Posted on February 20, 2018
For many governments, the audited financial statements are prepared on a basis of accounting that differs from that utilized in their general ledger accounting system. Audited financial statements are prepared in accordance with generally accepted accounting principles (GAAP) which are established by the Governmental Accounting Standards Board (GASB). Whereas many governments (especially smaller organizations) typically utilize a basic, cash-basis only approach for their general ledger. The cash-basis approach means that transactions are only recorded in the general ledger if they have an impact on cash. The differences in these two accounting methodologies result in an inability to easily trace audited financial statement accounts and amounts back to the underlying general ledger. So then, how are these non-general ledger amounts calculated and tracked?
In most cases, governments also maintain several subsidiary schedules – or even entire software applications – that track and account for GAAP-basis financial accounts that don’t appear in the general ledger. Common subsidiary schedules include:
- Accounts receivable
- Prepaid expenditures
- Capital assets
- Accounts payable
- Accrued payroll
- Compensated absences (vested employee benefits)
- Customer deposits
- Long-term liabilities (bonds, notes, leases, etc.)
As apparent in the examples above, most subsidiary schedules track financial accounts that only appear on the balance sheet and note disclosures. In some instances, when only a limited number of transactions occur during the year, it might be possible to only update these schedules at year-end. However, in many cases and for many different reasons, the schedules may require year-round attention to ensure accuracy for the audited financial statements. The reasons for more frequent updates might be related to staffing availability and expertise, or larger numbers of transactions, or the complexity of arrangements or underlying calculations, or all of the above.
Subsidiary schedules can take many forms. The most basic is a list developed and tracked in a spreadsheet application. However, there are also subsidiary schedules that are the result of dedicated software applications (e.g. inventory software, capital asset software, etc.). Typically, the number of transactions, the complexity of the account, and the budget constraints of the government will dictate what type of subsidiary schedule is utilized.
In some situations, the government may request assistance from the audit firm to compile subsidiary schedules for financial reporting. However, in those circumstances, the government is still ultimately responsible for the accuracy and completeness of the subsidiary schedules. Typically, these types of “nonaudit services” are only recommended when the subject matter is basic in nature, and does not consist of extremely technical arrangements or involve complex calculations. When the data is considered complex, the government should prepare the subsidiary schedules to help ensure their accuracy.
The audit firm’s involvement in nonaudit services will commonly be highlighted in the audit engagement letter and will require the government to certify that it accepts responsibility for overseeing the nonaudit services provided by the firm. This oversight acknowledgement is essential to maintain the independence of the auditor-auditee relationship. The government usually performs this oversight by designating an employee who possesses suitable skills, knowledge and experience about both the organization as well as the subject matter compiled by the audit firm.
With an understanding of the source data, the year-end review of the financial statements can be streamlined and made a less daunting task. Additionally, keeping good notes about each account during the review, and asking your auditor about amounts in question can also help elevate your government’s financial literacy and accelerate future years’ financial statement reviews.