Another Late CAFR: Who Cares? Why States Should Be Alarmed
The Government Finance Officers Association recommends publishing a comprehensive annual financial report (CAFR) within 180 days of the end of the fiscal year, but 20 states were not able to meet that timeline for fiscal 2018, according to Truth in Accounting.
Yes, that's 40% of states. Illinois last filed on time in 1999 and has been over a year late in six of the last 12 years, according to a news release the Illinois Office of Comptroller posted on its site. The state's challenges are not entirely unique. The Illinois situation reveals common pain points in generating government financial statements.
If you work in governmental accounting, you know firsthand that it's difficult to issue a CAFR on time. There are three potential solutions or lessons that government financial reporting teams can take away from the challenges facing Illinois:
1. Limit risk by maintaining control over key data
Illinois Auditor General Frank Mautino has said publicly that the Illinois Department of Human Services and Department of Healthcare and Family Services suffered setbacks when an outside technology vendor lost four months’ worth of Medicaid data, which the agencies had to re-create.
The Office of Comptroller faulted the previous governor’s administration for relying too heavily on third-party contractors to perform sensitive data conversions without adequate monitoring controls from state agency officials.
The lesson here is that even when working with third parties, make sure critical information documents and data are protected. Vet your vendor's security protocols and customer service, consider working with cloud technology that can mitigate or minimize the risk of losing access to your data, and have a plan for backing up data regularly.
What financial reporting teams can do:
One best practice is to maintain control of your data and reports within your own technology platforms but use permission controls to grant or lock down access by outside parties.
2. For effective internal controls, give auditors real-time visibility into data
The Illinois audit staff takes a dim view of the way agencies are reviewing support documents after transactions have taken place. Mautino's office wrote that the process is overly dependent on the post-audit program even though the Office of the Auditor General has repeatedly told agency officials the post-audit function is not a substitute for appropriate internal controls.
What financial reporting teams can do:
Technology partners can help integrate risk management into everyday operations, whether that's through designated assignments within workflows, granting reviewers and internal auditors more visibility into the details and history behind transactions, giving auditors the ability to review transactions in real time, or all of the above.
Internal policies and procedures covering multiple departments can be complex and hard to implement. Enterprise cloud platforms can provide unified data collaboration, reporting, and compliance environments. This empowers organizations to integrate controls, reporting, and audit activity in the same space, which removes the need to translate or retype data from one system to the next. For an interesting look at how one bank achieved value in governance, risk, and compliance efficiency, effectiveness, and agility, check out this white paper.
3. Centralize your data and working documents in a single system to eliminate the havoc that can come from using multiple financial reporting systems
The State of Illinois Office of the Auditor General has said in a publicly available report that the state's financial reporting process didn't allow for timely completion of an accurate CAFR.
“The State has a highly decentralized financial reporting process due to the use of numerous financial reporting systems, many of which are not interrelated and require manual intervention to convert data," it said. Illinois is implementing an enterprise resource planning (ERP) system that is intended to be more interrelated among agencies and is developing a new grant management system, both of which should improve internal controls and help the state produce timely, accurate financial statements, it said.
What financial reporting teams can do:
As the reporting process becomes "increasingly bloated," teams can take a few steps to overcome the inefficiencies of manually entering data from multiple source systems and copying it into multiple reporting programs:
- Consolidate reporting in a centralized cloud platform to enable real-time collaboration, so everyone has access to the latest version of a project
- Use software integrations and APIs to connect data directly from source systems to your reports to eliminate the chance of manual copy-and-paste errors
- Make your documented internal control policies and procedures easily accessible to all teams in the same reporting platform where they work
Modernizing your CAFRs can help maintain a healthy credit rating
There can be tangible risks in making the financial markets wait an unacceptably long time for a CAFR.
A downgraded rating on a general obligation bond or a costly increase in spread (the difference in yields between muni and Treasury bonds of identical maturities) is a real threat. Don’t forget, Standard & Poor’s suspended the GO bond rating on the city of Manassas Park, Va., after the city was late on its audited financial statements for fiscal 2016 and 2017.
With their extensive tax base, state governments are unlikely to be similarly penalized for late financials. Also, high demand and low supply in the municipal bond market can help minimize any investor backlash. However, it’s possible a tardy CAFR, in conjunction with other negative factors, could scare off bond investors, leading to higher interest paid on debt.
“While it doesn’t seem there is a high penalty the market is exacting, market conditions always change,” said Marc Joffe, a senior policy analyst at the Reason Foundation, a Los Angeles public policy group. “If investors had more ability right now to select bonds based on issuer characteristics, you would see a penalty.”
Also, regulators may crack down even if investors don’t. The Securities and Exchange Commission has acted against municipal bond issuers that attested to filing financial statements but did not follow through, Joffe noted.
Connecting agencies can help teams master the demands of CAFRs
One of the main reasons CAFRs have become too complex to create in a timely fashion? Teams are relying on scattered documents and data sources across different systems and people. Teams have relied on this age-old process, but it has failed to keep up with today's reporting demands, resulting in a disconnected headache to consolidate data and make a publish-ready CAFR with ease and confidence.
I have seen state and local governments accelerate their reporting significantly without sacrificing data integrity by using technology.
Producing accurate, complete, and timely financial statements is among the most critical missions for a state or municipal finance office. Department leaders should look for every improvement that will improve data connectivity, streamline systems, and strengthen controls. Agencies that advance in those areas don’t just respond to the demands of financial reporting. They are able to provide more value and build trust with their community and regulators.
My advice? Start small by optimizing one process, like budget reporting. You'd be surprised how quickly you can build momentum across multiple financial reporting processes—including your CAFR.