Financial Reporting: Why We Need Financial Statements

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Minch Lewis
August 23, 2024

Why do we need financial instruments?

Pilots rely on a dashboard of instruments to tell them where they are, where they are going and how they are going to get there. Financial managers have their own cockpit with a dashboard of financial instruments. If they are working, they guide the manager to keep the government going in the direction set by the budget. Are we going up or down? Are we using taxpayer resources as authorized?

What are the financial instruments?

They are standardized reports on the source and use of public resources usually found in year-end audited financial statements. The financial statements are taken from the government’s computerized financial management system. They are based on the quality of the financial management system. In February’s PA Times, I proposed five steps for strengthening financial management infrastructure. When those are in place, financial statements provide a reliable instrument to guide management decisions and public accountability.

What reports are included in financial statements?

The financial statements for government are prescribed by the Government Accounting standards Board (The GASB). They include a Management Discussion and Analysis, the government-wide and major fund statements and required supplementary information (RSI) as described in the Summary in Statement No. 34.

The budgetary comparison

Audited financial statements may contain hundreds of pages of schedules and notes, but the RSI presents a budgetary comparison that is the most useful text for financial managers. The budget, with any amendments, is the document, approved by the taxpayers, which authorizes the use of public resources for specified purposes. Financial decisions are legally required to comply with approved budgets. Particular attention is given to Required Supplemental Information and has been emphasized in the latest GASB pronouncements. GASB 103 was just issued in April 2024:

“This Statement requires governments to present budgetary comparison information using a single method of communication—RSI. Governments also are required to present (1) variances between original and final budget amounts and (2) variances between final budget and actual amounts. An explanation of significant variances is required to be presented in notes to RSI.”

The requirement to provide an explanation of significant variances is new and shows the importance that the GASB places on the report. Previously, users of the financial statements were left on their own to interpret variances. In the future, the budgetary comparison in the Required Supplementary Information section of financial statements will provide an instrument for reading what is happening with public resources compared to what was planned and authorized. The explanations will hold elected officials accountable for using resources to deliver, or not deliver, agreed upon services.

Reading the budget comparison instrument.

The budgetary comparison shows whether we are going up or down in specific budget areas. In a recent budgetary comparison report, a government spent $13 million more for General Government Support and $13 million less for Public Safety. While the variances were the result of many financial decisions made during the fiscal year, those decisions amounted to overspending on administration and underspending on the priority function of public safety. In another case, a school district spent $17 million less on “Instruction” than was authorized and paid for by the taxpayers. The impact of those decisions was not recognized until the audited financial statements were issued 6 months after the end of the fiscal year.

Using the budget comparison instrument for decision-making.

To prevent such unintended consequences, budget variance reports should be generated automatically by financial management systems monthly. The variance reports don’t require a full set of financial statements. They could be limited to data from the General Fund. A procedure could be set up in month-end reconciliations to produce the variance reports. Significant variances would be reviewed by relevant decision-makers in the administration. Legislative decision-makers would be advised with recommendations to modify the budget or otherwise deal with the variance.

How do we start?

The Government Finance Officers Association (GFOA) provides a useful discussion about timely financial reporting. “Legislative deadlines for submitting financial statements should be viewed as a minimum standard rather than as an ideal objective.” Steps to implement timely financial reporting include:

• recording activity during the year rather than during the “busy” season at year-end
• processing for closing and financial statement preparation
• preparing and distributing electronic reports
• contracting for professional services other than auditing
• concentrating on significant issues to match costs and benefits.

Instruments for public accountability

Monthly or even quarterly budgetary comparisons would provide the public with the opportunity to understand how taxpayer resources are being used. Interested citizens could voice their opinion on adjustments that should be made in the current and future budgets through the political process.

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Author: Minch Lewis is a part-time instructor at Syracuse University’s Maxwell School. He served as the elected Syracuse City Auditor for 9 years. He has developed and installed financial management systems for the affordable housing industry. He earned his MPA degree at the Maxwell School. He is a Certified Government Financial Manager (CGFM). He can be reached at [email protected] .

 

 

 

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