Most governmental finance managers are aware of the Government Finance Officers Association (GFOA) Certificate of Achievement for Excellence in Financial Reporting Program, and most governments choose to participate or not participate based on historical patterns – either to continue a long-standing series of Certificate awards, or to not participate in the program at all. Program participation, according to statistics on GFOA’s website, is more heavily weighted toward larger governments than smaller ones, but many smaller entities choose to participate. Will your local unit be the next to enter the program?
Many of us have seen the rows of award plaques on the wall of longtime program participants and understand the motivation to keep that pattern going into the future, but participation in the program is not really about the actual awards. The Comprehensive Annual Financial Report contains additional information that is not required by generally accepted accounting standards (GAAP) that allows a governmental unit to demonstrate enhanced transparency, full disclosure, and a level of competency in financial reporting that sets program participants apart from nonparticipants. This additional information is helpful to citizens, regulators, creditors, and others as they try to understand a government’s financial position and activity by analyzing the annual Comprehensive Annual Financial Report.
The Comprehensive Annual Financial Report is broken down into three sections – the Introductory Section, the Financial Section, and the Statistical Section. A standard GAAP financial statement is comprised of the Basic Financial Statements as well as some Required and Other supplementary information which would generally correlate to the Financial Section of a Comprehensive Annual Financial Report. All that being understood, though, what are the most significant additional items that are included in a Comprehensive Annual Financial Report that most governments are not currently preparing? Those would be:
- A Letter of Transmittal included in the Introductory Section
- Additional budgetary comparison schedules included in the Financial Section
- Inclusion of the Statistical Section
The Letter of Transmittal is written by the government and signed by the chief financial officer. It is generally three to four pages in length and discusses overall information about the governmental unit such as the reporting entity and services provided, governmental structure and the local economy, local points of pride, significant ongoing or upcoming projects, information on the external audit, as well as awards and acknowledgments. We generally find that the Letter of Transmittal, once it is written, is updated annually with a minimal amount of effort by the governmental unit. Writing it from scratch for the first year is generally the biggest challenge.
The second significant addition is that a Comprehensive Annual Financial Report requires presentation of budgetary comparisons for all budgeted funds, as opposed to a GAAP financial statement that requires budgetary comparisons only for the general fund and major special revenue funds. If your auditor drafts the annual financial statements, adding these additional budgetary comparisons should be a straightforward task.
The final additional item is probably the most significant one, which is the inclusion of the Statistical Section in the Comprehensive Annual Financial Report. The Statistical Section contents are defined by Governmental Accounting Standards Board (GASB) Statement No. 44. GASB 44 requires information to be presented generally for the last ten years regarding financial trends, revenue capacity, debt capacity, demographic and economic information, and operating information.
- The financial trend information is easily derived from current or past audited financial statements, so it is readily available.
- Information on revenue capacity speaks to the ability of a local unit to generate own-source revenues by providing schedules on the revenue base, rates, and principal revenue payers. This information is generally available in-house or from the local County Treasurer or Equalization department.
- Debt capacity information includes ratios of outstanding debt, direct and overlapping debt, debt limitations, and pledged-revenue coverage. That information is generally obtained from federal census records, internal information, and debt issues of other nearby governmental units.
- Demographic and economic statistics would encompass readily available information on population, personal income, unemployment rates, and the like, as well as information on principal employers that may require reaching out to an economic growth department or commission or similar entity.
- Finally, operating information would list the number of government employees by function over time, present operating indicators specific to each government, as well as capital asset information – all of which should be available in-house.
It is important to note that when a Comprehensive Annual Financial Report is presented, the independent auditors do not audit the Introductory or Statistical sections. The independent auditor’s report will delineate what information is audited and what is not.
Submitting a Comprehensive Annual Financial Report to the GFOA for entry into the program involves filling out an application and paying a fee that increases based on population. Once the Comprehensive Annual Financial Report is submitted, the GFOA will assign the report to a reviewer. Comprehensive Annual Financial Report reviewers are volunteers who handle the actual review on behalf of the GFOA (two Yeo & Yeo Principals are Comprehensive Annual Financial Report reviewers) and provide comments and pass/fail grades on various aspects of the report back to the local unit based on their review. Those comments are generally helpful reminders to include something that may have been missed, a request for clarification in a certain area, or to address a deficiency that the reviewer has identified. The comments, with responses from the local unit, are sent back to the GFOA with the subsequent year’s application.
Does the Comprehensive Annual Financial Report program sound like it may be something of benefit to your governmental unit? Please don’t hesitate to reach out to your Yeo & Yeo professional – we are here to help!