Proposals for Enhancements to Annual Reports

The perception that local governments' CAFRs are difficult to read and provide less than meaningful information is widespread among both report preparers and users. For example, government auditors and accountants participating in a research symposium sponsored by the Association of Government Accountants identified the lack of government usage as a major problem. They perceived users feel the complexity and volume of data in CAFRs are significant factors in their inability to make meaningful sense of the information presented in the CAFR. Although this problem of providing meaningful financial information plagues accountants and auditors in the private sector, the concerns are more extreme and vocal in the government sector.

In an effort to enhance the usefulness of reports, various recommendations for improvements in government financial reports now exist. Although the present agenda of the Governmental Accounting Standards Board (GASB) includes potential changes in the format and content of the General Purpose Financial Statements (GPFS) on which auditors issue an opinion, many other recommendations focus on the reporting of key financial and nonfinancial information outside the traditional GPFS section of the entity's annual financial report. For example, some current recommendations include providing 1) graphical presentations of important financial and nonfinancial information, 2) summaries of trend information, and 3) reports of performance measures that include both financial and nonfinancial indicators. The background behind each of these recommendations is described below.

Graphical Presentations

Since many report users don't relate well to tables of numbers such as those included in the GPFS section of governmental financial reports, graphical presentations are viewed as a means to provide a more easily understood message to report users. While some governmental entities already incorporate graphical presentations in their annual reports, most do not.

Graphical presentations are recommended and illustrated in a 1992 GASB Research Report titled Popular Reporting: Local Government Financial Reports to the Citizenry. Exhibit 1 illustrates how graphics, tables, and narrative statements can be integrated to enhance report readability and usefulness.

TABULAR DATA OMITTED

According to the research report, governmental organizations could issue a separate report of graphical and summarized information (called a popular report) specifically designed for the average citizen who does not have special training in government accounting, or they could incorporate popular reporting techniques in their traditional annual financial reports. For example, these recommendations can be incorporated in the introductory section of the CAFR as an improved way of presenting economic, financial, and demographic highlights of the year.

Summaries of Trend Information

At present, some governmental accountants are recommending summaries of trend information as an alternative report to the highly detailed government financial reports that now exist. Such a summary would show five years of financial and nonfinancial information in a tabular format similar to that contained in many public-company annual reports. The summary would contain only a few key indicators (20 to 25 maximum) that could be disclosed on a single page. Exhibit 2 illustrates this approach.

EXHIBIT 2 SAMPLE CITY, MISSOURI Example of a One-Page Summary of Key

Ratios

Revenues

Ratio Title

Revenues per capita

Ratio Calculation

Net operating revenues Population

1992

$594.04

1991

$593.36

1990

$615.80

1989

$622.75

1988

$619.12

Ratio Title

Elastic tax revenues ratio

Ratio Calculation

Elastic operating revenues Net operating revenues

1992

43.2%

1991

40.5%

1990

41.9%

1989

39.5%

1988

35.5%

Ratio Title

Revenue shortfalls ratio

Ratio Calculation

Revenue Shortfalls Net operating revenues

1992

-3.5%

1991

1.6%

1990

-2.8%

1989

-5.0%

1988

1.2%

Expenditures

Ratio Title

Expenditures per capita

Ratio Calculation

Net operating expenditures Population

1992

$516.77

1991

$601.33

1990

$605.98

1989

$593.22

1988

$600.56

Ratio Title

Employees per capita

Ratio Calculation

Number of municipal employees Population

1992

0.016

1991

0.017

1990

0.016

1989

0.015

1988

0.15

Operating Position

Ratio Title

Operating deficits ratio

Ratio Calculation

General fund operating deficits Net operating revenues

1992

-1.8%

1991

0.7%

1990

-3.2%

1989

-3.6%

1988

1.9%

Ratio Title

Fund balances ratio

Ratio Calculation

Unreserved fund balances Net operating revenues

1992

98.3%

1991

101.3%

1990

94.6%

1989

93.9%

1988

95.0%

Debt Structure

Ratio Title

Long-term debt ratio

Ratio Calculation

Net direct bonded long-term debt Assessed valuation

1992

$.017

1991

$.017

1990

$.019

1989

$.020

1988

$.024

Ratio Title

Net direct debt service ratio

Ratio Calculation

Net direct debt service Net operating revenues

1992

53.3%

1991

55.1%

1990

57.9%

1989

59.6%

1988

61.3%

Unfunded Liabilities

Ratio Title

Unfunded pension liability ratio

Ratio Calculation

Unfunded pension liability Assessed valuation

1992

1.1%

1991

0.9%

1990

0.9%

1989

0.7%

1988

0.7%

Condition of Capital Plant

Ratio Title

Maintenance effort ratio

Ratio Calculation

Repair expenditures of general fixed assets Quantity of assets

1992

1.4%

1991

1.9%

1990

1.6%

1989

1.5%

1988

1.8%

Community Needs/Resources

Ratio Title

Personal income per capita

Ratio Calculation

Personal income Population

1992

$10,122

1991

$10,350

1990

$10,025

1989

$9,830

1988

$9,540

Ratio Title

Property value ratio

Ratio Calculation

Change in property value Property value in prior year

1992

1.6%

1991

-1.0%

1990

-1.5%

1989

-0.9%

1988

0.7%

Proponents of summary reporting contend the summary would, to some extent, decrease information overload and provide users with an easily understood overview of the governmental entity's significant financial, economic, and demographic trends.

Performance Measures (SEA) Reporting

In April 1994, the GASB issued a concepts statement titled Statement on Concepts Related to Service Efforts and Accomplishments Reporting. This statement identified the concept that cities, school districts, colleges, and other types of government entities should provide performance-assessment information in their general purpose external financial reporting (GPEFR). An entity's GPEFR includes the CAFR, popular reports, or other separate reports.

The GASB foresees an extended period of experimentation in service efforts and accomplishments (SEA) measurement commencing with the issuance of the final concepts statement on SEA reporting. During this period, the GASB will continue research into relevant and reliable financial and nonfinancial measures. Through its prior research, the GASB has identified three broad categories of SEA measures that will provide a framework for SEA measure selection:

Measures of Input. The amount of the entity's resources devoted to an objective or activity of the entity (e.g., percent of total annual general-fund revenues appropriated to public safety).

Measures of Output. The volume of services provided by an activity of the entity (e.g., the number of criminal convictions attained during the year).

Measures of Outcome. The extent to which an activity contributed to an objective of the entity (e.g., the decrease in number of crimes occurring per capita during the year).

Input measures provide information about service efforts while output and outcome measures are considered useful for assessment of service accomplishments. Other indicators take the form of ratios between two of the groups of indicators listed above. For example, ratios between inputs and outputs provide indications of the organization's efficiency, while ratios between outputs and outcomes indicate effectiveness.

Additional information pertaining to SEA reporting is available in a series of GASB research reports. To date, reports have been released for elementary and secondary schools, water and wastewater treatment, mass transit, sanitation collection and disposal, fire department programs, public health, police department programs, and road maintenance. Exhibit 3 provides a list of the performance measures determined in the SEA study for fire department programs. Still to be released are research reports on performance indicators of colleges and universities, hospitals, and public assistance programs.

EXHIBIT 3 FIRE DEPARTMENTS Recommended Service Efforts and

Accomplishments Indicators

MEASURES OF INPUTS:

Funds Used to Provide Services

Total Operating Expenditures

Total Capital Expenditures

Labor Resources Used to

Provide Services

Full-Time Personnel

Part-Time and Volunteer Personnel

Total Man-Hours Worked

MEASURES OF OUTPUTS:

Measures of Workload

Population served-

Residential

Workforce

Tourist, Average Daily

Property Value Protected--

Residential

Commercial

Public Property

MEASURES OF OUTCOMES:

Percentage of Citizens Rating

Performance Satisfactory

ISO Fire Insurance Rating

Total Dollars in Fire Losses

Total Fire-Related Deaths

Total Fire-Related Injuries

Source: Robert W. Parry, Jr., Florence C. Sharp, Jannet Vreeland, and Wanda A. Wallace. 1991 GASB Research Report: Service Efforts and Accomplishments--Fire Departments. Norwalk, CT: GASB.

Placement in Annual Reports

As detailed by the Government Finance Officers Association's Governmental Accounting and Financial Reporting 1994 for state and local governments, the CAFR should consist of 1) an introductory section, 2) a financial section, and 3) a statistical section. In addition to a letter of transmittal, the introductory section can include other material deemed appropriate by management. Besides the independent auditor's report and the GPFS, the financial section can include schedules to present comparative data or provide greater detail for information in the GPFS. The statistical section, which is located last in the CAFR, is intended to include statistical tables, graphical presentations, trend analyses and related indicators, and other miscellaneous financial and nonfinancial information.

The proponents of a financial trend summary and of performance measures reporting recommend additional information be presented outside the GPFS but in a prominent part of the CAFR. For example, the financial trend summaries, performance measures reporting, and graphical presentations should be placed toward the front of the CAFR, perhaps integrated into management's narrative statement on annual operations included in the transmittal letter. To effectively improve report usefulness, these additional disclosures should not be relegated to the statistical information section presented at the very back of the CAFR. Placement of summary, graphical, and narrative material at the beginning of the annual report increases the likelihood the materials will attract the attention of both serious and casual report users.

Since the additional information would not be included in the GPFS section of the report, the proposed new disclosures may not have a direct effect on the auditor's report. As indicated below, however, the independent CPA does have some responsibilities for the new information.

Auditor's Responsibility for Additional Information in Annual Reports

The key to determining the auditor's responsibility for this additional information in the annual report revolves around the issue of who prepared the information. If the client prepares the information, the auditor has limited responsibility to read the information and perhaps make recommendations to the client. If the information is prepared by the auditor in an auditor-submitted document, the auditor's responsibility is more involved.

The AICPA industry audit guide for state and local governments indicates that Statement on Auditing Standards (SAS) No. 8, Other Information in Documents Containing Audited Financial Statements, and SAS No. 29, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents, apply when CPAs render an opinion on a governmental unit's GPFS.

If the information is provided by the governmental unit, SAS No. 8 describes the auditor's responsibility. The auditor has no responsibility to perform auditing procedures to the information, but should read the additional information and be alert to any material inconsistencies or material misstatements of facts between the information and the financial statements.

If a material inconsistency is identified in the additional information, the auditor should request the client to revise the information. If the client refuses to revise the material inconsistency, the auditor should consider including an explanatory paragraph in the report, withholding the report, or withdrawing from the engagement.

If the auditor discovers a material misstatement of fact in the additional information, the auditor should discuss the matter with the client and suggest that individuals with appropriate expertise, such as an attorney, be consulted. If after consulting with an expert there is still concern, the auditor should consider providing the client written notification of the concerns and consulting an attorney about future action.

If the information is provided by the auditor, SAS No. 29 requires the auditor to describe in a report the purpose of the audit, identify the accompanying information and state that it is presented for additional analysis but it is not a required part of the basic financial statement. The auditor should include or disclaim an opinion on the information.

The CPA should also consider the type of audit report issued on the general purpose financial statements. If a qualified opinion were rendered on the financial statements, the effects of such an opinion on the accompanying information should be indicated. If a disclaimer or adverse opinion were issued on the financial statements, the auditor should not express an opinion on the accompanying information because it could overshadow or contradict the opinion on the GPFS.

If the client requests nonfinancial information be included in the auditor-submitted document, the auditor has a choice of two courses of action. First, the auditor could choose to disclaim an opinion on the nonfinancial information since no audit work would likely have been performed. In many instances, however, the nonfinancial information may have been obtained from the accounting records. In this instance, the auditor could choose to render an opinion on the information since the accounting records would have been tested during the audit.

Becoming Informed About Key Indicator Reporting

Although pronouncements could be published in the next few years, the GASB has not provided any mandates for performance measures reporting, financial trend summaries, or graphical presentations. In the interim, governmental entities are encouraged to experiment with disclosures of key indicators in their annual reports. CPAs specializing in government accounting and auditing need to be informed about key indicator reporting for the type of government entities in which they specialize (e.g., municipalities or schools). Besides being aware of current developments with the GASB, CPAs should consider subscribing to journals and publications of governmental professional organizations. Examples of such organizations are shown in Exhibit 4.

EXHIBIT 4 Professional Organizations of Selected Local governments

General: Association of Government Accountants, Alexandria, VA Government Finance Officers Association, Chicago, IL

Cities/Counties: International City/County Management Association, Washington, D.C.

Public Schools: American Association of School Administrators, Arlington, VA National Association of School Business Officers, Reston, VA

Public Colleges: Association of Institutional Research, Tallahassee, FL National Association of College and University Business Officers, Washington, D.C.

The periodicals and journals of these professional organizations often address financial management, accounting, and budgeting issues. In addition, most of the organizations publish books and monographs related to major financial topics for their respective groups of governmental entities.

GASB ISSUES CONCEPTS STATEMENT ON SEA REPORTING

GASB recently issued a concepts statement on service efforts and accomplishments (SEA) reporting. The second in a series, the concept statement does not require specific SEA reporting measures, but highlights the important role that SEA reporting should play in financial reporting and encourages state and local governments to experiment with SEA measurement, reporting, and use.

According to GASB chairman James F. Antonio, "because the performance of state and local governmental entities is judged primarily by their efficiency and effectiveness in providing services, the Board has concluded that the general purpose external financial reports of governmental entities should include SEA reporting. The objective of SEA reporting, Antonio continued, "is to provide more complete information about a governmental entity's performance than can be found in traditional financial statements--information that can be used to assess the economy, efficiency, and effectiveness of governmental services."

To order the concept statement, contact GASB at (203) 847-0700, ext. 555.