S3:E6 – Common ACFR Errors
Join CRI Partners Rob Lemmon, Tina Stewart, and A.J. Bowers as they delineate some of the most common mistakes made surrounding the Annual Comprehensive Financial Reports (ACFR). Listeners will also learn the benefits of a properly performed ACFR, updates to the GASB pronouncements, and some top tips for ACFR accounting preparers.
From Carr, Riggs & Ingram, this is It Figures: The CRI Podcast, an accounting advisory and industry-focused podcast for business and organization leaders, entrepreneurs, and anyone who is looking to go beyond the status quo.
Hello, and welcome to another episode of the CRI, It Figures Podcast. My name is Robert Lemmon. I’m one of the audit partners in the governmental practice, and we’ve got a good governmental topic for everyone today. We’re going to be looking at common ACFR errors.
I know it’s tricky for a lot of people. There’s often difficult requirements to comply with to get your ACFRs correct in winning those GFOA awards. So we’re going to look at some of the common pitfalls, and with me today, two fantastic presenters. I’m really pleased that these two were able to join us.
First off, we’ve got Tina Stewart. Now, Tina is a super duper smart ACFR reviewer, and somebody I turn to very often for help with ACFRs. So Tina, do you want to say a couple of words, and introduce yourself?
Sure. My name is Tina Stewart, and I am a partner with the professional services team. My specialties are governments and not-for-profits as I am kind of the technical go-to for the firm. I live in Spanish Fort, Alabama, and I have looked at several ACFRs throughout my career. I am also a GFOA reviewer, so I see several on that aspect as well. And I look forward to doing this podcast with you Rob.
Oh, thank you, Tina. We’re glad to have you. And with all those credentials, you’re definitely a source of knowledge, and I know you’re going to have some really good content to share with everyone today. So thank you for being here.
And also with us is AJ Bowers. AJ, he’s one of the partners that I actually work with a lot. He’s in my local office. So AJ, do you want to go ahead and introduce yourself?
Thanks Rob. My name’s AJ Bowers. I’m a partner with Carr, Riggs & Ingram. I’ve been with the firm for about 15 years. I oversee the audit department in Albuquerque and West Texas, and specialize in government. And I review ACFRS for both the GFOA as well as the firm nationwide. So I’m happy to be here. Thanks for having me Rob.
Oh, thank you. So I’m going to dive straight in actually and put people on the spot with a few questions. So Tina, let’s just go through the concept of an ACFR and make sure people understand how does that differ just from regular financial statements?
So typically the financial statements are just the basic financial statements and MBNA. However, an ACFR presents a wider variety of information. So it’s going to include statements such as the transmittal letter, statistical section, and org chart. And it kind of gives the reader a better understanding of not only that governmental entity, but also that financial information that it’s reading within the financial statements.
Okay. So I mean that’s obviously sounding like a little bit more work than just standard financial statements. So many of these governments do it, why do they? To put it bluntly … it’s extra work. Why do they go through the extra work?
So, I think there’re several reasons that a lot of governments do this, and I think one of the main reasons is because it does give more transparency for the reader, for the citizens of that government in order to see, hey, what is going on in this government? So they’re not just getting the financial information, they’re getting the whole picture when they see this ACFR.
And additionally, you’re able to get the GFOA certification, which is a big bonus for a lot of governments as they like to show that, hey, not only did we get a clean audit report, but we also got a good standing with another outside entity that’s saying, “Hey, look, your financials are reported correctly and your information’s reported correctly.”
Got it. So obviously more information for citizens. That’s a big plus, plus the certification showing you’ve met the quality standards as well. So you’re getting more information and it proves it’s a higher quality. So yeah, that is obviously a good reason to go through the extra work, put in that extra information for the ACFR. Excellent. Thank you for that.
Well, I’m going to start with kind of a general question, throw it out to both of you and we’ll start with AJ if you don’t mind, but the whole reason we’re here is what are common ACFR errors? So with all the reviews that you both do of different ACFRs, what do you think are the most common errors that you tend to see? AJ, you go first, what do you tend to see?
Thanks Rob, I’ve got a few common errors that I see, but the top error that I see is the net investment in capital asset calculation. So that portion of the net position on the statement of net position itself, you should be able to calculate as it relates to your capital assets, your debt that’s outstanding on spend bond proceeds, et cetera. And so too often people leave off reconciliation of that, either within the notes, or putting something … and breaking out that debt or putting the unspent bond proceeds in a note disclosure somewhere to be able to calculate that. That’s a pretty common error that we see, and actually the GFOA has now come … and it starts this month, but now they’re starting to require a separate schedule be submitted with the financial statements and the ACFRs for the reviewers to be able to track that back because that’s a significant comment that we see all over the place, and that we ask our clients for it a lot.
The other errors that I see are going to be the MDNA. I see some … the missing analysis for your major funds really. And so you’re supposed to disclose all the major funds, the reasons for the significant change to the fund balances. You have to have a comment of whether or not it increased or decreased within the year. And the reason for that. So you’re supposed to in the MDNA, put that reason for all of your major funds. Too often it’s not all of the funds, they don’t put a reason, they don’t say that it increased or decreased.
Also, on the statement of net position, there’s specifically … sometimes there’s this confusion on what is unearned or what is unavailable for the deferred inflows and outflow. So you’ll have really items that are unavailable that shouldn’t be on there, or maybe there actually are some items that relates to deferred inflows that need to be put in there on the statement of net position that relate to taxes. However, that should be disclosed in the notes that it meets the definitions of 63 and 65 under the GASB requirements.
The other common issues relates to inflows and outflows is not reporting the bond refundings on there in the current year, the defeasance of that debt or not breaking out the pension deferrals and the OPEB deferrals. And those all need to be reported separately.
And then lastly, not including budgetary comparisons for your non-major governmental funds that have legally adopted annual budgets. All of these funds, every fund that has a legally adopted annual budget should have a budgetary comparison as part of the supplementary information. And those need to be in there. So a lot of times they’re not, or there’s one missing and they haven’t disclosed that there’s not a legally adopted annual budget for that fund itself. So those are the common errors that I see.
You see a lot. That was a lot of stuff. I mean I knew having … I know AJ pretty well, work with him a lot so I should have known that the net investment in capital assets would be the first one you go to because I know personally that’s a pet peeve of yours. But also, I really liked what you said about the MDNA because I know, under the GASB 34 requirements, there’s about eight bullet points of what needs to be in the MDNA. And I think it even italicizes or emphasizes the word, reasons for the variances in the GASB standard. And I see similar stuff that often those reasons are omitted from the description. And it’s such an easy one to get right in my opinion. It’s so easy to just add an extra sentence and explain the numbers, and it provides so much value. So I’m glad you gave us that big list. That was some excellent stuff. So Tina, what about you? Did AJ take all of the common errors, or do you see any extras that you also see?
No, I definitely see other errors as well, but I will say just to kind of build upon what you were talking about with the MDNA, both you and AJ, is that I think a lot of people also don’t understand the reason isn’t just a mathematical equation as well. It has to be the true reason for the variance to be there.
So if there’s an increase, it’s very evident if more revenues that they’re … the revenue number is higher. We need to say why there is more revenue, what function caused this to happen. That also needs to be within that reasoning. And I think that’s a common error we all see upon ACFRs.
But with that, I’ve also seen a lot of the transmittal letters mirroring MDNA, and that’s a big no-no in these ACFRs from the GFOA standpoint, because those transmittal letters are really just to say about the operations of the government and what’s been going on new within that government.
So it’s not going to mirror the financial MDNA explanations. It’s going to be a little bit different and a broader, more perspective into how the government is doing. I’ve also seen a lot of what … lately, where cash equivalents and investments are getting confused. We really need to decipher between the two, because unfortunately, if you mis categorize the investments into those cash equivalents, when you go to do the cashflow statement on a proprietary fund, it’ll really stand out that there’s an error within your classifications.
There’s also some issues between reconciliations between the government wide and the fund financial. So I think this is seen quite often where we’ll see plugs in those numbers where people don’t really understand how they’re reconciling these fund financials to the government wide financial statement, and it’ll cause issues as well to pop out within these ACFRs.
That’s excellent. I didn’t think there’d be more options out there after AJ gave such a good list, but those were some excellent ones. I like what you’re saying, the transmittal letter shouldn’t just be a replication of the MDNA. It’s different content. I can understand how it might be convenient for people to kind of copy it from one to the other, butt that isn’t the purpose of having duplicative information. It should be separate and distinct and different information.
And also with investments, I can really see what you’re saying there. Cash and investments are very different animals, especially with volatile investment markets, or high-growth investment markets. It certainly is very different to cash. So it certainly is important to be breaking those out properly and clearly. So excellent job, Tina. I really liked those extra items you had there.
So I’m going to jump back to AJ, put AJ back on the spot here and just say, so use your crystal ball AJ, tell me, what do you think might be going on that’s causing these errors? What’s your prediction or estimate that could be the cause of these common ACFR errors?
I think there’s just so many nuances within the pronouncements themselves and the related GFO requirements. And so I think there’s a little bit of just a lack of understanding that goes into those, as well as really the opinion variations at the level of detail that needs to be disclosed.
So one client may think that they’ve done enough to disclose the net investment in capital assets, but another one thinks that there needs to be some more. So really it’s just a matter of what is going to provide enough detail to meet the reviewer’s opinion on those checklist items.
So I just think that the nuances, the differences in interpretation and then just how much level of detail they need to put in there. These financials are so large to begin with that all of a sudden if you’ve now missed a number here, or a number there that you just didn’t disclose in the financials, you could just have this little small error.
Yeah. No, certainly from my years of looking at financial statements and ACFRs, ACFRs are … as Tina was telling us earlier, a whole nother beast, and there’s much more going on that just a regular set of financial statements. So the size of them, yeah, I see what you’re saying that inevitably there’s a potential for errors there and inconsistencies within the documents. But yeah, you mentioned something in there AJ, a checklist. And actually I’ll come to Tina. I think this might tee her up quite nicely for this next question I was going to ask. What resources are out there for people who are trying to prepare ACFRs, and what resources are there to help them address these common errors, and not make these common errors, Tina?
So the GFOA website has several different resources out there, but the main resource the GFOA has on their website is the GFOA checklist, which you can utilize to self review your ACFR to make sure that it’s in the right standard for the GFOA award.
You could also utilize your prior year GFOA review comments. And it’s also a really good opportunity for you to go to your auditors. Maybe they can provide a non-attest service in order to prepare your financial statements, or I know here at CRI, we provide constant free CPE classes that we have GASB updates, which would actually help you make this act for in compliance with everything. So I think there’s several ways that we can make sure that we’re able to prepare our ACFR correctly.
Excellent. And I do believe Tina, am I right in saying you’ve actually taught some of those CRI, CPE sessions on GASB standards, is that true?
I absolutely have. And I believe AJ has as well. And you as well. I think all three of us have at one point altogether at one time as well.
Yeah. Mine might have been a little while ago, but I knew you guys were on it. Actually Tina, I want to come to you with a couple of follow-up questions. I mean, that GFOA checklist, that must be pretty extensive. I’m assuming it must be 100s of questions. So if you were trying to put together an ACFR using that GFOA checklist, you’d want to leave yourself more than couple of days, right? This thing takes a while to get through, is that true?
I do think you need to leave yourself time to do it, and I think you should actually be using it before and after you finish your ACFR. So if I was preparing my ACFR, I would make sure I read through it before to ensure that I’m including everything. And then after to make sure I didn’t exclude anything that needed to be included. So I would kind of do it on both ends, which I would say, yes, it would definitely take a day or two to ensure that everything’s included on your ACFR. So I definitely would leave time for that review.
Yeah, especially if you might find things in there that weren’t in there and you have to go and get that info and add it in. And another follow up there. You mention GFOA prior year comments. Now, I’m thinking this is just your prior year ACFR, some comments come from somewhere and it tells you what was good and what was bad. Is that what these look like, and where do they come from, and what do they say?
So when you submit an ACFR for award through the GFOA, a reviewer is going to review your ACFR, your financial statements in order to determine whether it’s in proper performance for an award.
And when they do this, they leave review comments, whether they found any issues, things that were not in conformity with the ACFR, this is all in a list of comments. And when they put these comments down, you get a copy of these comment with your award, or with a letter saying you didn’t get the award.
So I would utilize these comments that you get from your review submission to determine what changes you potentially need to make to your ACFR. And I believe it’s required that you respond to the comments. So you’re already going to have to investigate any changes you need to make as well.
Perfect. That’s brilliant advice. So obviously, don’t make the same mistake twice. If somebody’s already reviewed last year’s document and told you to fix these things, that’s low-hanging fruit. You should easily be able to go and fix those things, especially if you’re already provided a response. So excellent. Well, thank you so much for those extra answers and clarifying that stuff.
I’ve just got a couple more questions, and we’ll put AJ back on the spot now. AJ, what new GASB pronouncements do you see coming? Or just changes from the GASB in general, not necessarily a pronouncement, but what do you see coming down the pipe that could have a big impact on ACFRs and pose a challenge for people who are trying to prepare an ACFR in the near future.
Yeah, there’s a couple statements that are currently being implemented that are going to affect the ACFRs. One of them is GASB 84 as it relates to fiduciary activities. And then really reporting those custodian funds.
And so what that really is, it’s a change … I shouldn’t say it’s a change, it’s a clarification of GASB 34 and the fund classification as well as a presentation themselves. So one of the things that I think is going to be a challenge, and that I have actually seen is with a client who early implemented 84 is, they did not have the proper presentations related to a combining statement for those custodial funds, for those fiduciary funds as part of the supplementary information.
So ensuring that that is incorporated I think is going to be important, as well as the proper classifications it relates to liabilities versus what is truly going to be considered net position.
So there are some presentation items of what considers a liability and the timing as it relates to custodial funds under GASB 84. So I think those are going to be challenging. In addition to two other statements that are going to be implemented in this year and the following year is going to be statements 87, which is for leases, and 96, which is for subscription-based IT arrangements. Those are going to require new categories of assets, liabilities, and different transactions to disclose, including note disclosures. And so anytime there’s a change, there’s a possibility for mistake.
So those are the ones that I see that are currently issued. Into the future, GASB’s working on updating the financial reporting model. So that’s going to have a substantial change on it, but that’s to be continued on that one.
Okay. Nothing too imminent on the overhaul in general, but certainly some statements there that have got some significant impacts and causing some challenges with some new information. You said it was 84, 87, and you said 93?
- Oh see, I’m glad you’re there in my office to keep my straight, but yeah, those are definitely going to have a big impact. And I know at least two of those, they got an extension for implementation through the GASB 95 edition that came out due to the pandemic. So it bought people a little bit of time, but I think that time’s up now, and that they’re going to have to be implementing those standards pretty soon here.
I’m going to wrap up with one final question that I’m going to throw out to both of you. So Tina, if you want to take a shot first at this next question, just in general, what would be your top tips for any ACFR preparers, just to help them with the process? Tina, what would you say?
I think if this is not your first ACFR, it would definitely be applying your prior GFOA review comments, because too many times I’ve seen that people had comments, responded to the comments, and didn’t update their subsequent financial statements. And I think as you said earlier, that’s the low-hanging fruit. And then the other would be, I would definitely utilize that GFOA checklist as a guide to walk you through preparing your ACFR, and ensuring that your ACFR is fully compliant.
Excellent. And AJ, what do you think? Top tips for ACFR preparers?
So my are also going to be related to the checklist itself. So there’s a couple things on the checklist that I want to draw attention to is, the questions that have an asterisk, those questions are ones that lead to significant comments. So as Tina referenced, those comments that you get every year, there’s two different categories. There’s the categories of, here’s comments, and then there’s the category of a significant comment, which they will state on there that says, if not corrected, could prevent you from getting the award in future years. So those asterisks correlate directly with the significant comments. So fix those ones predominantly.
The second is I wouldn’t do the ACFR or the checklist without the GAAFR book, or the blue book, which is the governmental accounting auditing and financial reporting book that the GFOA has. The checklist has page number references to the chapters and where all of that stuff is in the GAAFR. So if you’ve got a question of how do you prepare something, that’s the place to go, and it’s going to directly correlate the question to the guide of where to put that. So use that checklist, but know the nuances of that checklist, and use it according.
Excellent tips, and yet more good resources to help people accurately complete their ACFRs. And actually, my top tip would’ve been, like I kind of alluded to earlier, leave yourself enough time because from what I’ve seen from these ACFRs, and the ACFR checklist, it is extensive, and unless you’ve got it absolutely perfect first time, there’s going to be some time needed to go back and make fixes to comply with all the checklist requirements.
AJ, it sounds like you don’t have to get a perfect score on the ACFR checklist. There’s some wiggle room. If you make one or two mistakes, you won’t lose the award straight off of one mistake. Is that true AJ?
From my experience, you’re not going to lose it because of one mistake here or there. The key to me is really seeing that those significant comments … you might get one or two, and then just ensure they’re corrected because their comments will say, “may preclude you from getting the award in future years.”
So, take their advice.
Yeah, certainly for those significant items. You want to get those right. And then to my point about time, leaving yourself enough time to do the full ACFR and get through all the checklists and everything, do either of you guys know what is the current rule on when it needs to be submitted … how long after a fiscal year end before the ACFR needs to be submitted to the GFOA to win the award? What was the timing on that, either of you guys?
So the timing is six months from fiscal year end. There are extensions that you can request. It’s a one month extension. You typically can’t have an extension for the same reason over and over again, but they’ve been pretty lenient in the COVID area to ensure those have been provided. But in a perfect world it’s supposed to be six months after year end.
Excellent. OK. Well, thank you both so much. I snuck a few extra questions towards the end there that you weren’t expecting. So I appreciate you doing those extra questions. But I think that wraps up what we wanted to cover today. And I think this has been really informative and really useful advice on how best to prepare an ACFR, where it can go wrong, and all the resources out there to kind of keep you on the right track and avoid those common errors.
So, thank you both again so much for all your time. If you’ve enjoyed this podcast, please do check out the CRI website, cricpa.com
There’s a bunch of different podcasts up there. It’s not just governmental topics, although there’s a number of governmental-specific episodes, but there’s a whole range of different financial topics you can hear about. So please do check those out. And on the website, there’s a governmental page as well that has other information, not podcasts, but other types of useful information like articles and tools and resources that you can use on that website, cricpa.com
So, that’s all we’ve got for now, please tune in for another episode of the It Figures Podcast, and thank you for listening. Goodbye.
If you want more CRI insights, or are interested in learning about our firm, please visit our website at cricpa.com. Thanks for listening to this episode of It Figures, the CRI Podcast. You can subscribe to ItFigures on iTunes, Spotify, or wherever you prefer to listen to your podcasts. If you like to what you heard today, please leave us a review.
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