TARGETING SPEEDIER FINANCIAL REPORTS

For some time, the complexity of dealing with scores of rules set forth by the Governmental Accounting Standards Board (GASB) has become a hefty weight for often-understaffed finance offices to carry. As a result, many state and local financial reports take many months after the end of the fiscal year to come out.

The most extreme current example has been Illinois, which has yet to release its report for Fiscal 2023, which ended more than two years ago, requiring the state’s comptroller to issue an interim report in the meantime.

Though Illinois is a wildly extreme example, late reports aren’t uncommon. Since they serve as an important planning document for state leaders, including agency heads, this isn’t a trivial matter. If government leaders don’t know for sure how the books look until many months after they’ve been closed, they can find themselves operating in darkness.

There are a number of reasons for these delays, including the absence of up-to-date technology. There are still a surprising number of smaller entities that continue to rely on manual bookkeeping practices, which can delay the completion of an auditable report.

Then, too, finance offices continue to have difficulty in finding skilled personnel for many of the positions that are involved in this process.

But over the course of time, we’ve heard that complex financial reporting requirements are perhaps the biggest challenge here. And on that front, we have some good news to deliver.

First of all, the technological challenges are slowly but surely being relieved. In fact, the GASB has been working on a project that will help to standardize language in financial reports, and that in turn will make advances in technology easier to utilize.

Perhaps the most cutting edge of the technological advances is the use of artificial intelligence to help crank out financial reports. As Chase Smith told us several months ago, “One of the things that AI does so fantastically is to summarize complicated information.” Smith is vice president of products at ClearGov, which provides technological solutions for financial planning, budgeting and reporting for local governments.

With artificial intelligence, and other technologies, “we can provide the information that people want in the way they want it, when they want it,” Shayne Kavanagh, senior manager of research for the GFOA, told us.

Cities, counties and states are also rethinking questions of what information is significant enough to an entity to be necessary or even useful. The accountants refer to this issue as one of “materiality.” Though the decision of what is material and what is not hasn’t been well defined, many entities feel obliged to report numbers that are so small that they don’t have any real significance to financial outlooks.  

As GFOA’s Kavanagh explained to us, “Lowering materiality thresholds can save lots of time and energy. We went through the list of GFOA ACFR award winners, and pulled out a whole bunch of them from 2023, and looked at the thresholds for reporting capitalized assets. It turned out that 72 percent of them had not changed their capitalization thresholds in 10 years. Adjusted for inflation, the real value of those thresholds has decreased substantially. And that means that governments are tracking assets that are less and less costly, which causes them to do more and more work.”

Another impetus to eliminating disclosures that aren’t of consequence is that in the scope of a long annual report, they can serve to reduce focus on information that is truly important.

A third approach to helping local governments that are struggling to complete their annual comprehensive financial reports is the use of Six Sigma techniques. The three major themes to this approach according to a GFOA paper are:

·       “Avoid batch processing and achieve a continuous flow for work through the process. . . Both continuous flow and rhythm contribute to avoiding backlogs and bottle necks.”

·       “Making the process visual clarifies roles of all parties, including external auditors. It also identifies points where work is handed from one party to the next in a process. Hand-offs are a major point of potential process failure and delay.”

·       “Develop standard operating procedures to minimize the variation in the process, which helps reduce errors. You can go a step further by creating dedicated error proofing tools, based on the standard operating procedures.”

Meanwhile, although the proliferation of new standards by the Governmental Accounting Standards Board has led to some of the difficulties mentioned above, the GASB is taking a relatively new approach, which has the potential for making the future of financial reporting somewhat less onerous than the past.

“We understand that when we add to generally accepted accounting principles, we’re asking governments to use scarce resources in their finance departments on something they otherwise wouldn't have to," says Joel Black chair of the GASB. “So, the board has set a very high bar for us to undertake new projects.”

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