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Written by: Curtis Coonrod
[Revised: 9/2021]
Indiana now requires some cities, towns, and counties to publish financial statements in accordance with GAAP (Generally Accepted Accounting Principles).
Other units may also benefit by preparing GAAP statements on a voluntary basis.
IC 5-1-11.5-4* requires GAAP financial reporting for large counties, cities, and towns that issue bonds. This requirement applies to counties with populations in excess of 100,000 and cities and towns with populations greater than 75,000.
How does GAAP differ from the traditional Indiana accounting practices that were developed over the years by fiscal officers and the State Board of Accounts?
The traditional system focuses on appropriations and claims only one year at a time. Little attention is directed at the future. GAAP builds on that system by recognizing transactions, especially liabilities, that will affect future years.
Traditional Indiana accounting practices are deficient in reporting significant liabilities, such as retiree benefits. This is detrimental to the holders of municipal bonds, who worry that they may not be paid if cash runs short. It is also detrimental to taxpayers, who will ultimately pay the bills.
GAAP reporting forces units to report liabilities fairly. Units with too many liabilities may lose their favorable credit ratings and find themselves unable to borrow more.
However, GAAP is costly. Most Indiana units do not have staff with the expertise to prepare them. These units will need to beef up their staffing or hire consulting accountants to perform the work. As seen in the past, many people believe the cost of hiring extra help will be offset by more favorable credit terms on bonds. That has led to several Indiana units issuing GAAP statements for years, even when not required to do so.
Most units with audited GAAP statements will probably opt to submit an annual comprehensive financial report (ACFR, formerly known as a “CAFR”) to the Government Finance Officers Association (GFOA) for evaluation. An ACFR includes the GAAP statements along with several pages of other information. Indiana law does not require ACFRs, but they are favored by bond rating agencies like Standard & Poor’s.
For units issuing bonds, the hope of a better rating could be motivational in terms of spending the additional money to prepare a complete ACFR and submit it to GFOA.
For counties, cities, and towns looking to reduce the cost of GAAP statements, there are options:
- If the county, city, or town has no plans to issue bonds in the coming year or so, no GAAP statements are required.
- Even if a GAAP statement is required, an ACFR is not. Some cost can be conserved by issuing only a GAAP statement and not a full ACFR.
- GAAP statements are not required to be audited. Auditing is labor-intensive and time-consuming and creates risk and liability for accountants. Most accountants charge a much lower fee to “prepare” or “compile” a GAAP statement if they are not asked to audit it.
- The Board of Accounts generally charges lower audit fees than private-sector accountants. However, the Board of Accounts will not prepare the statements. There may be some savings in hiring a private sector accountant to prepare the GAAP statements and have them audited by the Board of Accounts. The Board of Accounts’ willingness to take on the project may depend on their workload, so it is prudent to contact them and get a commitment as early as possible.
- The Board of Accounts can be asked to waive the requirement if the waiver will be in the best interests of the county, city, or town.
Our firm is especially well suited to answer questions and assist counties, cities and towns interested in GAAP financial statements. Our principal accountant, Curtis L. Coonrod, is a member of the GFOA Special Review Committee, which reviews ACFRs nationally. Formerly an assistant national director of government accounting for a national CPA firm, Coonrod has participated in the preparation of hundreds of governmental GAAP statements. – [Click his name to view Curt Coonrod.]
See Indiana Code regarding GAAP statements below.
* IC 5-1-11.5-4 Application to certain counties and municipalities
Sec. 4. This section applies only to the following:
(1) A county that has a population of more than one hundred thousand (100,000).
(2) A municipality that has a population of more than seventy-five thousand (75,000).
Notwithstanding any other law, a county or municipality subject to this section may not issue bonds after June 30, 2020, unless the county or municipality has for its preceding budget year prepared an annual financial report using the modified accrual basis of accounting in accordance with generally accepted accounting principles. However, upon request of a county or municipality to the state examiner, the state examiner may waive the requirement under this section if the state examiner determines that a waiver is in the best interest of the county or municipality.
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If you have questions or would like further information, please contact us at: Coonrod@Coonrodcpa.com
This article is intended to provide information of general interest to local government officials in Indiana. The information is not guaranteed to be applicable or appropriate in particular circumstances. Local officials should consult competent professionals before acting on any information contained in this article. We are not attorneys. Advice of a legal nature should be sought only from qualified attorneys.
We inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (I) avoiding penalties under the Internal Revenue code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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