Unsung Heroes of Transparency and Accountability: Timely Audit Reporters

May 3, 2021

By Richard A. Ciccarone, President, Merritt Research Services an Investortools Company, and external advisory panel member, GFRC


Slow audit reporting is not a new issue, but the lack of overall progress is problematic for investors and other stakeholders who rely on an entity's audited financial information as an objective, meaningful tool to make important decisions. 

Releasing timely audit reports is crucial to assessing credit evaluation and proper pricing in the municipal bond market. Likewise, it also remains an essential tool for good governance and stewardship. Still, it continues to take too long for many state and local governments, their enterprises, their agencies, and other tax-exempt obligors to finish auditing their books.

Since 2007,  I have been tracking the time it takes for municipal bond related audits to be completed and signed after the close of the fiscal year end by examining the audits collected and digitized by our firm,  Merritt Research Services, an Investortools, Inc Company.   Merritt Research, which specializes in municipal bond credit data and research for its CreditScope analytical database, is used by many of the nation’s largest institutional municipal bond investment companies, dealers, and insurance companies to make investment decisions.   

In our latest audit time study, we examined nearly 10,000 Fiscal Year 2019 municipal issuer audits, segmented by credit sector, encompassing both governmental and qualified tax-exempt municipal bond type borrowers.  Our findings revealed no serious changes from past timing studies, which is both good and bad news, depending on the entity involved.  Many municipal bond audits were late again with only minor improvement or deterioration in past performance for the various state and local credit sector peer groups that comprise the overall municipal bond issuer base.   One recurrent finding, often understated, is that most of the perennial faster reporters routinely repeat each year. 

In the interest of timely transparency, a variety of interest groups ranging from bond investors to government watchdogs and regulators have increasingly called for accelerating the time it takes to finish an audit.  Despite these pleas, many municipal bond borrowers have not responded with faster audit turnaround times. The median audit time for municipal bond entities is normally around two to three times longer than for their corporate bond counterparts, which average 60 to 90 days (as regulated by the SEC based on corporation size) after the close of the fiscal year.

State and local governments are historically the tardiest to release their audits among all types of municipal bond issuers.  There doesn’t seem to be a single argument that justifies this chronic lateness.  The most common explanations cited for slow reporting usually revolve around complaints involving required governmental accounting practices, involvement of inadequately staffed state auditor overseers (depending on state laws), or the multiple presence of enterprises and component units, which must be incorporated in a state or city audit.

I believe those arguments lose credibility considering that a significant number of governments can complete faster audit reporting routinely despite their size, complexity, or statutory constraints.    Our analysis, which tracks the auditors themselves, also found no obvious patterns that consistently pointed to the size or specific private auditing firms as a predictor of faster or slower audit times.

Depending on the municipal credit sector, it generally takes about 120 to 175 days after the end of the fiscal year to complete audits. The overall total median audit completion time for fiscal year 2019 was 151 days. The fastest municipal bond sectors to complete their audits for 2019 were also the fastest to do so in the previous year: Wholesale Electric Public Power (94 days), Hospitals (114) and Private Higher Education (117). The slowest sectors were counties (180 days), cities (175) and states & territories (173). 

The best performers in our report finished their audits in 90 days or sooner, providing exemplary best practice models for timely reporting among municipal bond issuers. The city of Sioux Falls, South Dakota, which earned the distinction as the fastest reporter of all cities, was able to complete an unqualified audit in 80 days, eight days faster than the previous year. Runners up in the City category, Columbus and Kettering, Ohio, are perennially fast reporters with completion times that hover around 90 days. New York City, which probably has the most complex books of all cities deserves honorable mention because it regularly clocks in around the 120-day mark after the end of fiscal year, 55 days less than the median for all cities.

What is the secret that enables some governments to regularly produce timely audits?   More than anything else, the answer seems to lie in the will and determination of leadership.  In referencing our study, Columbus, Ohio’s auditor, Megan Kilgore, told The Bond Buyer that her city was able to complete its audit in 87 days because the city is “a well-oiled financial reporting machine” with a 90-day goal to get the job done.  She went on to say that her office makes it a practice to have “a detailed project plan for staff and external auditors to schedule all of their financial statement preparation and audit activities with reasonable time frames”.  

Both investors and citizens benefit from audits that are more timely. It is in everyone’s best interest to place the same commitment this effort audits as Columbus, Ohio.  That is why, our analysis on audit timing this year places the spotlight on those governments that show us the way by demonstrating that transparent, timely reporting is not only a best practice, but also best possible.  As time goes on, we hope to see other issuers follow suit, answering the call of investors, watchdogs, and regulators.