ACCT424Paper 2-CAFR - CAFR Paper 92% earned grade PDF

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CAFR Paper 92% earned grade...

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Advanced Accounting ACCT 424 Fall 2019 CAFR Analysis: Cincinnati, Ohio Michael Johnstone

Introduction Cincinnati, Ohio was founded in 1788, chartered as a village in 1802 and incorporated as a city in 1819 (City of Cincinnati. 2017). Cincinnati’s highest government officials are an elected major and nine members of city council (City. 2017). Both the mayoral office and members of city council serve four year terms (City. 2017). The mayoral office appoints the city manager, with approval from the city council (City. 2017). Cincinnati is a city that is currently going through many renovations and welcoming vibrate new companies and endeavors within their city. You can find several headquarters of Fortune 500 companies, and 400 Fortune 500 companies operating within Cincinnati. The city reports on 28 major initiatives in the last few years to promote revitalization of the community (City. 2017). These initiatives include bringing many new jobs into the metropolitan area. Comprehensive Annual Financial Report (CAFR) There are four major sections to the CAFR, introductory section, financial section, statistical section, and political section. The introductory section includes the Letter of Transmittal, GFOA Certification of Achievement, if applicable, a list of principal officers, and an organizational chart (Togh. 2015). The financial section provides the critical information in determining the financial health and condition of the government (Togh. 2015). The financial section includes the Report of Independent Auditors, Management’s Discussion and Analysis (MD&A), the Government-wide financial statements, the Fund Financial Statements, and Required Supplementary Information (RSI) (City. 2017). The statistical section is useful in determining the government’s economic condition (Togh. 2015). The introductory section includes the letter of transmittal. The Government Finance Officers Association (GFOA) recommends that the letter of transmittal include: a profile of the local government, some characteristics of the local economy, any long-term financial goals set, any relevant financial policies, and any major initiatives (Togh. 2015). The date of the letter of transmittal should be the first date the CAFR is available to the public, post-audit date; therefore, the letter is not audited (Togh. 2015). The financial section of the CAFR is the largest section. The MD&A should include a brief discussion of the financial statements, should compare information in the government-wide financial statements with prior years, an analysis of net position, an analysis of fund changes with explanation of significant changes, an explanation of significant differences in actual and budgeted amounts, a discussion of modified accrual for governments, and any known conditions or decisions that will have a significant effect on financial position in the future (Togh. 2015). The government-wide financial statements are the statement of net position and statement of activities. The government-wide financial statements are prepared with accrual based accounting (Togh. 2015). The fund financial statements are prepared with modified accrual accounting and are very specific to the government preparing them. Each government has funds they are specific to their needs and resources. The fund financial statements need to include a function for each fund (Togh. 2015). There are three fund types; governmental, proprietary and fiduciary (Roger CPA Review. NDa). Each of types of funds will be presented separately. The notes to the financial statements should include any information that is crucial to fair presentation that is not

included “on the face of the financial statements” (Roger. NDb). The RSI section includes the Budgetary comparison schedule (BCS), which is “a statement of revenues, expenditures, and changes in fund balance – budget and accrual” (Roger. NDb). The political section contains copies of approved election and reelection materials for the municipality’s main elected offices. Inclusion of this section ensures the public knows all election and reelection material had been reviewed and approved by the municipality for distribution and contains factually correct information (Togh. 2015). There are five categories of statistical information in the CAFR; financial trends, revenue capacity, debt capacity, demographics and economic information and operating information (Togh. 2015). The statistical section is not audited and its main goal is to provide users with information to help them understand the financial section better. The statistical section provides context and information to help users gain understanding of the overall health of the government. The financial trend section will provide information about change in net position and fund balances (Togh. 2015). The revenue capacity section will provide the revenue base, revenue rates and principle revenue payers (Togh. 2015). The debt capacity section will include ratios of outstanding debt and debt limitations (Togh. 2015). The demographic and economic information section will include major employers and relevant demographic information (Togh. 2015). The operating information section will include the number of government employees, capital asset information, and information about retirement and pension benefits (Togh. 2015). Comprehensive Annual Financial Report (CAFR) Purpose & Users The purpose of the Comprehensive Annual Financial Report (CAFR) is to ensure the government’s accountability to their community. The CAFR gives users the tools to determine the health and success of the government in fulfilling their fiscal and social responsibilities (Longo, Sheeran, & Crawford. 2017). According to the Government Reporting Instructions Protocol (GRIP) the CAFR reports the difference of actual results of operations and the “legally adopted budget” (GRIP. NDa). This comparison will help is assessing financial health, compliance with finance laws and regulations, and in evaluating the effectiveness and efficiency of the government (GRIP. NDa). The CAFR is also used in future economic, social and political decisions (GRIP. 2018). Users of CAFRs are citizens, legislative and oversight bodies, management and governing bodies, and investors and creditors (Longo, et. al. 2017). Other users may be taxpayers that do not reside in the community but pay income tax, other governments for comparison purposes, and underwriters and analysts (GRIP. 2018). There are six qualitative characteristics of the CAFR; they are, timeliness, relevance, reliability, understandability, comparability, and consistency (GRIP. 2011). These qualitative characteristic standards set by GRIP are intended to ensure the CAFR is meeting its intended purpose to its users. The citizenry must be able to understand the CAFR to determine the success of the government when they are making voting decision. The timeliness of the report plays a huge role in the usefulness of the report. In 2005, GRIP conducted a survey of users of government financial statements by asking over 250 people the question “What issues would you like to bring to the GRIP’s attention?” (GRIP.

2011). The consistent and overwhelming response from the users was that financial reporting needed to be timelier (GRIP. 2011). Comprehensive Annual Financial Report (CAFR) Timeliness & Cincinnati GRIP wanted to ask the question “how does the passage of time affect the usefulness of the information in audited financial reports?” (GRIP. 2011). Through the months of July and September 2010, GRIP surveyed users of government financial statements to determine their opinion on how timeliness affects report usefulness. GRIP asked these users, in five different time frames, “how useful is or would information be if published [time frame] after the end of the fiscal year?” (GRIP. 2011). The time frames GRIP used were 45 days, 3 months, 6 months, 12 months and more than 12 months after the end of the fiscal year (GRIP. 2011). The specificity of “after the end of the fiscal year” is necessary because the question is based on how long until the report is available to the public after the end of the fiscal year, not the date of audit or completion of financial statements (GRIP. 2011). The question was asked on a Likert scale of 15, 1 being “not useful at all” and 5 being “very useful”, with the additional answer of “I don’t know” (GRIP. 2011). The results: very useful 5

4

3

2

not useful at all 1

Don’t know/ No answer

Total

Within 45 days

170

12

5

3

1

3

194

Within 3 months

84

87

18

3

0

2

194

Within 6 months

17

55

85

29

6

2

194

Within 12 months

3

12

48

86

44

1

194

12 months or later *by number of responses

3

1

25

62

100

3

194

very useful 5

4

3

2

not useful at all 1

Don’t know/ No answer

Total

Within 45 days

87.6%

6.2%

2.6%

1.5%

0.5%

1.5%

100.0%

Within 3 months

43.3%

44.8%

9.3%

1.5%

0.0%

1.0%

100.0%

Within 6 months

8.8%

28.4%

43.8%

14.9%

3.1%

1.0%

100.0%

Scale

Scale

1.5% 6.2% 24.7% 44.3% 22.7% 0.5% 100.0% Within 12 months 1.5% 0.5% 12.9% 32.0% 51.5% 1.5% 100.0% 12 months or later *by percentage distribution *data for both charts retrieved from GRIP The Timeliness of financial reporting by state and local governments compared with the needs of users Report (2011)

Respondents were made up of 82.5% bond analysts, 9.3% legislative and oversight staff, and 8.2% citizens and taxpayers (CAFR. 2011). From the table, we can see that the majority of

respondents found government financial reports very useful if issued within 45 days, with a significant drop from 45 days to 3 months in usefulness. How is Cincinnati’s reporting timeliness? The City of Cincinnati’s fiscal year ended June 30, 2017 and the release of their CAFR was December 28, 2017; that means their report was released 181 days after the end of their fiscal year. In this case if the same respondent were asked about Cincinnati’s timeliness of financial reporting only 1.5% would find their report very useful, with the major rating the usefulness a 2 on the Likert 1-5 scale. This means that there is much room for Cincinnati to improve on providing their CAFR users with information that will be useful to them. Opinion I think the CAFR can be a great tool. A downfall I see is that availability of it to users, specifically citizens. The CAFR could be very useful for voters when making social and political decisions, but I would bet not many citizens know about their city’s CAFR or know how to use it. I think timeliness of the report would also play a huge role in the usefulness of it, even if citizens know how to access the information. As with the study explained above, releasing the CAFR to the public 3 months after the end of the fiscal year can greatly diminish users’ ability to find the CAFR helpful in assessing of the government.

References City of Cincinnati. (2017). Comprehensive Annual Financial Report [PDF Document]. Cincinnati, Ohio GRIP. (2011). The Timeliness of financial reporting by state and local governments compared with the needs of users [PDF Document]. Retrieved from https://www.GRIP.org/cs/ContentServer? c=Document_C&cid=1176158316214&d=&pagename=GRIP%2FDocument_C%2FDocumentPage GRIP. (2018). Rules and Procedures; Amended and restated through December 14, 2017 [PDF Document]. Retrieved from https://www.GRIP.org/cs/BlobServer? blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175821170353&blobheader=applicati on%2Fpdf GRIP. (NDa). Concepts Statements – Concepts Statement No. 1 [Summary]. Retrieved from http://www.seagov.org/concepts_statements/con_stmt_one.shtml Togh, Kamal. (2015). CAFR What is it and why should you use it? [PDF document]. Retrieved from https://cdn.ymaws.com/idahocities.org/resource/resmgr/Mountain_West_Institute/CAFR__Togh_Kamal.pdf Roger CPA Review. (NDa). FAR Lecture 29.04 Fund Financial Statement & Governmental Funds. Roger CPA Review. (NDb). FAR Lecture 29.06 Fiduciary Funds and Notes and RSI Longo, S., Sheeran, Aaron J., & Crawford, Frank. (2017). Where’s Waldo? What to Look for in Local Government Financial Statements [PDF Document]. Retrieved from https://www.gfoa.org/sites/default/files/Where'sWaldo.pdf...