ANNUAL EXTERNAL AUDITS February 2016

The objective of a year-end, external audit is obtaining an independent assurance as to whether a community’s year-end financial statements are presented fairly in accordance with Generally Accepted Accounting Principles (GAAP). By integrating a review of the internal controls associated with financial reporting, the audit also helps to ensure that financial checks and balances are in place to protect public assets. Consequently, regular external audits can provide a powerful tool by which a community can build taxpayer confidence in government operations. The Technical Assistance Bureau (TAB) encourages communities to have independent audits performed by certified public accountants every year. Cities and towns that receive an excess of $750,000 annually in federal funds (even indirectly through a state agency) are required to complete annual audits that comply with the federal Single Audit Act of 1984. Financial statement audits provide information that is especially valuable when a credit rating agency reviews and reports on a municipality’s fiscal condition as it prepares to enter the bond market. A city’s or town’s inability to produce accurate financial reports could negatively impact a rating agency’s opinion on its financial outlook and therefore affect its bond rating. A credit rate reduction could result in hundreds of thousands, and possibly millions, of dollars in additional interest payments for taxpayers over the life of a borrowing. As important, a rate increase can create savings. The independent audit can also be a valuable management tool for assessing the fiscal performance of a community. Although communities that are not subject to the Single Audit Act or that do very little borrowing are free to operate without regular audits of their financial statements, it is not a prudent course. Funding audits at least every two or three years is still recommended.

copied from an article from the Massachusetts division of local service.

posted by Jeff Bennett