Public Administrators’ Understanding
of External Financial Reporting:
It Begins With Curriculum
Tammy R. Waymire
Northern Illinois University
Shannon N. Sohl
Northern Illinois University
Brandy Howard
McGladrey LLP
ABSTRACT
State and local governments’ external financial reports contain important information for the
citizenry and government stakeholders. However, unless information in those reports is readily
consumable, public trust may erode. It is important that public administrators understand and
effectively communicate results from these reports, skills that are embodied in the universal required
competencies established by the Network of Schools of Public Policy, Affairs, and Administration.
This article is designed to be a resource for teaching external financial reporting in these programs.
We first provide a graphical depiction of the external financial reporting model as prescribed by the
Governmental Accounting Standards Board and discuss key elements of it. We then discuss the
production and uses of these reports. These discussions should help future public administrators
understand the mechanics of reporting and the challenges related to the production and use of
these reports. Such understanding should facilitate the communication of these reports.
KEYWORDS
Public administration curriculum, external financial reporting, state and local governments, public finance
INTRODUCTION
A career in public administration requires an
understanding of external financial reporting
and the ability to communicate the historical
financial results within these reports to the
citizenry, debt holders, bond rating analysts,
vendors, and other stakeholders in state and
local governments (SLGs). While other fin­
ancial documents such as the annual budget
may also be used by external stakeholders, we
focus on the external historical financial reports,
which often come with the assurance of an
JPAE 21 (2), 281–294
independent auditor and conform with the
requirements of the Governmental Account­ing Standards Board (GASB), (i.e., generally
accepted accounting principles [GAAP]). These
reports are a credible source of historical
financial performance and can be an important
element in helping public administrators meet
the overarching goal of “pursuing the public
interest with accountability and transparency”
based on its relevance in achieving the five
universal required competencies established by
Journal of Public Affairs Education281
T. Waymire, S. Sohl & B. Howard
the Network of Schools of Public Policy, Affairs,
and Administration (NASPAA, 2009, p. 7):
•to lead and manage in public governance;
•to participate in and contribute to the
policy process;
•to analyze, synthesize, think critically,
solve problems, and make decisions;
•to articulate and apply a public service
perspective; and
•to communicate and interact productively
with a diverse and changing workforce
and citizenry.
External financial reports are one of the most
important accountability mechanisms that span
all environments identified by Romzek and
Dub­
nick (1987): bureaucratic (e.g., cost of
operating), legal (e.g., legal debt limits), pro­fes­
sional (e.g., bond rating agencies and auditors),
and political (e.g., decisions to increase sales
taxes in lieu of a more controversial tax such as
property taxes). In essence, these financial re­
ports capture decisions made in the interest of
the public and allow the public to, in turn,
evaluate information concerning government
performance and hold officials accountable for
the decisions made on their behalf. While trust
is an important determinant of constituents’
support of policy directives (Hetherington,
2006), the public’s trust remains low if there
are gaps in the information they receive (Or­ren, 1997; Welch, Hinnant, & Moon, 2005).
There­fore, public administrators need to have a
command of the information contained in the
external financial reports in order to effectively
communicate the results within these reports to
the citizenry and other stakeholders.
By extension, external financial reporting is an
essential component of the financial manage­
ment1 curricula within public administration,
affairs, and policy programs.2,3 Kattelus, Cheng,
and Engstrom (2005) suggest that academic walls
between public administration and accounting
programs may stunt the coverage of external
financial reporting in these programs and
contribute to coverage in finance courses that is
slanted in favor of budgeting topics. Moody
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and Marlowe (2009) report results that affirm
this proposition, finding that budgeting tends
to be the most emphasized financial manage­
ment topic, in terms of course requirements,
time allocated to the topic, and importance of
the topic. Government finance curricula should
extend beyond budgeting, as understanding ex­
ternal financial reports and being able to assess
and compare financial condition mea­
sures
within and across governments are also critically
important (NASPAA 1992; Peddle & Thur­
maier, 2011; Sohl, Peddle, Thurmaier, Wood,
& Kuhn, 2009; Wang, Dennis, & Tu, 2007).4,5
Successfully integrating external financial re­
porting into public administration, affairs, and
policy curricula is fraught with challenges,
including resource constraints associated with
the costs and availability of qualified faculty
(Purtell & Fossett, 2010). In this article, we
take a two-part approach to providing a
resource that may be helpful to faculty teaching
in these programs. First, we present the complex
external financial reporting model. Extending
Mead’s (2001) detailed depiction of the model,
we present a graphical depiction of the model
that may be useful as a concise way of teaching
external financial reporting to public admini­
stration, affairs, and policy students. Each
element is discussed in depth. Second, we
discuss the production of the external financial
reports, including all of the players involved in
this process, as well as the specific uses of the
reports. Understanding the model, its pro­duc­
tion, its uses, and the tensions between
producers and users will be helpful for students
as they enter the field of public administration
and are responsible for communicating pro­duc­
tively and interactively with the citizenry re­
garding financial results and plans/projections
based on historical results (NASPAA, 2009).
STATE AND LOCAL GOVERNMENT EXTERNAL
FINANCIAL REPORTING MODEL
GASB prescribes the standards that are used by
SLGs in preparing their external financial
reports. When these standards are followed,
financial statements are said to be prepared in
conformity with GAAP (Finkler, 2005). While
some state laws exempt SLGs from producing
Understanding External Financial Reporting
financial reports in conformity with GAAP be­
cause of cost or other user needs, GAAP-based
financial reports are often required and can be
useful for a variety of reasons. Perhaps most
importantly, based on state laws and regulations,
SLGs may be subject to annual audits designed
to ascertain the accountability of public funds,
and an unqualified, or clean, audit opinion re­
quires the use of GAAP-based statements. This
clean audit opinion may be helpful for SLGs
that may be in the market for debt financing,
subject to regulations associated with federal
funding received, or as a candidate for awards
such as the Government Finance Officers As­
soc­iation (GFOA) Certificate of Achievement
for Excellence in Financial Reporting. GAAPbased financial statements also provide for
certain standardization that may be useful in
comparing the financial results of an SLG over
time or to other SLGs. Given that other finan­
cial reporting, such as budgets, may be prepared
using various methods (often cash-based or
modified cash-based) and come with­out the
assurance of an auditor opinion, the GAAPbased reports provide a standardized, reliable
source of financial information, parti­cularly if
public administrators can distill this infor­
mation in a consumable way for the citizenry.
GASB (1999) Statement No. 34, Basic Finan­
cial Statements—and Management’s Discussion
and Analysis—for State and Local Governments,
prescribes the model for external financial re­
porting. Although the accounting for SLGs
is arguably different from that of for-profit
entities, a push for a model that would be
comparable with that of for-profit entities
culminated in a model that contained two sets
of statements with GASB Statement No. 34
(GASB 34). Implemented over the period from
2001 to 2003, the GASB 34 external financial
reporting model includes one set of financial
statements that presents a consolidated view of
governmental financial results and mimics the
financial reporting of for-profit entities by
using the accrual basis of accounting. The
model also includes a second set of financial
statements, the more familiar fund financial
statements, which use the modified accrual basis
of accounting for the majority of trans­actions.
This current reporting model re­
quires, at a
mini­­mum, general purpose external financial
reports (GPEFR) depicted in Figure 1.6
The scope of the reporting is expanded if an
SLG opts to prepare a comprehensive annual
financial report (CAFR), which includes, in
addition to the financial section (i.e., GPEFR),
an introduction containing an informative letter
of transmittal and a statistical section contain­
ing a great deal of historic and economic infor­
mation. These sections essentially bookend the
financial section, with the introduction pre­
ceding and the statistical section following the
financial section. As shown in Figure 1, the
financial section contains the auditor’s opinion
letter, management’s discussion and analysis
(MD&A), basic financial statements (both
government-wide and fund tracks), notes to
the financial statements, required supple­ment­
ary information (RSI), and other supplementary
information (OSI).
We present important elements of each piece of
the financial section. This information could be
used in teaching this material in public admini­
stration, affairs, and policy programs, perhaps
in concert with a CAFR of a local government
in close proximity to the university. Alterna­
tively, students could be required to select a
CAFR from their hometown or a local govern­
ment in which they have interest. The oppor­
tunities for teaching this material include
lecture and discussion using a local government’s
CAFR, creating and assigning questions from a
specific CAFR, and projects that require stu­
dents to evaluate the performance for a specified
local government. For instance, students could
address key policy questions, such as, “Should
we finance our new crime prevention program
through borrowing, using our reserves, or rais­
ing taxes?” Students could also evaluate revenue
diversification over time and/or across multiple
SLGs using the CAFR’s content. Faculty teach­
ing in this area could also incorporate projects
that require students to prepare popular reports
based on the CAFR, as doing so could serve to
enhance their abilities to distill and commun­
icate relevant information to citizens who may
otherwise be overwhelmed by the CAFR content
(Kloby, 2009; Yusuf & Jordan, 2012).7
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T. Waymire, S. Sohl & B. Howard
FIGURE 1.
State and Local Government (SLG) External Financial Reporting Model Financial Section
of the CAFR
Auditor Opinion Letter
Management, Discussion and Analysis (MD & A)
Basic Financidal Statements
Government-wide Financial Statements
Fund Financial Statements
Primary Government
General
Special Revenue
Governmental
Activities
(Accrual)
Capital Projects
Government Funds
(Modified Accrual)
Debt Service
Permanent
Business-type
Activities
(Accrual)
Internal Service
Enterprise
Proprietary Funds
(Accrual)
Agency
Pension Trust
Component Units
(Accrual)
Investment Trust
Private Purpose Trust
Notes to the Financial Statements
Required Supplementary Information
Other Supplementary Information
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Journal of Public Affairs Education
Fiduciary Funds
(Accrual)
Understanding External Financial Reporting
Auditor’s Opinion Letter
The primary purpose of the auditor’s opinion
letter is to provide assurance on the financial
statements. In establishing the basis for the
opinion given, the letter contains standardized
language that delineates the responsibilities
of the auditor (expressing an opinion on the
fin­
ancial statements, taken as a whole) and
management (the fair presentation of the finan­
cial statements and design and imple­mentation
of internal controls).8 The placement of the
auditor’s opinion letter is intentional—con­
tained within the financial section such that no
assurance is placed on the introductory or
statistical sections. Furthermore, the letter
generally expresses little assurance on the RSI
or OSI. The letter may provide insight if
financial sustainability concerns have been
identified. The report date signifies the timing
of the completion of the audit work, and that
sufficient audit evidence has been gathered to
support the opinion (American Institute of
Certified Public Accountants [AICPA], 2002).
There may be a significant lag between fiscal
year-end and the report date.
Management Discussion and Analysis
The MD&A is designed to provide narrative
that extends the information provided in the
financial reports. Often summary tables of
financial information are provided, as well as
graphs, such as pie charts of revenues by source,
which could be useful in determining any risks
associated with concentration. Another com­
mon graph included is a bar chart that depicts
both revenues and expenses for governmental
or business-type activities. For governmental
activities, we would expect that programspecific revenues would not cover the expenses
of general government, public safety, and
public works, for example, as these activities are
financed in large part by general revenues. In
contrast, business-type activities (e.g., electric
utility service) should be designed to generate
revenues sufficient to cover costs. Deficits
indicated in these graphs may suggest taxpayer
subsidies for these services and may constitute
an area of concern. The MD&A is also a rich
source of information regarding government
policy (e.g., the circumstances in which debt is
issued), current financial metrics (e.g., general
obligation bond ratings), credit­
worthiness
(e.g., bond ratings), and economic outlook
(e.g., projected unemployment rate).
Government-wide Financial Statements
The basic financial statements can be daunting
as they include financial results in both the
government-wide statements and the fund fin­
ancial statements. The government-wide fin­
ancial statements include a balance sheet (titled
Statement of Net Position) and an income
statement (titled Statement of Activities). These
two statements are prepared using the accrual
basis of accounting; therefore, all assets and lia­
bilities (either current or long-term) are re­port­
ed in the Statement of Net Position. GASB
Statement No. 63 recently changed the struc­
ture of the Statement of Net Position to include
additional categories (GASB, 2011). The typical
accounting equation (assets = liabilities + equity)
was expanded to include deferred outflows of
resources as a section following assets and defer­
red inflows of resources as a section following
liabilities. Deferred outflows commonly include
unamortized losses on refunding bond issues.
Deferred inflows commonly include unearned
property taxes, which are recognized in a later
period that the taxes are intended to finance.
The Statement of Net Position also allows
users to evaluate the reserves, the accumulation
of surpluses or deficits over time in the net
position section. The unrestricted net position
is commonly viewed as the available, accrualbased, surplus. Citizens and other SLG stake­
holders may wish to compare the unrestricted
net position to total expenses in order to
determine how many months of reserves are
available to cover expenses in the next period.
The Statement of Activities conveys a great deal
of information, given its unique presentation.
For governmental activities (e.g., general gov­
ernment, public safety, highways and streets),
expenses are reported and then reduced for
program revenues, that is, revenues generated
specifically for the purpose of the activity.
The resulting net expense amount is generally
negative, suggesting that these activities are
supported, in large part, by general revenues.
Journal of Public Affairs Education285
T. Waymire, S. Sohl & B. Howard
SLGs or citizens seeking to benchmark financial
performance could use these relative net
expense amounts to evaluate the emphasis on
these various programs and the burden that
they place on general revenues. This same
presentation is used for business-type activities,
allowing users to determine whether businesstype activities are self-sustaining or require the
support of general revenues. General revenues,
which appear at the bottom of the Statement of
Activities, are provided in detail, allowing users
to evaluate revenue mix and any potential areas
of concentration that may be of concern.
The government-wide financial statements offer
a rich source of information for students to use
in comparing one government over time or
multiple governments for a given year. For
example, faculty could create exercises that
require the comparison of the revenue mix of
three or more local governments in a geograph­
ic region and then the degree to which the
mix has evolved for each of the governments.
This type of exercise provides students oppor­
tunities to explore the risks associated with
concen­
tra­
tion. In addition, a single set of
government-wide financial statements could be
used to demonstrate the articulation that occurs
between the Statement of Activities and the
Statement of Net Position; that is, the change
in net position reported on the Statement of
Activities is added to the beginning-of-year net
position to arrive at end-of-year net position.
This calculation of reserves could also be
expanded by requiring students to examine the
policy issues associated with generating and
maintaining a sufficient, yet not excessive, level
of reserves.
Fund Financial Statements
As a separate track of financial statements, the
funds are first categorized by governmental
(typically where the majority of transactions
occur), proprietary, and fiduciary. Each of the
three types of funds then has its own set of
financial statements. Emphasis is often placed
on the governmental funds because of the
volume of transactions and the importance of
the activities that take place in these funds.
However, proprietary funds’ statements and
fiduciary funds’ statements also deserve at­ten­
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tion as they may be important to citizens, who
have a vested interest in understanding the
public utility services they receive from their
local governments (proprietary funds) and the
magnitude of pension funding concerns (fidu­
ciary funds).
The first of the three fund types, government­al, is the only one to use an alternative basis of
accounting — the modified accrual basis of ac­
counting. The governmental funds’ state­ments
include a Balance Sheet and an income state­­ment, titled Statement of Revenues, Ex­pend­­
itures, and Changes in Fund Balances. A pri­
mary feature of the modified accrual basis of
accounting is that long-term assets and
liabilities are not recognized. As a result, the
governmental funds’ Balance Sheet only pre­
sents current assets and current liabilities.
Similar to the government-wide Statement of
Net Position, two additional categories are
included—deferred outflows of resources and
deferred inflows of resources, which commonly
includes property tax revenues to the extent
that the amounts will not be available to meet
current period obligations. The fund balances
section of the Balance Sheet categorizes fund
balances by whether they are non-spendable,
restricted, committed, assigned, or unassigned,
following GASB Statement No. 54 (2009).
Emphasis is often given to the unassigned fund
balances, as they represent the accumulation of
surpluses available for general use and not
designated for some other purpose. Just as
they would with the unrestricted net position
reported in the government-wide Statement of
Net Position, citizens and other SLG stake­
holders may wish to compare this unassigned
fund balance to annual expenditures to deter­
mine the number of months of reserves
accumulated. However, the other categories of
fund balance may also be of interest to users
in evaluating the SLG’s compliance with any
legal restrictions.
The Statement of Revenues, Expenditures, and
Changes in Fund Balances, which is also
prepared using the modified accrual basis of
accounting, categorizes revenues by source
(taxes, intergovernmental, licenses and permits,
etc.) and expenditures by purpose (general gov­
Understanding External Financial Reporting
ern­ment, public safety, highways and streets,
capital outlay, debt service, etc.). The modified
accrual presentation allows users to view
amounts expended on capital outlay and debt
service, as well as the entire proceeds from the
issuance of long-term debt. This is in contrast
with the government-wide Statement of Net
Position, which provides year-end balances in
capital asset and debt accounts. In addition,
transfers between funds are provided. Both the
Balance Sheet and the Statement of Revenues,
Expenditures, and Changes in Fund Balances
categorize funds by whether or not they are
major (significant in size relative to all funds).
Major funds are given separate columns to
allow readers to analyze whether legal require­
ments for generating, spending, and reserving
financial resources have been met and whether
budgetary constraints have been followed.
Nonmajor funds are presented in the aggregate.
The governmental funds’ statements should be
emphasized in CAFR exploration activities.
Faculty who teach external financial reporting
could highlight the differences associated with
the modified accrual basis of accounting used
to prepare this set of statements. For example,
the inclusion of proceeds of debt and ex­
penditures for repayment of debt and capital
outlay on the Statement of Revenues, Expend­
itures, and Changes in Fund Balances could be
used by students to benchmark investments in
capital assets for a sample of SLGs or for one
SLG over time. This type of analysis has the
potential to serve as a foundation for discussion
of the policy issues surrounding the adequacy
of infrastructure investments.
As shown in Figure 1, the transactions recorded
in the governmental funds (using the modified
accrual basis of accounting) are also recorded in
the government-wide statements as governmental
activities (using the accrual basis of accounting).
As a result of the differing accounting treatment,
the fund balances of the governmental funds
must be reconciled to the net position of the
government-wide governmental activities (the
equity reconciliation), and the net change in
fund balances of the governmental funds must
be reconciled to the changes in net position of
the government-wide governmental activities
(the reconciliation of surplus/deficit). Although
the complexity of the reconciliation process
may be better left to the accountants in SLGs,
there are some common reconciling items that
may be beneficial for all public administrators
to understand. The primary difference between
the two bases of accounting lies in the treatment
of long-term assets and liabilities. Therefore,
the transactions involving these accounts
constitute the majority of the reconciling items.
Within the equity reconciliation, cumulative
dif­ferences are presented, for example, the bal­
ance in capital assets, net of accumulated
depreciation. These reconciliations offer oppor­
tunities for students to explore the articulation
of financial statement line items among the
government-wide and governmental funds’ state­
ments. For example, within the surplus/deficit
reconciliation, users can see the current year
differences that are the result of capital outlay
expenditures, which are capital­
ized in the
government-wide statements (and therefore
reflected within the balances on the Statement
of Net Position) and expended in the gov­
ernmental funds’ statements (and therefore
reflected as an expenditure in the Statement of
Revenues, Expenditures, and Changes in Fund
Balances). Any such assign­
ment could also
include exploring the notes to the financial
statements, which provide additional insight
regarding the changes in the balance of capital
assets over the fiscal year.
The second set of financial statements in the
fund set of statements is for the proprietary
funds, and includes a balance sheet titled
Statement of Net Position, an income statement
titled Statement of Revenues, Expenses, and
Changes in Net Position, and a Statement of
Cash Flows. The presentation of these finan­cial statements includes a column for each
enterprise fund (commonly, utility services
provided by the SLG) that is determined to be
major based on its relative financial significance,
as well as one column for the aggregate of any
internal service funds. The statements are
prepared using the accrual basis of accounting,
which recognizes all assets and liabilities, in­
clud­ing those of a long-term nature. The per­
form­ance of enterprise funds can be evaluated
to determine whether these funds are selfJournal of Public Affairs Education287
T. Waymire, S. Sohl & B. Howard
sustaining, that is, whether charges for services
cover the costs. Internal service funds are essen­
tially centralized purchasing functions that,
absent the creation of a separate fund, would
have been accounted for within the govern­
mental funds. When SLGs choose to create an
internal service fund, this segregation from the
governmental funds allows the citizenry and
other stakeholders to examine the effectiveness
of this purchasing function.
The third set of financial statements presented
within the fund statements is for the fiduciary
funds, including any agency, pension trust, in­
vestment trust, and private-purpose trust funds.
For many local governments, the pen­sion trust
funds may be the only fiduciary fund type, and
these funds are certainly of interest to a wide
range of SLG stakeholders. Generally, each pen­­
sion fund is separately identified; for ex­ample,
if there are separate pensions for police, fire,
and general government employees, each one
would be separately presented. Employer and
employee contri­butions are separately identified,
and disbursements made for pension benefits
are also identified.
Notes to the Financial Statements
In addition to the rich source of financial in­for­
mation that can be derived from the fin­ancial
statements (both government-wide and fund),
the notes provide additional context. The first
note to the financial statements is typically a
summary of significant accounting policies.
This summary note may include infor­mation
about capital asset policies, including capitali­
zation thresholds, whether infrastructure assets
are depreciated, and estimated useful lives of
the various capital asset types. This summary
note may also provide information about the
adoption of GASB standards and the impact of
such adoption.
Each note that follows is generally dedicated to
a specific financial statement account. The cash
and investments note identifies the investment
policies, the circumstances in which cash may
be categorized as restricted, and other risk con­
cerns. The receivables note for local governments
will generally identify the timeline for the pro­
perty tax cycle, for example, lien date, levy date,
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and collection date(s). This information may
be helpful in evaluating how unavailable
revenues (governmental funds’ Balance Sheet)
were reported, as property tax revenue recogni­
tion may be deferred to future periods for two
common reasons: (a) collections of the revenue
will not occur in a time that will make them
available to meet current period obligations,
usually within 60 days following fiscal year-end,
and (b) the government may elect to match the
revenue recognition to a later period, which the
levy is intended to finance. The capital asset
and long-term debt notes will include a flow of
the balances in these two accounts: (a) begin­
ning, (b) increases—either acquisitions of capital
assets or issuance of debt, (c) decreases—either
dispositions of capital assets or repayment of
debt, and (d) ending balance. This may be
helpful in charting investment in capital assets
and financing used to achieve this growth. In
addition, the notes to the financial statements
are a rich source of infor­mation about con­
tingent liabilities, commit­ments, pensions, and
other postemploy­ment benefits. Faculty seek­
ing to incorporate CAFR-related assign­ments
could require that students read and interpret
the poli­cies associated with capital assets (e.g.,
capitalization thresholds), commitments, and
pensions. This type of assignment could help
lead students into discussions related to the
policy decisions that they may face as they enter
the public administration profession.
Required Supplementary Information
The RSI section follows the financial statements
and notes to the financial statements. Although
the auditor may have applied only limited
procedures in evaluating the RSI, this section
contains credible information that may be
help­­ful for citizens and other users of the fin­
ancial statements. SLGs are required to report
budget-to-actual comparisons in the RSI for the
general fund and certain special revenue funds.9
Often SLGs will also report budget-to-actual
comparisons for other funds that are not expli­
citly required. The content of these compar­isons
includes budgeted amounts, both original and
final, as well as actual amounts. Although var­
iances (budget less actual) are not required as
they are calculable from the given information,
many SLGs will voluntarily report them. Users
Understanding External Financial Reporting
of the financial statements may wish to evaluate
the precision in the SLG’s fore­casting of rev­
enues and expenditures. How­ever, users should
also keep in mind that SLGs are likely to create
budgets such that favorable variances are more
likely (Callahan & Waymire, 2014). The RSI
is also a source of more detailed information
regarding pension funding.
The budget-to-actual comparisons presented in
the RSI provide an excellent opportunity for
students to evaluate government compliance
with the budget document. Given the propen­
sity for favorable budgetary variances (actual
revenues greater than budgeted revenues or
actual expenditures less than budgeted ex­
penditures), students would also benefit from
exploring these comparisons for a given year or
over time to evaluate whether an SLG appears
to be building in budgetary slack (setting rev­
enue estimates artificially low or expenditure
estimates artificially high). As MPA students
will become public administrators in a few short
years, they may face pressure by bond rating
analysts and the general public to generate
favorable variances. Calculating and exploring
the underlying reasons for budgetary variances
as part of their undergraduate or graduate
curriculum is therefore potentially valuable.
Other Supplementary Information
To the extent that nonmajor funds are of
interest to the SLG financial statement users,
the OSI section may be helpful. Often referred
to as combining schedules, OSI schedules
provide individual fund balances and activity
that have been aggregated in the financial
statements. In addition, OSI includes a great
deal of information regarding long-term debt.
Details of specific bond issues may be presented,
allowing users to evaluate foreseeable risks in
the ability of the SLG to service each debt issue.
FINANCIAL STATEMENT PRODUCTION & USES
Students preparing to enter careers in public
administration should also understand the role
of both the producers and the users of SLG
external financial reports. The complexity of
the reports can place producers of the financial
statements and the end users of the statements
at odds with one another. The primary
producer, the SLG, must bear the costs of
preparing the internal accounting reports and
adjustments that feed into the statements,
working with auditors in their evaluation of the
statements, and then producing and dissemi­
nating the final reports to the external users.
These users of the financial statements depend
upon the reliability and timeliness of the
information included in the reports to evaluate
creditworthiness, compliance, and performance.
Understanding the perspectives of both groups
—producers and users—can be helpful in
facilitating effective communication of the
contents of the external financial reports.
From a production perspective, the complexity
of the reporting model has significant cost
implications. The lag between fiscal year-end
and CAFR report date may be indicative of
such costs to the producers. The Municipal
Securities Rulemaking Board (MSRB, 2013)
reports that submissions of annual audited
financial reports were received, on average,
about 202 days after the end of the fiscal year.
Responsibility for the delay in the release may
be due in part to SLG management practices
(e.g., the time it takes to produce and adjust the
year-end trial balance); however, the volume
and complexity of the reporting certainly
contributes to the lag. To encourage more
timely release, the GFOA requires submission
of the CAFR within six months after fiscal
year-end for governments to be eligible for the
Certificate of Achievement for Excellence in
Financial Reporting. Similarly, some states
require the release of audited financial
statements within a specified time period (a
common deadline is six months following fiscal
year-end). However, even CAFRs released
within six months may suffer from loss of
information relevance over the period from
fiscal year-end to report release.
While SLGs are the primary producers of
financial statements, involvement by a number
of parties shapes the process. On the front end,
GASB establishes the reporting framework and
the standards by which SLGs must abide in the
preparation of their financial statements to be
in conformity with GAAP. However, state legis­
latures may establish alternate reporting re­
Journal of Public Affairs Education289
T. Waymire, S. Sohl & B. Howard
FIGURE 2.
Production and Uses of Financial Statements
PRODUCTION OF FINANCIAL STATEMENTS
Standard Setters
(GASB) and Regulators
(e.g., State Legislature)
Professional
Organizations
(e.g., GFOA, AGA)
Software Companies
State or Local
Government
Management
Auditors
The audit lends credibility
to the financial statements.
State or Local Government
Financial Statements
Evaluate
creditworthiness
Evaluate compliance
with laws, regulations
and grant requirments
Evaluate financial
and nonfinancial
performance
Research and
benchmark financial
and nonfinancial
performance
USES OF FINANCIAL STATEMENTS
quirements. For example, states have exempted
certain local governments, particularly those
that are smaller, from implementing GASB 34.
Professional organizations such as the GFOA and
the Association for Government Account­ants
(AGA) provide the professional support for
the primary producers of financial state­ments,
in­cluding the accounting and finance profes­
sion­
als in SLGs.10 Furthermore, as shown in
Figure 2, the hands-on production of the fin­
ancial statements depends critically on auditors,
who lend credibility to the financial statements
and often provide much-needed expertise.
On the user side of SLG financial statements, a
number of parties depend on the information
290
Journal of Public Affairs Education
in the financial statements and the timeliness of
its delivery. Although there is a wide range of
users with significant variation in their level of
sophistication in evaluating the CAFR, they share
common expectations for its use. As shown in
Figure 2, we categorize the primary uses as fol­
lows: (a) evaluating creditworthiness, (b) eval­u­
ating compliance with laws, regula­tions, and
grant provisions, (c) evaluating financial and
non­
financial performance measures, and (d)
researching and benchmarking financial and
nonfinancial performance measures. The finan­
cial reporting process should yield this beneficial
information to external stakeholders, and it
should do so in a timely manner. Moreover, if
the financial data were more accessible over
Understanding External Financial Reporting
time and across SLGs, this would be helpful in
the decision-making process within SLGs (e.g.,
projections, forecasting, and costing of services).
A commonly cited reason for examining the
CAFR is to determine the SLG’s credit­worth­
iness. Bondholders, who are investors in SLGs,
depend on bond rating analysts to review the
CAFR, evaluate the SLG’s ability to repay
principal and interest, and assign a credit rating
that reflects this perceived creditworthiness.
Other users, including legislators, citizens, and
the media, are interested in this information as
well. However, the differential levels of sophi­
stication and influence of these users creates a
unique challenge. Citizens and the media may
have access only to year-end external financial
reports, and the noted lag may render the
information contained in the reports stale by
the time it is available. In contrast, bond rating
analysts may be able to request and receive
interim financial information, making the
delay of the release of the financial statements
less problematic for them. Even for these more
influential users of the reports, however, the
year-end audited external financial reports are
important in their analyses, and they too may
be negatively affected by the lag.
SLG reporting is designed, in part, to meet the
needs of users who seek to evaluate compliance
with laws, regulations, and grant require­­ments.
Many SLGs depend significantly on federal
funding in executing their missions, and this
funding comes with the expectation that the
SLG will comply with any applicable require­
ments. Timeliness is important to users evalu­
ating the CAFR for these needs, as the deter­
mination of future grant awards depends in
part on the SLG’s previous compliance with
grant requirements. In the absence of significant
federal funding, SLGs still use their CAFR to
demonstrate compliance with state laws and
regulations and with their own budgets.
Financial and nonfinancial performance is im­
por­tant to a wide range of users as well. Whe­
ther the financial measures include financial
position, fund balance (i.e., reserves), or
comparisons of budget-to-actual perform­ance,
the CAFR is a rich source of information.
Many SLGs report information in the statistical
sections of their CAFRs that also provide
impor­tant nonfinancial performance inform­
ation, such as the number of licenses sold,
trended crime information, and infrastructure
quality. Combined with the financial inform­
ation presented, this nonfinancial performance
information may help users, including govern­
ment officials, citizens, and the media, discern
the effectiveness and efficiency of the SLG.
However, timeliness is a critical element of the
information’s usefulness.
CONCLUSION
In this article, we provide a concise framework
of the current external financial reporting model
that includes detailed discussion of its elements,
as well as a discussion of the issues surrounding
the production and uses of the resulting reports.
With the discussion of each element of the
CAFR, we offer faculty who teach SLG external
financial reporting practical exercises and dis­cus­
sion opportunities that can be of value to pub­­lic
administration students. Such instructional tools
serve to increase both student knowledge of the
model and confidence in this knowledge. Link­
ing the technical accounting content to the
policy issues that these students will likely face
as they enter the profession offers the potential
for these students to gain a command of the
language of external financial reporting.
In an environment characterized by an expect­
ations gap in transparency (Lewis & Hildreth,
2011), graduates of public administration, affairs,
and policy programs must be prepared to distill
key information from these reports and ef­
fectively communicate it to the citizenry. This
will be particularly important as transactions
in SLGs are becoming increasingly complex
(Purtell & Fossett, 2010). Furthermore, given
that the public administration workforce is
aging (Lewis & Cho, 2011; Williamson, Burke,
& Beinecke, 2011; Wolf & Amirkhanyan,
2010), these graduates may face both the ben­
efits and the challenges associated with rapid
career advancement. As a result, they will need
to understand and appreciate the frustration of
users (information may be difficult to interpret),
Journal of Public Affairs Education291
T. Waymire, S. Sohl & B. Howard
as well as the frustration of the producers of
these reports within their SLGs (the reports
require significant investments of time by ac­
counting and finance staff ). Faculty teaching in
these programs may therefore wish to incorporate
both elements—the mechanics of reporting and
the production and uses of the reports—into
their courses. These elements should be explor­
ed with policy questions that require students
to grasp the implications of the reporting and
the way the reporting is viewed by government
stakeholders. Such in­struction has the potential
to improve the skills of public administrators,
increase the effec­
tiveness of communication
with the citizenry, and increase public trust.
NOTES
1. Financial management includes both accounting
and finance topics, and accounting includes both
financial (external) accounting and reporting and
managerial (internal) accounting and reporting
(Finkler, 2005). As noted, we focus on external
accounting in the form of external financial reports.
2. Ellwood (2008) posits that there has been a con­
vergence between “the pure public policy program
and the various schools and departments of public
administration and/or affairs—with the public pol­
icy programs incorporating many management com­
ponents of the public administration programs,
while many of the public administration programs
have incorporated an increasing amount of the
policy school curriculum” (p. 172). We posit that
all three program types should place an emphasis
on financial management and on external financial
reporting specifically, given its importance to
government stakeholders.
3.
While we support the inclusion of external
financial reporting in the curriculum of each of
these programs, we acknowledge that public policy
programs may be different. Cleary (1990) notes
that public policy programs are not as likely to be
accredited by NASPAA.
4.Grizzle (1985) notes a disconnect between the cover­­
age of financial management skills in MPA pro­grams
and their perceived importance. Frank (1992) simi­larly suggests a deficiency in practical financial man­agement skills among public managers. Both Grizzle
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Journal of Public Affairs Education
(1985) and Frank (1992) note an over­emphasis of
budgetary topics, similar to Moody and Marlowe
(2009), suggesting a pervasive and long-standing
neglect of other financial management top­ics in the
programs that generate public administrators.
5. There are a number of accounting and finance
guides available for public administrators, which
may be indicative of a deficit in these skills.
Governing (2014) produces a Finance 101 series
of articles; the Government Finance Officers
Association (GFOA) published An Elected Official’s
Guide: Government Finance (Miller, 2008); and
the Governmental Accounting Standards Board
(GASB) produces a number of guides that could
be used by public administrators.
6.The model is currently being evaluated to deter­
mine whether modifications need to be made to
improve its effectiveness. The GASB conducted 11
research roundtables in major U.S. cities during
2013 to reexamine the effectiveness of the GASB
Statement No. 34 financial reporting model. The
roundtable documents involved open-ended ques­
tions of the participants regarding the merits of the
current reporting model. Therefore, the GASB does
not seem to have a predefined model, but rather
the goal of evaluating the current model before any
changes are proposed.
7. We have used all of these approaches in teaching
external financial reporting to accountancy students
enrolled in a governmental and nonprofit accounting
course. We have also required the preparation of a
Citizen-Centric Report for a specified SLG using
the guidance provided by the Association of Govern­ment Accountants (AGA, n.d.). This project required
the use of other sources of information about
the municipality from the U.S. Census Bureau
and other government agencies. Other forms of
popular reporting could be the foundation for
other projects using CAFR information but would
likely need to be supplemented with demographic
and statistical information from sources outside of
the CAFR.
8. It should be noted that although management is
required to assume responsibility for the content and
preparation of the financial statements, the auditor
may, in fact, prepare the financial statements. Gen­
erally accepted government auditing standards
(GAO, 2011) provide the requirements for the
audit, including the safeguards that should be in
place if an auditor, rather than the SLG, compiles
the financial reports. Essentially, if the audit firm
prepares the financial statements, it must do so from
the records of the SLG, and the SLG must confirm
the presentation, including any aggregation of
accounts within the statements.
Understanding External Financial Reporting
9. These comparison schedules may not be present­ed
in conformity with GAAP; therefore, users of the fin­ancial statements should be aware that the amounts
may not reconcile to amounts in the financial state­
ments. Presenting this information on a non-GAAP
basis may be beneficial, however, in that it may be
more comparable to the budget document.
Governing. (2014). Finance 101 Special Series. Washing­
ton, DC: Governing.
10. The following resources may be helpful to both public
administrators and accounting staff within SLGs:
Government Accountability Office (GAO). (2011). Gov­ernment auditing standards. Washington, DC: GAO.
American Accounting Association, Government
and Nonprofit Section: aaahq.org/gnp/index.htm
Association for Budgeting and Financial Management
(ABFM): abfm.org
Association of Government Accountants (AGA):
agacgfm.org
Government Finance Officers Association (GFOA):
gfoa.org
Governmental Accounting Standards Board (GASB):
gasb.org
Municipal Securities Rulemaking Board (MSRB):
msrb.org
U.S. Government Accountability Office (GAO):
www.gao.gov
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ABOUT THE AUTHORS
Tammy R. Waymire is an associate professor of
accountancy at Northern Illinois University.
She teaches and researches in the governmental
and nonprofit accounting area. Her prior work
experience includes auditing governmental and
nonprofit entities, especially those subject to
the Office of Management and Budget (OMB)
Circular A-133.
Shannon N. Sohl, senior research associate, join­
ed the Center for Governmental Studies at
Northern Illinois University in 2006. She is cur­
rently co-leading a digital financial reporting
initiative and also focuses on fiscal condition
assessments, comparability models, and ways
to improve transparency and accountability of
local governments.
is a recent graduate of the Lead­
ership Master of Accounting Science pro­gram
at Northern Illinois University, where she also
earned a bachelor’s degree with honors. She is
currently an assurance associate on the Ser­vice
and Not-for-Profit team at McGladrey LLP.
Brandy Howard