Auditor involvement with official statements and Web sites: GFOA believes that as a general rule, state and local governments sh

The story of the audited financial statements does not necessarily end when a government releases its annual financial report. Governments frequently desire to incorporate the audited financial statements into a later official statement or post them on the government's Web site. Some auditors argue that a government should not be able to do either without first obtaining the auditor's consent. Many governments counter that the audited financial statements belong to the government, which should be able to use them in any appropriate manner, at its discretion.

Recently, two of GFOA's standing committees--the Committee on Accounting, Auditing, and Financial Reporting and the Committee on Governmental Debt Management--jointly developed guidelines for the benefit of governments wishing to incorporate their audited financial statements into offering statements or to post them on their Web sites. The GFOA Executive Board approved these guidelines in the form of a recommended practice at its winter meeting in Orlando, Florida.

BACKGROUND

Chapter 16 of the American Institute of Certified Public Accountants' authoritative audit and accounting guide, State and Local Governments, clarifies the rules governing auditor involvement with audited financial statements included in an official statement. The key elements of that guidance can be summarized as follows:

* Section 16.06 on "conditions affecting auditor association" reads, in part: "Because there is no Securities and Exchange Commission (SEC) requirement for auditor association with governmental official statements, an auditor generally is not required to participate in, or undertake any procedures with respect to, a government's official statement." In other words, the independent auditor is presumed not to be associated with financial statements included in an offering statement.

* Section 16.06 goes on to list a number of specific actions that the independent auditor might take subsequent to the audit that would create an "association" between the auditor and the offering statement. Examples of such actions include assisting in preparing the financial information included in the official statement and reviewing a draft of the official statements at the government's request.

* Footnote 5 to Section 16.06 notes that "some auditors require that they become associated with a government's official statements even though the conditions described in this paragraph establishing association would not otherwise exist." In other words, as section 16.10 goes on to elaborate: "Although an auditor is not required to become associated with a government's official statements except in the situations described in paragraph 16.06, some auditors include a provision in the engagement letter requiring the government to obtain permission from the auditor before using the independent auditor's report in the official statement. Such a provision establishes a requirement that the auditor become associated with the government's official statements when the government requests the required permission from the auditor."

* Section 16.07 clarifies that even when an auditor is "associated" with an offering statement, the auditor "has no obligation to perform any procedures to corroborate other information contained in those documents." Rather, the auditor is required only to "read the other information and consider whether that information, or the manner of its presentation, is materially inconsistent with information, or the manner of its presentation, appearing in the financial statements."

On the matter of auditor association with audited financial statements posted to a Web site, Section 9550.4.16-17 of the AICPA's Professional Standards clarifies that the independent auditor is not responsible for other material that appears on a Web site that includes audited financial statements: "Electronic sites are a means of distributing information and are not 'documents,' as that term is used in section 550, Other Information in Documents Containing Audited Financial Statements. Thus, auditors are not required by section 550 to read information contained in electronic sites, or to consider the consistency of other information (as that term is used in section 550) in electronic sites with the original documents."

SPECIFIC RECOMMENDATIONS

In view of the facts just outlined, GFOA has chosen to make the specific recommendations below

1. Having paid for the independent audit, a government owns the audited financial statements and should feel free to use them in any appropriate manner.

GFOA believes that state and local governments, as a general rule, should be free to publish their audited financial statements (including the report of the independent auditor) as they see fit--whether it is in an offering statement, on the government's Web site, or somewhere else--without having to obtain prior permission from the auditor, provided that all of the following conditions have been met:

* The independent auditor's report accompanies the same complete set of financial statements for which an opinion was rendered;

* The financial statements are not used in a potentially misleading manner; and

* No material subsequent event has occurred that might render the financial statements potentially misleading.

2. The independent auditor should not be permitted to create an essentially artificial "association" with audited financial statements included in offering statements or posted on the government's Web site simply by inserting a clause to that effect in the audit contract.

Auditing standards generally accepted in the United States of America do not require state and local governments to accept a clause in their audit contract requiring prior permission from the independent auditor before the audited financial statements may be included in an offering statement or posted on the government's Web site. GFOA urges state and local governments to resist the inclusion of such a clause in their audit contracts.

3. When the independent auditor actually does happen to become associated with audited financial statements included in an offering statement, a state or local government should take steps to avoid unwarranted delays and unjustified costs.

GFOA recommends that state and local governments and their independent auditors reach a dear understanding during the audit contracting process, from the preparation of the request for proposals for audit services through the final audit contract, regarding the potential for auditor "association" with future offering statements. The two key elements of that understanding should be as follows:

* A maximum time should be set during which the independent auditor would be required to read the unaudited material accompanying the audited financial statements.

* Because the amount of additional work required of the independent auditor would be minimal (i.e., simply reading the material that accompanies the audited financial statements), no additional fee should be required.

4. The audit contract should clarify that the government is free to post its audited financial statements on its Web site.

GFOA recommends that the audit contract make clear that the government is free to post its audited financial statements on its Web site without seeking or obtaining permission from the audit firm.

The complete text of the new recommended practice--"Auditor Association with Financial Statements Included in Offering Statements or Posted on Web sites--can be found at www.gfoa.org. Exhibit 1 is a flow chart summarizing the rules governing auditor association with audited financial statements included in an offering statement.

STEPHEN J. GAUTHIER is director of GFOA's Technical Services Center,

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