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Retaining Budget to Actual Comparisons Within the Audited Financial Statements

Background

Generally accepted accounting principles (GAAP) currently require that state and local governments present as part of their basic audited financial statements a budget to actual comparison statement for governmental funds with annual appropriated budgets. GAAP require that this budgetary comparison statement be presented on the budgetary basis of accounting to demonstrate legal compliance. If the budgetary basis of accounting differs from GAAP, as is often the case, GAAP further require that a reconciliation between the two bases of accounting be presented. This treatment has provided an invaluable link between the legal budget and GAAP financial reporting, which has served to enhance the credibility of both.

Recently, the Governmental Accounting Standards Board (GASB) has explored the possibility of removing the budgetary comparison statement from the basic audited financial statements, mandating instead that it be presented as "required supplementary information" (RSI). By definition, RSI does not fall within the scope of the independent audit of the financial statements, although auditors are required to perform certain limited procedures in connection with RSI.

There can be no question of the importance of the budget to a majority of a government’s stakeholders. Indeed, most of a government’s key decisions are based in one form or another upon the budget. Given the importance attached to the budget, it is essential that stakeholders be provided reasonable assurance that a government has maintained budgetary compliance. Until now, this assurance has been provided by the inclusion of the budget to actual comparison statement within the audited financial statements. Relegating budgetary information to the unaudited RSI, as is now under consideration by the GASB, would significantly weaken this important control, and would consequently diminish the confidence of the public and other stakeholders in the government’s budget, and even potentially in the government itself. This proposal also would diminish the importance of the Comprehensive Annual Financial Report (CAFR) to government managers and policy makers.

GFOA Position

GFOA opposes any move to reclassify the budget to actual comparison statement as RSI, thereby removing it from the scope of the audited financial statements. Instead, the GFOA urges the GASB to maintain the integrity of the historic link between the budget and GAAP financial reporting by continuing to include the budgetary comparison statement as an integral part of a government’s basic audited financial statements, as originally proposed in the GASB’s exposure draft Basic Financial Statements -- and Management’s discussion and Analysis -- for State and Local Governments.

Approved by the Committee on Governmental Budgeting and Management
February 3, 1999